Recent reporting on a disastrous wargame simulating a Russian incursion into Lithuania—without any Western response—reflects growing concern about Russia’s ability to wage war against NATO members beyond Ukraine in the near future, with or without a resolution to the war in Ukraine. Setting aside questions of military doctrine or capacity, there is a notable gap in understanding what the Russian economy and regime can sustain on the home front in these future scenarios.
There is little doubt that European governments have neglected their own military capabilities for too long. But Russia’s capacity to sustain the wartime economy it has built on the fly since February 2022 is now at an inflection point—a victim of the regime’s refusal or inability to properly mobilize for war. Without a dramatic correction to its economic imbalances, the Russian economy five years from now will have far less capacity to sustain a large-scale war against European states unless that war ends swiftly.
Businesses now speak openly of «optimization,» increasingly relying on part-time employment and other measures to slash staff spending. As a result, the façade of growth—previously inferred from rapid nominal wage and price increases—is collapsing. Behind it, a far less resilient picture is emerging.
The largest problem facing the wartime economy is straightforward: virtually all productive capacity expanded since 2022 serves the war effort directly or depends to some degree on incomes and cash flows driven by the war. The multiplier effect of defense spending and federal procurements—the extent to which each ruble spent by the state generates additional economic activity—collapsed in the second half of 2024. This blow was deepened by the end of mortgage subsidies that had propped up consumer spending.
Without growth in the civilian economy and without any prospect of another commodity windfall, the regime is eroding its ability to expand the tax base needed to sustain militarization—unless it resorts to politically dangerous full mobilization, further damage to civilian businesses, and faster declines in living standards. In short, Russia is slowly becoming a garrison state—one with relatively developed e-commerce and financial services bracketed onto an increasingly militarized industrial base, sustained by commodity exports.
And tomorrow and tomorrow and tomorrow
Unfortunately for the regime, sanctions relief has become a material economic risk because of the economy’s gradual deformation since 2022. Consider Russia’s capital stock. Vice Premier Aleksandr Novak has admitted that fixed-asset investment growth in 2025 is expected to be close to 0%, while the Ministry of Economic Development forecasts a 0.5% decline in 2026. Q3 investment data released in December painted a grim picture: investment in computer and electronic/optical products manufacturing fell 41.6% year-on-year, machinery and equipment fell 19.3%, construction fell 22.8%, transport and storage fell 33.3%, telecommunications fell 14.6%, and administrative services fell 17.3%.
These are all leading indicators of recession this year, compounding the distorted capital allocation seen since 2022. According to Rosstat real-terms data for fixed-asset investment (factories, roads, physical infrastructure), net investment in transport and logistics was 28% higher by the end of 2024 than in 2021. Yet Russian Railways is currently carrying less freight than during the COVID period, has slashed its investment program for several years running, and January figures showed a net 7% year-on-year decline in aggregate haulage.
Investment in metals production rose 28% and in metal products more than 68% over the same period, while Russia’s steelmakers have faced large demand declines, construction has contracted since 2024, and consumer spending has followed suit. Meanwhile, investment in consumer retail was 10% lower in 2024 than in 2021 and has fallen further since. Telecommunications investment was nearly 16% lower—surprising given the emphasis on digitalization and data as drivers of the productivity revolution Mishustin hopes to engineer. Infrastructure more broadly may have been «optimized,» but it has suffered worsening structural underinvestment since 2022, especially in utilities.
A cursory reading of the available data makes clear that investment—the engine through which demand, incomes, and productive capacity are created and distributed—has not substantively increased Russia’s ability to produce consumer goods. A sudden repeal of sanctions would therefore be disastrous: the abrupt decline in import price levels would deliver a negative trade shock to domestically produced light industrial products and consumer goods.
While the cost of importing machinery, machine tools, and other inputs needed to build factories or businesses would fall significantly, no large pool of underutilized labor remains to be mobilized. The extensive nominal inflation of the past four years, combined with the currently stronger ruble exchange rate, has raised producers’ real costs relative to imports. To manage this shock, the regime would need to maintain extensive capital controls—even without sanctions trapping capital in the country. Without them, those who have profited most from the war (a very small share of the population in which non-real-estate wealth has concentrated) would almost certainly send what they can into foreign banks and financial assets.
Worse still, the ruble’s recent stabilization at levels not far from the post-Crimea range of 60−70 to the US dollar has been achieved by strangling imports through high interest rates. Last year’s trade surplus—the regime’s only direct means of accessing credit through export earnings—fell 8.7% from 2024 to $ 139.3 billion.
The end of sanctions would therefore create an indeterminacy problem for policymakers, businesses, and households alike. Everyone would have an incentive to buy better-quality foreign products as quickly as possible, eroding the trade surplus, weakening the ruble, and forcing policymakers to keep interest rates elevated. An increase in Russians traveling abroad, if it materialized, would also register as an import in the national accounts. Declines in investment would continue unless rates fell dramatically—which, given the tight labor market and the expansion of war-related productive capacity without benefits to civilian sectors, would unleash another round of self-sustaining inflation similar to 2023 and much of 2024, necessitating higher rates for longer.
Any discussion of sanctions relief as a tailwind for a future Russian economy must grapple with how deeply these imbalances are now embedded in the country’s macroeconomic conditions. They cannot be unwound simply or quickly.
Resilient and/or brittle?
Russia’s underinvestment and malinvestment paint a very different portrait of future capabilities than scenarios that—understandably—take its static capacity to maintain an expanded military through and past 2030 as given. One must think in terms of opportunity cost and long-run obligations.
In classic fashion, last September Putin announced that 20 trillion rubles would be spent on infrastructure through 2036—a sum officials could proudly claim equaled 10% of GDP. But that amounts to just 1% of GDP annually over a decade in a country that has needed to spend closer to 5% (and perhaps significantly more) annually for modernization and, where relevant, expansion. Officials have known for years—and noted before the invasion—that investment levels had to rise to sustain GDP growth rates closer to 5%. Since infrastructure investment tends to have a catalytic effect for businesses, such spending—along with education and healthcare—tends to be the most supportive of growth.
When an economy is starved of necessary investment in infrastructure capacity, persistent inflation risk builds over time. If nominal incomes suddenly accelerate—as occurred in 2023−2024—the surge in spending power can quickly outstrip what existing railways, roads, utilities, and other public goods can sustain. In a country where transport costs have often represented 10−20% of the final price of many goods over the past twenty years, these bottlenecks have an exaggerated effect. Multiply this dynamic across the broader economy.
Poor demographics—compounded by the accelerating loss of able-bodied working-age men—the tight labor market resulting from COVID, recruitment, and the wartime economy, and the contested politics of migration all create additional bottlenecks. High interest rates for civilian businesses that cannot access credit do the same. So does a national corporate system overly reliant on self-funded investment rather than bank credit—a downstream effect of inadequate anti-trust enforcement and the concentration of market power in state or state-adjacent enterprises, which contributes to persistent underinvestment and higher prices for consumers.
Talk of the Russian economy’s «resilience» often conflates deepening economic distortions with a profound capacity to «adapt.» Adaptation is real, but just as individuals can learn unhealthy coping strategies, so too can economic agents and policymakers trapped in a system whose dysfunctions have intensified over the past decade. Structurally, the regime has built a brittle economy that struggles to accommodate strong expansions of consumer demand without high inflation, struggles to invest in productive capacity unless the state directs it, and cannot grow meaningfully above current income levels without abandoning some core tenets of how «Putinism» as a system is constructed. These issues persist whether or not sanctions are ever lifted.
For the garrison, everything. For the rest, what’s left
Imagine a post-war scenario in which Russia maintains a military of 1.5 million active-duty soldiers backed by another 1.5 million reserves and ancillary personnel. That totals roughly 3 million people—largely working-age men—in a workforce of just over 73 million. About 4% of the workforce would be tied to positions completely reliant on state pay at salary levels inflated by wartime service. Estimates vary, but let’s assume these 3 million are supported by another 4 million in manufacturing roles effectively reliant on state military procurements. That adds up to a bit more than 5% of the workforce. Combined, this represents just shy of 10% of all officially counted working-age people in the Russian economy.
This 10% is joined by hundreds of thousands of additional workers in other sectors such as metallurgy, mining (notably wartime expansions in rare earths production), and logistics roles fed by state spending. In an economy that wastes human capital so spectacularly, it is exceedingly difficult to get the other nine out of ten workers to underwrite this segment of the workforce—particularly when so much post-Crimea job growth outside defense manufacturing has clustered in low-productivity service jobs.
From a base of approximately one in ten laborers explicitly reliant on defense spending—and more indirectly so, returning only a fraction of their salaries in taxes to the state—policymakers are further constrained by their dependence on oil and gas revenues to balance the budget, the inflationary effects of raising consumption taxes, and a private sector skidding toward collapse. There is little reason to believe that a peace deal in Ukraine would suddenly revive the Russian economy. Excepting 2021—which was another mini-commodity windfall largely squandered—the country’s GDP growth ceiling remains approximately 1% per year. There are hundreds of thousands fewer able-bodied working-age men than in 2021, and the already chronic disease of underinvestment in infrastructure and productive capacity has only deepened. Worse, much of the new productive capacity built to meet demand remains reliant on continued state military spending at levels—according to German intelligence—closer to 10% of GDP, 50% higher than official figures.
Unless spending continues at current levels, some military plants would have to idle post-war. Though Sergei Chemezov and others have spoken of shifting into civilian production, it is unrealistic to expect Russia’s defense giants to meaningfully expand into light industrial production—where they would be uncompetitive against imports—and with consumers’ declining spending undermining any investment in «dual-use» goods serving both military and civilian demand. If plants idle, associated demand for freight and metals (a key source of support for metallurgical firms and coal producers facing bleak export outlooks) would also fall.
Any large-scale rotation of spending out of defense into other areas would swiftly trigger a consumer recession while risking higher inflation, as construction, services, or whatever benefits from that rotation struggle to find labor to meet new demand—much like what occurred in the US after WWII.
The likeliest scenario is a sustained decline in living standards over the next few years, coupled with real-terms declines in budget revenues, public investment, and private investment. Imports cannot be allowed to rise significantly, as this would weaken the ruble, drive inflation higher, and harm investment. Yet the only way to prevent this outcome is to keep strengthening «buy Russian» requirements for businesses and federal procurements—creating a spiral of tight labor markets without sufficient demand to sustain investment, leaving inflation structurally higher unless rates are held onerously high or federal spending is cut to the bone once again. The worse the decline in business investment in 2026, the worse the fall in real incomes will be.
The economy will adapt and eventually exit recession, but it will take a significant amount of time, and the inertia of Russia’s low-growth ceiling will reassert itself—worsened by the specter of peaking oil demand and abundant LNG supplies.
Russia will not become another North Korea, nor do declines in real incomes or quality of life necessarily trigger a political crisis. From a purely financial perspective, with or without sanctions, today’s military spending levels and the macroeconomic damage they inflict are unlikely to remain sustainable through 2030 without a punishing economic adjustment. Garrison states can still offer amenities and pleasures. They can retain pockets of innovation or dynamism, reinvent the wheel, and find ways to squeeze more tax from citizens and subjects. But in Russia’s case, an expanding share of the state’s resources is being funneled away from productive uses—weakening long-run growth, harming public health and welfare, and eventually reducing the resources available to mobilize for future conflict.
So many have made so much money from the reorientation of the state’s spending and capacity toward war that the Kremlin cannot feasibly stop unless it plans to unleash analogous sums for positive development. Yet the longer it spends like this, the more embedded these conflicting inflation, interest rate, currency, and investment dynamics become. Officials can claim poverty is at record lows, yet 40% of Russians say they have difficulty affording—or simply cannot afford—the basics needed to get by. Life is visibly getting worse for most Russians. Deal or no deal with Kyiv, there are no easy ways out.
