In Reply to: What happens if they pass the bill anyway? posted by mh on June 22, 2025 at 10:31:14
Russia’s wartime economy, once defiant in the face of Western sanctions and geopolitical isolation, is showing signs of fatigue. On Thursday, Russia’s economy minister Maxim Reshetnikov warned the country was “on the brink” of a recession at the St. Petersburg Economic Forum.
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.
For decades, the Kremlin has allowed Russia’s defense budget to grow faster than the country’s GDP, but the budget expenditures have increased enormously since the start of Russia’s invasion of Ukraine. In 2021, the country spent 3.6% of its GDP on national defense, according to the World Bank. Now, 6.3% of the GDP goes to defense spending, nearly double the share in the United States.
Russia’s military spending bubble has created what Elina Ribakova, economist at the Peterson Institute for International Economics describes as a game of musical chairs.
“Everybody’s making money. Suddenly, people are enjoying higher incomes, and can get a mortgage, or buy durables. It makes this war popular in a practical, morbid way. You want the music going,” she explains.
But, as Nicholas Fenton, associate director at the Center for Strategic and International Studies warns, “You can only kind of spend so much before you hit structural limits in the economy. And the big hang up for the Russian economy throughout this period has been the country’s chronic labor shortage.”
Prior to Russia’s invasion of Ukraine, the country reported 4.75% unemployment in 2021, with levels hitting a record 2.4% low in early 2025, according to state-reported data. But as unemployment has declined, the country has also witnessed a mass exodus of as many as one million residents, and has suffered significant military deaths in the hundreds of thousands. These figures have exacerbated a pre-existing worker deficit in Russia due to a declining working-age population. In 2022 alone, the number of workers aged 16 to 35 fell by 1.33 million, and their share of the labor force was the lowest on record since 1996.
These preexisting shortages in the labor market have compounded as citizens were drafted, emigrated, or flocked to defense-related jobs with lucrative bonuses. Although real wages increased, productivity didn’t, fueling inflation and the threat of stagflation outside of the military, and stifling investments in non-defense sectors.