Russia’s War Economy: Caught in a Perilous Cycle

As Russia's war in Ukraine stretches into its second year, the country's economic landscape reveals a troubling paradox: Moscow finds itself in a position where it cannot afford to win or lose. According to Renaud Foucart, a senior economics lecturer at Lancaster University, the Russian economy is increasingly dominated by the costs and impacts of this ongoing conflict.

In a recent op-ed for The Conversation, Foucart argues that Russia's economy is tethered to its military endeavors, with the Kremlin’s record military expenditure driving its GDP growth. Official figures indicate a 5.5% increase in GDP year-over-year for the third quarter of 2023. However, this growth is largely fueled by an unprecedented defense budget—36.6 trillion rubles, or approximately $386 billion—for this year alone.

Foucart underscores that this surge in economic activity is not indicative of a healthy economy but rather a reflection of the war's overwhelming influence. "Military pay, ammunition, tanks, planes, and compensation for dead and wounded soldiers, all contribute to the GDP figures," Foucart notes. "Put simply, the war against Ukraine is now the main driver of Russia's economic growth."

Yet, this military-driven economic uptick masks deeper problems. The war has exacerbated a severe labor shortage, with an estimated 5 million workers missing as young professionals flee or are conscripted. This shortage has led to soaring wages and mounting inflation, currently at 7.4%, well above the central bank's 4% target. Furthermore, foreign investment in Russia has plummeted, dropping by around $8.7 billion in the first three quarters of 2023, according to the central bank.

The economic fallout poses a formidable dilemma for Moscow. Should Russia win the conflict, the financial burden of rebuilding and securing Ukraine would be staggering. The prospect of economic isolation from the global market, compounded by continued Western sanctions, further complicates the situation. Foucart suggests that Russia's "best hope" might lie in increased dependency on China, its few remaining strategic allies.

Conversely, a prolonged stalemate seems equally problematic. Foucart highlights the massive costs of maintaining and repairing Russia’s own infrastructure and addressing internal social unrest. "The Russian regime has no incentive to end the war and deal with that kind of economic reality," he writes. "Its economy is now entirely geared towards continuing a long and ever deadlier conflict."

As experts continue to analyze Russia's economic trajectory, concerns about further degradation persist. Despite claims of resilience in the face of Western sanctions, the long-term outlook for Russia remains bleak. The nation's economic strategy, heavily reliant on warfare, could lead to a protracted and increasingly perilous cycle with no clear path to recovery.