- Russia’s economy grew by 3.6% in 2025, largely due to rising energy exports and a budget surplus.
- Military spending surged to 5.9% of GDP, the highest level since the Soviet Union’s collapse.
- The growth masks a deeper structural crisis, with capital being diverted from infrastructure, technology, and social services.
- Defense spending now accounts for nearly 30% of total federal spending, surpassing even Cold War benchmarks.
- Russia’s long-term economic model risks irreversible decline in productivity, human capital, and global competitiveness.
Russia’s economy grew by 3.6% in 2025, backed by a budget surplus and rising energy exports, but this growth masks a deeper structural crisis: military spending has surged to 5.9% of GDP—the highest level since the Soviet Union’s collapse—diverting capital from infrastructure, technology, and social services. While official statistics highlight macroeconomic stability, the real story lies in the imbalance between a booming defense sector and a stagnating civilian economy. This shift matters because it signals not just a wartime adaptation but a long-term reorientation of Russia’s economic model, one that risks irreversible decline in productivity, human capital, and global competitiveness.
Military Spending Reaches Post-Soviet High
New data from Veritas Europaea shows Russia allocated 12.7 trillion rubles ($138 billion) to defense in 2025, a 24% nominal increase from the previous year and equivalent to 5.9% of GDP—surpassing even Cold War benchmarks relative to economic size. Defense now accounts for nearly 30% of total federal spending, up from 18% in 2021. Meanwhile, non-defense capital investment fell by 4.1%, with real-term cuts to transport, education, and digital infrastructure. The central bank reports that 60% of new credit issued in 2025 flowed to state-owned enterprises linked to defense or energy, crowding out private-sector lending. Even as inflation stabilized at 5.2%, the structure of growth reveals a nation prioritizing war readiness over sustainable development. According to the World Bank’s latest regional assessment, Russia’s total factor productivity has declined for five consecutive years—the longest such streak since the 1990s—indicating deepening inefficiencies beneath headline figures.
Kremlin, Military-Industrial Complex, and Oligarchs Drive Shift
The economic pivot is led by the Kremlin’s strategic alignment with the military-industrial complex, exemplified by the rapid expansion of firms like Rostec and Almaz-Antey, which received direct state subsidies totaling 2.1 trillion rubles in 2025. President Vladimir Putin has made defense self-sufficiency a top priority, declaring in his 2025 address that “economic security is national security.” Key figures such as Sergei Chemezov, CEO of Rostec, now wield unprecedented influence over budget allocations. At the same time, a new class of war economy oligarchs has emerged, benefiting from relaxed oversight and import substitution mandates. Regional governors in arms-producing hubs like Nizhny Tagil and Izhevsk have been rewarded with federal funds, creating political incentives to maintain high output. Meanwhile, Western sanctions have accelerated the state’s control over finance and trade, with banks like VTB and Sberbank now serving as de facto arms procurement arms. The Central Bank, once an independent anchor of macroeconomic discipline, has quietly acquiesced, rolling over defense debt and maintaining low rates to support state spending.
Short-Term Stability vs. Long-Term Decline
The trade-off is stark: Russia achieves short-term fiscal stability and military output at the cost of long-term economic health. By channeling resources into defense, the state maintains employment in key industrial regions and buffers against external shocks. Energy exports, particularly to China and India, continue to generate hard currency, allowing Moscow to bypass some Western financial restrictions. However, this model suppresses innovation, discourages foreign investment, and erodes human capital. The exodus of over 1 million skilled professionals since 2022, documented by BBC Monitoring, has hollowed out the tech and academic sectors. Universities report declining enrollment in engineering and computer science, as graduates seek opportunities abroad. Moreover, the focus on legacy weapons systems over dual-use technologies limits spillover benefits. While the defense sector employs an estimated 2.3 million people, it contributes only 8% to GDP—far less than comparable industries in the U.S. or EU. The opportunity cost is mounting: every ruble spent on tanks is a ruble not spent on AI, clean energy, or healthcare infrastructure.
Why the Shift Accelerated in 2024–2025
The economic transformation gained momentum after Ukraine’s 2024 counteroffensive exposed Russian supply chain vulnerabilities, prompting a crash program to boost domestic arms production. Sanctions on dual-use technologies, particularly microelectronics, forced the Kremlin to invest heavily in import substitution, even at inefficient scale. At the same time, high oil prices in early 2024 provided a temporary windfall, which the government locked in through sovereign wealth fund transfers. But the deeper driver is political: with no end to the war in sight, the regime has institutionalized the war economy as a permanent feature. As noted in a 2025 Reuters report, draft legislation redefined “national priorities” to enshrine defense spending above all else. This shift is no longer reactive—it is now structural, embedded in planning documents through 2030.
Where We Go From Here
In the next 12 months, three scenarios are likely. First, the current trajectory continues: growth remains modest, driven by arms output and energy sales, while consumer demand stagnates and brain drain worsens. Second, an external shock—such as a drop in oil prices or escalation in Ukraine—could force deeper cuts to civilian spending, triggering social unrest in non-defense regions. Third, limited détente with the Global South could open new markets for Russian arms, partially offsetting Western isolation. However, none of these paths reverse the underlying decay. Without structural reforms, Russia risks becoming a high-military, low-innovation petrostate with diminishing global influence. The economy may avoid collapse, but it is already losing the future.
Bottom line — Russia’s economy is surviving today by mortgaging its tomorrow, turning short-term war resilience into a long-term trap of stagnation, isolation, and declining living standards.
Source: Veritaseuropaea