Recent indicators suggest that the Russian economy has become weaker compared to the initial stages of the war in Ukraine. As the war enters its fourth year, a recent report from the "Peace Research" institute at the University of Edinburgh reveals that the Russian economy is facing increasing challenges due to the massive financial burdens imposed by the war.
The report, titled "A Race Against Time? Why Russia's War Economy Is Running Out of Steam," states that Russia has been forced to spend heavily to finance military operations, at a time when its ability to generate revenues has declined. The report explains that one of the main sources Russia relies on to fund this spending, the Russian sovereign wealth fund, is being rapidly depleted. According to the data, about 76% of the fund's reserves, which stood at around $148 billion before the war, were spent in just the first three years of the war.
Preparations
In a previous article of mine, published last May, I pointed out that Russian President Vladimir Putin has the capacity to bear the costs of a long war, based on economic preparations that spanned more than two decades. During his tenure, Russia consistently achieved budget surpluses, succeeded in building up large foreign exchange reserves, and reduced its dependence on Western debt.
However, the fundamental question raised today is to what extent these preparations can continue to support the Russian economy. Currently, Russia is still able to continue financing the war, but this is achieved by relying heavily on its previous reserves, whether in foreign currency or from the sovereign wealth fund, in addition to allocating an increasing share of its national resources to the military sector.
Pressures n Pressure on the Russian economy is increasing due to external factors. The European Union, which is currently the largest importer of Russian liquefied natural gas and pipeline gas, announced in early December its intention to stop importing Russian LNG by 2026, with pipeline gas imports to cease the following year.
Despite these challenges, Russian sources of income have shown a degree of flexibility during the war years. Russia has diversified its crude oil export destinations, with now China accounting for about 47% of these exports, India for about 38%, and Turkey with a share estimated at around 6%.
These financial flows, along with pre-war economic preparations, have helped support the three main pillars of any economy during conflicts: industrial production, financial capacity, and social flexibility.
Industry and Energy n According to an analysis by the Center for Economic Policy Research in 2024, war-related industrial production in Russia increased by about 60% in the first years of the war, and this expansion continues to be a mainstay of the Russian industrial base. The defense industry has taken the largest share of the manufacturing sector's growth since the war began.
In the same context, energy sector revenues remain an important source of support for the federal budget, despite the government's increasing reliance on domestic borrowing and drawing down reserves to cover the financial deficit.
At the household level, wage increases in sectors related to the military establishment, as well as government assistance to families of conscripted soldiers, have helped mitigate the effects of inflation. Moreover, conscription revenues have contributed to raising the household savings rate, especially in poorer regions of Russia. Nevertheless, it cannot be ignored that this war and its staggering costs cast a shadow on the prospects for Russia's economic growth.
Challenges nThe key question now is: how long can Russia continue to support its war economy by relying on what remains of its reserves? Labor shortages have become a general structural problem, not just a temporary phenomenon. At the same time, inflationary pressures persist even as growth slows. These challenges are compounded by the ongoing population decline. Conscription, waves of emigration, and long-term population decline have reduced the size of the available workforce for both the industrial sector and the military establishment.
Furthermore, Russia faces increasing technological constraints. Export controls imposed on it have isolated it from many advanced components, forcing it to rely more on parallel imports or local alternatives, which are often more costly or less efficient. This negatively affects production speed and limits the development of new, advanced military systems.
Ultimately, Russia's ability to continue fighting depends heavily on factors outside its borders. These factors contribute to slowing the pace of tightening financial pressure, while increasing U.S. and European sanctions restrict Russia's access to advanced technology and complicate its external trade.
Although the Russian economy does not appear to be on the brink of collapse, it also lacks full stability. It continues to exist by shifting burdens and pressures to the future, whether in the labor market, public finances, or the daily lives of Russian households.
