While Putin ranged across various topics today during his Direct Line event—still ongoing at the time of writing—he opened the session with a line that has evolved over the past nine months: the economic slowdown is intentional. «It’s a conscious step, the price to pay for maintaining the quality of the economy and macroeconomic indicators.» What is striking is the inversion of the usual approach. Over the previous fourteen years, Putin has more often than not blamed economic conditions on the government, distancing himself as though he bore no responsibility. This year, however, that pattern has been reversed. Russia’s roughly 1% annual GDP growth is portrayed as an intentional cooling, one that Putin deems acceptable because the economy has grown 9.7% over the past three years—more than three times faster than the Eurozone.
The claim that the economy has grown 9.7% warrants scrutiny. Although GDP is a useful indicator, the growth since 2022 has depended on investment to an unprecedented degree in post-Soviet history—an investment surge with rapidly diminishing returns due to its heavy concentration in military industries. The recent uptick in non-military production over the past two months aligns entirely with year-end budgetary spending and remains comparable to levels seen in spring 2023. According to data from the company ModernWay, import volumes of goods from China have fallen 15−20% this year. Given that there has been no meaningful revolution in domestic production of consumer goods and that, even with parallel import schemes, consumers are absorbing higher costs, the growth Putin cites is unlikely to be as robust as it appears. It depends on sustaining elevated levels of military investment that continue to erode the civilian economy.
These considerations arise amid renewed speculation about whether peace talks—managed or mismanaged by the United States—will materialize. Analysts like Mark Galeotti and defense officials on NATO’s eastern flank are confronting an uncomfortable reality: any peace, if achievable, would free up Russia’s military to threaten others, as the armed forces continue to expand in size and to learn, adapt, and refine operations in an era dominated by mass drone warfare. This prospect is serious and should not be dismissed. Yet it overlooks a critical question: will Russia’s economic and political capacity to wage further conflicts remain durable in a post-peace environment?
First, there is no guarantee that a peace deal would bring meaningful sanctions relief. Although this is often assumed as a carrot in the Trump administration’s approach, Europe is likely to maintain restrictions with ongoing negative effects. More importantly, even the end of U.S. financial sanctions would not materially boost the Russian economy through an influx of developmental investment. Wartime nationalizations and the broader degradation of rules-based economic policy—in favor of direct interventions and sophisticated forms of manual control—have eroded confidence.
While some businesses will inevitably return, foreign investment has never been a major driver of Russian economic growth over the past two decades, with limited exceptions in oil and gas and a brief window in 2006−2007. Finally, the Bank of Russia would need to maintain capital controls without being able to blame sanctions for them. Without those controls, tens of billions of dollars would likely flow out to safer jurisdictions, led by the wealthiest Russians and followed by anyone with significant savings—especially in a world where war can suddenly be imposed.
Second, the regime’s willingness to prioritize the war and allocate all available resources to it does not mean the economy can sustain indefinite mobilization in peacetime without enormous costs. Defense Minister Andrei Belousov admitted that military spending this year exceeded already substantial plans by 20%—reaching 7.3% of GDP, or 15.9 trillion rubles. With plans to allocate 6% of GDP to defense over the next three-year cycle, that figure is likely to rise further. The 7.3% estimate is probably a significant understatement, as it excludes the opaque use of state-guaranteed policy loans to defense manufacturers, whose debts have been periodically rolled over since the first financial sanctions in 2014. If twenty-four years of underinvestment before the invasion created bottlenecks that limited the economy’s ability to absorb massive war-related spending without high inflation, the ongoing redirection of resources—combined with the demographic shadows of COVID and wartime casualties—has amplified those bottlenecks. Peace may offer relief only if accompanied by meaningful demobilization.
Russian Railways provides a key example. The war effort and the ability to sustain operational intensity in Ukraine depend heavily on a national rail system that was already underinvested before the invasion. Current projections indicate that coal transport by rail—the largest contributor to rolling stock orders and tariff revenues—may decline 24% by 2030, due to China’s alternative sources and the global energy transition nullifying any demand growth. Since transportation constitutes a large share of goods costs, ending cement tariff exemptions to raise revenue could increase prices by 16%. The company is reportedly so cash-strapped that it is being forced to sell its tower in Moscow City to raise funds. Efforts to boost revenue will fuel inflation, while aggregate cargo volumes continue to trend lower than even during the COVID nadir. Whatever infrastructure goes unbuilt, unimproved, or unexpanded today will translate into higher costs tomorrow.
Declines across the national metals and industrial base are severe enough to suggest little scope for a domestic manufacturing revival in peacetime. Severstal estimates that steel demand will fall 14% in 2025—the lowest level since 2011, when the economy shed roughly one million jobs in value-added production and manufacturing after the 2008−2009 crisis. Steel output was down as much as 20% as of October, while aluminum output fell 9.3%. These are crisis-level figures. The war provides no relief: domestic prices continue to rise despite falling output (albeit slowly), and manufacturers report that production is cheaper not only in China but even in Germany in many cases. If defense spending remains at officially 6% of GDP (and higher in reality), it will continue to drive inflation without stimulating demand beyond the military sector. Reduced domestic manufacturing will inevitably increase imports, threatening the trade surplus on which the regime’s macroeconomic stability depends.
Finally, there is little reason to expect interest rates to decline significantly anytime soon. Without sanctions and capital controls, high rates will be needed to keep money in Russian banks. Since the regime remains determined to maintain elevated military preparedness, it will perpetuate the inflationary effects of the war even as Putin and others speak of «quality» and deliberate economic cooling. As long as these conditions persist, the Bank of Russia will have limited room to cut rates. In turn, businesses will invest less, construction will slow, and yet more resources will effectively be redistributed to the military and defense-industrial sectors through preferential credit access.
European governments should worry not only about the terms of any peace deal in Kyiv but also about the day after tomorrow. Yet it is worth remembering that the war has profoundly damaged the Russian economy, even if not in the dramatic manner many Western officials initially hoped. The sheer quantity of resources directed to the military may continue to grow inexorably. But the quality of the economy sustaining it is deteriorating over time.
