Russia’s wartime economy had revolted against Western sanctions and geopolitical isolation, which showed signs of fatigue. On Thursday, Russian Economy Minister Maxim Reshetnikov warned the country that it was “On the Edge” The economic recession of the St. Petersburg Economic Forum.
Reshetnikov’s manifesto confirms what several economists had anticipated earlier this year: After years of forecasting the imminent recession forecast, Russia’s high-consumption economy has finally fallen into difficult restrictions on labor, productivity and inflation.
Russia’s 2022 invasion of Ukraine prompted a series of sanctions by Western countries, and a near-national deviation from Western companies. But despite predicting its imminent demise, the country’s economy has achieved a long-term attitude by pursuing what economists call “military Keynesianism” that has promoted growth through large amounts of defense-related fiscal spending. By investing record resources into last year’s military industrial complex to reach $167 billion in value, the Kremlin soared industrial production, driving GDP growth for two consecutive years and canceling wages from war-related sectors.
For decades, the Kremlin allowed Russia’s defense budget to be faster than the country’s GDP, but budget spending has already been A large increase Since Russia invaded Ukraine. According to the World Bank, the country spent 3.6% of its GDP in 2021 on the Ministry of Defense. Now, 6.3% of GDP is spent on defense spending, almost twice the U.S. share.
Russia’s military spending bubble created the musical chair game described by Elina Ribakova, an economist at the Peterson Institute for International Economics.
“Everyone is making money. Suddenly, people enjoy higher incomes, can mortgage or buy durables. This makes this war pop in a practical, morbid way. You want the music to keep moving forward.”
But, as Nicholas Fenton, deputy director of the Center for Strategic and International Studies, warned: “You can only spend a lot of money before the economy encounters structural restrictions. During this period, the big link to the Russian economy is the country’s chronic labor shortage.”
Before Russia invaded Ukraine, the country reported an unemployment rate of 4.75% in 2021, reaching levels Record 2.4% low According to data from the national report, in early 2025. But as unemployment rates drop, the country has also witnessed massive escape One million residentsand suffered major military deaths among thousands of military deaths. These figures exacerbate the pre-existing worker deficit in Russia due to the decline in working-age population. In 2022 alone, the number of workers aged 16 to 35 fell by 1.33 million, with the lowest labour share recorded since 1996.
These existing labor market shortages complex With the drafting of citizens, immigration may flock to defense-related work and receive profitable bonuses. Despite the increase in real wages, productivity has not increased, fueling inflation and threats of traps outside the military and stifling investment in non-defense sectors.
This spring, Russia’s manufacturing industry, including defense companies, suffered its biggest recession in nearly three years, down 2 points from February to March. Similarly, Russia’s industrial production growth reached a two-year low, up just 0.2% year-on-year.
All prices are rising. Growth 9.52% Last year, it was 7.42% compared with 2023. Currently, Russia’s inflation rate is nearly 10%, and the hawkish stance of the central bank has been Interest rates up to 20% In June. Meanwhile, the central bank’s growth forecast is 1-2% between 2025.
However, interest rates may be shifting: Senior officials and Russian businessmen have repeatedly called for cuts to promote growth, while President Vladimir Putin urged policymakers to balance inflation and growth.
Ultimately, the country will need to increase labor productivity for the country’s potential for change, a tough feat, which is ongoing sanctions and massive inflation, according to Alexander Kolyandr, senior researcher at the European Center for Policy Analysis.
Based on per capita, the United States’ GDP is far behind its peers. near Mexico or Türkiye is more Western Europe. Unlike Germany or Japan, Russia’s growth depends largely on exports of volatile commodities, such as oil and state-driven demand.
Oil and gas revenue 20% The country’s GDP emphasizes the instable nature of its fiscal health. In the first half of 2025, the decline in oil exports and falling global prices forced the Kremlin to modify its budget deficit. But the growing conflict between Israel and Iran has raised oil prices, providing potential temporary budget easing.
“The war in the Middle East is actually pretty good for Putin, but it doesn’t save the economy. It just means that the government may continue to maintain this policy of declining management,” Kolyandr told wealth.
Ribakova agrees with Kolyandr. “We’re kind of rubbing oil because it’s the most effective sanctions against Russia. Of course, now we’ve seen prices rise,” she said.
However, Russian oil exports do not solve the country’s lack of solutions for foreign investment and U.S. companies’ retreat. Even with President Donald Trump’s attitude of diplomacy with the Kremlin, Charles Kupchan, a senior fellow at the Foreign Relations Committee, made the return of American businesses to Russia the main bargaining chip.
“Trump said to Vladimir Putin, ‘If you are ready to reach an agreement and end this war and agree to a ceasefire, I can envision the return of the American company to Russia. I can envision Vladimir Putin’s recovery.”
