Russia’s economic activity has remained high due to substantial military expenditures, which have kept industrial facilities operational and unemployment rates low. However, this growth model is increasingly unsustainable, as the nation relies heavily on imports from countries like China for goods previously sourced from Western markets. Alexandra Prokopenko, a fellow at the Carnegie Russia Eurasia Center and former advisor to Russia’s central bank, noted in a recent Foreign Affairs article that the country has reached the limits of its production capabilities and labor supply. To significantly expand military output or train more troops, Russia would need to adopt a full-scale wartime economy, redirecting all available resources toward defense—similar to its approach during World War II. This could involve repurposing civilian manufacturing lines, such as auto plants, for military use. Yet the Kremlin has avoided such measures to prevent consumer shortages and potential public discontent. n nEconomic strains are mounting due to supply chain constraints, workforce deficits, tighter fiscal policies, and the absence of advanced Western technology. Gross domestic product (GDP) expansion has sharply decelerated, registering only 1.1% year-to-date, a notable drop from 4.1% in 2024 and 3.6% in 2023. The primary driver of current spending—military operations in Ukraine—offers little long-term economic benefit. Prokopenko likened defense outlays to a disposable-goods model: factories run at peak levels, workers are employed, and demand for raw materials rises, but the final products are quickly destroyed. Weapons and equipment lost in combat represent sunk costs, while ongoing payments to injured or deceased soldiers will continue burdening the state budget even after hostilities cease. n nUnlike investments in infrastructure such as roads, energy systems, or educational facilities, military spending does not enhance a nation’s productive capacity. As a result, while industrial activity remains elevated, the economy accumulates no durable assets or efficiency improvements. This dynamic keeps the country busy but progressively poorer over time. n nRecent U.S. sanctions targeting major energy firms Rosneft and Lukoil could further destabilize the economy. These two corporations handle roughly half of Russia’s oil exports, with Rosneft alone contributing about 17% of federal revenue. With oil and gas prices already low, the Kremlin has been forced to tighten its budget. Although alternative sales routes exist, they come with higher logistical costs and risks, especially as buyers may avoid transactions due to fear of secondary sanctions. Capital Economics warned that the decline in energy income might push Russia into a recession. n nEvidence suggests the downturn may have already begun. Sequential GDP contraction in the first and second quarters, according to Russia’s central bank, meets the criteria for a technical recession. Sberbank CEO German Gref described the current state as “technical stagnation,” while Economy Minister Maxim Reshetnikov cautioned in June that the nation was “on the brink” of economic decline. The actual impact will depend on how rigorously the U.S. enforces its new sanctions. Some analysts speculate the move may be part of a broader negotiation tactic, particularly given former President Donald Trump’s history of using escalation to prompt de-escalation. Capital Economics also questioned whether Trump would maintain policies that could increase domestic fuel prices in the U.S. n nNonetheless, even if Russia enters a recession, experts believe it is unlikely to force President Vladimir Putin to end the war in Ukraine. So far, economic hardship has not altered the Kremlin’s strategic objectives. Officials are expected to resist any appearance of being coerced by external pressure. However, the financial toll of sustaining the conflict is expected to grow steadily.
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Russia’s ‘disposable-goods’ economy gets busier but poorer, and sanctions could trigger a recession
Massive defense spending has propped up growth, kept factories humming, and pushed unemployment lower, while Moscow has relied on allies like China for goods no longer available from the West. n n“But the country has exhausted its reserves of manufacturing capacity and manpower,” Alexandra Prokopenko, a fellow at the Carnegie Russia Eurasia Center and former Russian central bank advisor, wrote in Foreign Affairs on Monday. n n“To produce substantially more equipment or recruit and train far more soldiers, Moscow would have to shift to a more comprehensive war footing by directing all available resources toward military needs, as it did during World War II, or commandeering civilian production lines for military purposes.” n nSuch a mobilization would require Moscow to order car plants, for example, to exclusively produce military vehicles. But the Russian government hasn’t resorted to those measures because it doesn’t want to create shortages of consumer goods and risk social unrest, she added. n nMeanwhile, production bottlenecks, labor shortages, tighter government spending, and the lack of Western technology are increasingly causing strains in the economy, Prokopenko said. n nGDP growth is slowing sharply, tracking at just 1.1% so far this year, down from 4.1% in 2024 and 3.6% in 2023. That’s partly because all the money Moscow spends for its war on Ukraine has few lasting benefits. n n“In effect, defense spending functions like a disposable-goods economy: factories operate at full capacity, workers earn wages, and demand for inputs surges, but the output is designed to vanish almost immediately,” she explained. n nNot only do weapons and equipment get obliterated on the battlefield, but payments for dead and injured soldiers will continue to weigh on the Kremlin’s budget even after the fighting ends. n nSuch spending contrasts with government outlays on infrastructure that help improve an economy’s long-term potential. n n“This cycle sustains employment and industrial activity in the short term but generates no lasting assets—such as highways, power plants, or schools—or productivity gains, leaving the economy busier yet poorer with each passing year of war,” Prokopenko wrote. n nRussian recession warnings n nAnd U.S. sanctions announced Wednesday on Russian energy giants Rosneft and Lukoil could push the economy over the edge. n nThat’s as oil and gas revenue, which is the Kremlin’s main source of funds, has been falling amid low energy prices, forcing Russia to rein in its budget. The two companies account for about half of the country’s oil exports, and Rosneft alone contributes about 17% of Russia budget revenue. n nWhile they can still find ways to sell their crude, it will require more work-arounds that add to costs while some customers may balk over fears of secondary sanctions. n n“As for Russia itself, the hit to energy revenues could tip the economy into recession,” Capital Economics said in a note on Thursday. n nIt’s possible a recession has already arrived. Last month, data from Russia’s central bank showed GDP shrank on a sequential basis in the first and second quarters, meeting the definition of a so-called technical recession. n nAlso last month, Sberbank CEO German Gref, one of Russia’s top banking chiefs, said the economy was in “technical stagnation,” And in June, Economy Minister Maxim Reshetnikov warned that Russia was “on the brink” of a recession. n nTo be sure, much depends on U.S. execution of its new sanctions, while markets weigh whether the measures are another example of President Donald Trump’s negotiating strategy of escalating to de-escalate. n nIndeed, Capital Economics said it’s hard to see Trump sticking with a policy that would raise U.S. gasoline prices. n nBut even if Russia suffers a recession, analysts see a low probability that it will be enough to bring Putin to the negotiating table and end his war on Ukraine. n n“Russia’s economic problems have not had much bearing on Putin’s war aims so far, and the Kremlin will want to resist being strong-armed into a deal by the US,” Capital Economics said. “But the economic costs for Putin for continuing the war are likely to ratchet up.”