The Kremlin’s War Chest: How Russia Is Buying Time in Ukraine
Martin Lukáč
While missiles rain down on Ukraine, hundreds of billions of rubles are flowing into Russia’s defence industry. The economy is running at full throttle, but only because of the war. Russia has bet on an expansion of arms production, yet demographic and financial limits are emerging in the background. How long can this model last?
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Military Keynesianism: Russia’s Economic Behemoth in Uniform
After the West imposed a wave of harsh sanctions on Russia following the invasion of Ukraine, an economic collapse was widely expected. Instead, the Kremlin set its economy in motion in a different war by massively supporting the military-industrial sector. Since 2022, Russia has reoriented itself toward large-scale state investment in defence, arms production, and military recruitment. The result is an economy that is growing, but one that is increasingly running up against the tangible limits of Russia and its citizens.
This approach has a name: military Keynesianism. It refers to a state policy in which economic growth is sustained through increased spending in the defence and security sectors, though in Russia’s case, this model has grown into a massive behemoth. In 2025, the Russian state planned to spend more than 13.5 trillion rubles on national defence, representing over 6% of GDP. Together with spending on internal security, this amounted to roughly 40% of the entire state budget, a figure exceeding Russia’s combined expenditures on healthcare, education, social policy, and the civilian economy.
According to a report by the Centre for Strategic and International Studies (CSIS), this influx of money serves several purposes. The first is military production itself: Russia is investing in modernising factories, developing weapons, drones, and ammunition. A significant portion of the budget, however, is absorbed by human resource costs, sign-on bonuses for soldiers, payments to the families of the fallen or disabled, and incentives to sustain recruitment. In 2024, for example, recruitment bonuses more than doubled, reaching up to two million rubles per recruit in some regions.
The second goal is employment support. Production in arms factories has become a local growth engine; regions that were previously economically weak have seen a surge in industrial output. The state also supports defence enterprises through cheap loans and direct investments drawn from the National Wealth Fund. The third effect is the strengthening of societal loyalty to the regime. We are talking about thousands of people who are now directly or indirectly dependent on the war economy – soldiers, factory workers, suppliers, employees of state funds, and the families of the fallen. War thus turns into a tool of social integration. In a country that has long struggled with civic passivity and poor demographic trends, war becomes the “employer of last resort.”
The problem with this behemoth, however, is that this type of growth is artificial and unsustainable. Russia’s economy is running at full speed today not because it is innovative, efficient, or open, but because the state has pumped it full of war money, distorting large amounts of data in the process. For example, unemployment in Russia has dropped sharply, yet factories report a shortage of available labour due to early emigration, low birth rates, and the short life expectancy of Russian soldiers at the front.
The question, therefore, is not whether Russian military Keynesianism works. For now, it does at least, according to macroeconomic indicators. The real question is how long it can last before it runs into its own limits: labour, technological, financial, or societal.
Internal Weaknesses and Risks: Stability with Cracks
At first glance, Russia’s wartime economy may appear to have found a way to function even under the harshest sanctions. A closer look, however, reveals that this model rests on shaky foundations. Behind the glossy growth figures lie serious structural problems that are steadily deepening.
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Demography as the Enemy
The greatest weakness is the dramatic shortage of labour. Russia has struggled with demographic decline for years, but the war has multiplied this problem. Hundreds of thousands of young men have left the country, while hundreds of thousands more have either fallen or are fighting at the front. Added to this are stricter measures against migrants, who traditionally filled jobs in construction, services, and manufacturing. After the terrorist attack at Crocus City Hall, the Kremlin cracked down on illegal migrants—particularly those of Muslim origin resulting in the number of deported migrants in 2024 nearly doubling to around 80,000 people.
The result? The country reports a historically low unemployment rate of 2.3%, not because the economy is booming, but because there are simply not enough people. Companies across sectors report acute labour shortages, which pushes wages up and reduces competitiveness. The defence sector benefits the most, as the state generously subsidises salaries there. The civilian sector, however, is left at a disadvantage.
Inflation as an Invisible Tax
Low unemployment, high wages in the arms industry, and rising state spending create ideal conditions for inflation. Prices are rising at a pace the Central bank struggles to contain, even after raising the key interest rate to 21%. On the one hand, the state is pumping money into the economy through spending; on the other, the central bank is trying to curb consumption by making credit more expensive. The result is an illogical dance between fiscal expansion and monetary tightening.
Inflationary pressure is also felt by ordinary households in food, services and rent. And while incomes for some groups are rising (especially in the defence sector), others feel the rising cost of living ever more acutely. Inflation thus functions as a silent tax that erodes purchasing power and undermines trust in the financial system. Non-military sectors stagnate or decline. The first signs of slowdown are already visible, some industrial indicators are falling, trade is slowing, and business confidence is weakening.
The economy is therefore hitting a ceiling: labour supply can no longer be expanded, productivity is not growing, and inflation is eroding the effect of state spending. The risk of stagflation, a combination of low growth and high inflation, is emerging. For a regime that relies on social stability, this is a dangerous cocktail.
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Psychological Fatigue
Behind the economic data lies a less visible factor: societal fatigue. The fullscale war is entering its fifth year, and while propaganda continues to broadcast powerful chorales about the strength of “Mother Russia” and presents the conflict as part of a grand historical struggle, everyday reality is far more prosaic. Prices are rising, goods are becoming less available, and many young men are leaving or being mobilised. Although direct resistance to war is not widespread, silent tension is growing. This is why the Kremlin invests not only in the war itself, but also in “selling” it to the public through symbolism, benefits, narratives, and financial incentives.
Future Obstacles: Oil, China, and the Credit Bubble
While Russia’s economy is surviving for now thanks to a state-backed military boom, obstacles are forming in the background that could threaten this entire model. These are not only internal weaknesses, but also external factors beyond Moscow’s direct control. Some are already beginning to manifest; others remain uncertain.
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Oil – Black Liquid Certainty
Oil and natural gas remain the largest sources of revenue for the Russian state. Although their share of the budget is gradually declining, in absolute terms, they still amount to tens of billions of dollars annually. The problem is that with the contraction of the European market, this source is becoming increasingly unreliable. Western sanctions, price caps, discounted sales to Asia, and high transportation costs reduce net export profits. If oil prices were to fall below $50 per barrel, the budgetary balance would be severely disrupted.
Even today, the Kremlin is factoring in shortfalls as gas revenues are falling, and Gazprom alone posted a loss of $13.1 billion in 2024, while domestic reserves are being rapidly depleted. A global drop in oil demand, for example, due to a trade war or a recession in China, could deal a severe blow to the Russian economy.
The Chinese Pillar
After losing European partners, Russia has increasingly turned to China. Trade between the two countries is breaking records, with Chinese firms supplying Russia with technologies, components, and vehicles, while China has become the largest buyer of Russian oil and gas. Beijing and Moscow are thus partially able to circumvent sanctions, generating a record $244.8 billion in bilateral trade.
But dependence cuts both ways. China’s own economy is slowing, and while rhetoric about a “partnership without limits” sounds grand, the reality is pragmatic: Chinese banks remain cautious about sanctions, sensitive technologies are withheld, and the yuan has yet to become a full-fledged substitute for the dollar. The yuanization of the Russian economy is hitting limited interest rates on yuan-denominated loans in Russia are far higher than in China, indicating a shortage of the currency.
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A Credit Bubble in the Shadow of Defence
Another risk is a quiet credit expansion. While the Russian state does not have high public debt, it massively supports defence enterprises through cheap, state-guaranteed loans. Companies producing weapons, components, or logistics services receive loans at interest rates of 5 – 6%, while ordinary commercial loans exceed 18%, depriving all sectors of the economy except defence, security, and the military. Estimates speak of hundreds of billions of dollars in new corporate loans since 2022.
The question is: what if these companies are unable to repay? A potential collapse of defence plants could spill over into the banking sector. So far, this does not appear to be an acute threat, but if losses deepen or state orders slow, a domino effect could emerge. A similar problem exists in the mortgage market: cheap, state-backed mortgages meant to support domestic consumption have fueled housing demand and inflated prices. The central bank is pushing for stricter rules, but the government fears public discontent. Social calm is crucial for the regime.
A Hard Blow of Sanctions
The most serious and risky scenario for the Kremlin would be, according to a CSIS report from 2025, a drastic increase in sanctions pressure. This scenario is the one that got chosen by the EU and the USA. The United States and European powers initiated a decisive escalation in economic warfare against Russia’s energy-dependent economy. The US administration imposed sweeping sanctions on Rosneft and Lukoil, the nation’s largest oil producers, to systematically dismantle the Kremlin’s primary source of war financing. To enforce global compliance, Washington threatened punitive tariffs of up to 500% against nations that continue to facilitate oil transactions above designated price caps. This policy shift was punctuated by a transition to physical maritime enforcement, with US and UK forces seizing “shadow fleet” tankers such as the Marineraand Olina in international waters.
Simultaneously, the European Union’s 18th sanctions package introduced transformative regulatory measures, most notably the “molecule ban”. This regulation prohibits the import of refined petroleum products from third countries if they were processed using Russian crude oil, effectively shifting the compliance burden onto the chemical origin of the cargo. Furthermore, the EU and UK lowered the crude oil price cap to $47.60 per barrel, implementing a dynamic mechanism to ensure the cap remains 15% below market prices. To combat evasion, the UK government established legal grounds under the Sanctions and Anti-Money Laundering Act of 2018 to board and seize stateless or “false-flagged” vessels, treating them as military targets for interdiction.
International reactions to these measures have been characterised by a mix of strategic adaptation and growing caution. India, the world’s second-largest purchaser of Russian crude, saw its imports drop by one-third in late 2025 as major private players like Reliance Industries halted purchases to preserve access to Western markets and avoid secondary sanctions. While Russia attempts to reorganise its supply chains through “shadow middlemen” and new exporters, the effectiveness of these workarounds is increasingly hampered by Western maritime crackdowns. China remains a critical lifeline for Russian exports, yet even Chinese banks have become increasingly wary, frequently delaying energy payments to avoid being caught in the tightening net of secondary sanctions.
Conclusion
Russia’s wartime economy has survived the shock of the first sanctions and adapted into a state-managed, militarised machine. Military Keynesianism has become, at its core, a combination of massive public spending, state-backed industry, and systematic recruitment policies that, for now, maintain economic and social stability.
At the same time, it is increasingly clear that this model rests on short-term foundations. Labour shortages, overheating in the defence sector, rising inflation, and stagnation in civilian industry suggest that the growth potential of Russia’s economic behemoth is limited. Major systemic imbalances such as dependence on oil, Chinese supplies, and controlled credit pose significant risks for the future.
Although an immediate collapse of the Russian economy is unlikely, the combination of structural stagnation, a demographic crisis, and sophisticated sanctions pressure is systematically eroding its long-term potential and its ability to finance a large-scale military conflict. The economy is transforming into an isolated, state-run military enterprise dependent on a single objective: sustaining war in order to sustain itself. The Kremlin’s strategy is therefore a high-stakes gamble, predicated on the assumption that Western political will might break before Russia’s structural economic decline becomes irreversible.
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Martin Lukáč is an Intern at the Strategic Analysis Young Leaders Programme
Disclaimer: Views presented here are those of the author solely and do not necessarily reflect the views of the Strategic Analysis.
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