Following Russia’s invasion of Ukraine, the country experienced an unexpected economic boom driven by massive defense-related fiscal spending. This approach, known as ‘military Keynesianism,’ fueled growth by pouring resources into the military-industrial complex, which reached a value of $167 billion last year. This spending led to increased industrial production, GDP growth, and higher wages in war-related sectors.
However, Russia’s economy is now facing significant challenges. The country is encountering hard limits in labor, productivity, and inflation. Prior to the invasion, Russia had an unemployment rate of 4.75% in 2021, which dropped to a record low of 2.4% in early 2025. Despite this, a mass exodus of residents and significant military casualties have exacerbated a pre-existing worker deficit. In 2022 alone, the number of workers aged 16 to 35 fell by 1.33 million, hitting a record low since 1996.
These labor shortages have been compounded by citizens being drafted, emigrating, or moving to defense-related jobs. While real wages increased, productivity did not, fueling inflation and threatening stagflation outside the military sector. This spring, Russia’s manufacturing sector suffered its steepest downturn in nearly three years, and industrial production growth hit a two-year low, increasing only 0.2% year-on-year.
Inflation in Russia is currently at nearly 10%, with the central bank’s interest rates reaching 20% in June. The central bank forecasts growth between 1% and 2% for 2025. Economists suggest that for sustainable growth, Russia needs to improve labor productivity, a difficult task amid ongoing sanctions and inflation.
Oil and gas revenues, which account for around 20% of Russia’s GDP, highlight the precarious nature of its fiscal health. Despite recent increases in oil prices offering temporary relief, the lack of foreign investments and the total retreat of American companies remain significant issues.
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Russia’s economy boomed after the invasion of Ukraine—it’s now running out of steam
Reshetnikov’s declaration confirmed what several economists foresaw earlier this year: Russia’s high-spending war economy, after years of defying predictions of imminent recession, is finally running into the hard limits of labor, productivity, and inflation. Russia’s 2022 invasion of Ukraine prompted a slew of sanctions by Western nations, and the near-total departure of Western companies from the nation. But despite predictions of its imminent demise, the country’s economy has held up fairly well by pursuing what economists call “military Keynesianism,” fueling growth through massive defense-related fiscal spending. By pouring a record number of resources into the military-industrial complex, which reached a value of $167 billion last year, the Kremlin spiked industrial production, drove two consecutive years of GDP growth, and lifted wages across war-related sectors.
— news from Fortune