Russia’s War Economy Faces Stagnation as Growth Slows

Russia’s economy, which initially benefited from increased military spending following the full-scale invasion of Ukraine, is now experiencing a slowdown. While GDP growth reached approximately 4% annually in 2023 and 2024, propelling Russia to become the ninth-largest economy globally, forecasts for 2026 predict a significant deceleration to just 0.8% The Guardian. Experts caution that the economic boost fueled by the war is waning, potentially leading to a recession.

Tax Policy and Inflationary Pressures

In early 2026, Russia implemented changes to its tax policy, increasing the value-added tax (VAT) from 20% to 22% and introducing excise taxes on electronics. These measures were intended to address the slowing economy, but businesses have largely passed the increased costs onto consumers, resulting in higher prices for goods and services RFE/RL. The Central Bank of Russia forecasts inflation to be around 4% by mid-2026.

Budget Deficit and Defense Spending

Russia’s budget is facing a growing deficit, primarily driven by escalating military expenditures. In 2024, approximately 6% of GDP is allocated to defense, although some estimates suggest total war-related spending could reach as high as 9% of GDP UIAMP. The Institute of Economic Forecasting of the Russian Academy of Sciences suggests that unfavorable demographic trends, technological limitations, and declining revenues from hydrocarbon exports could further worsen the economic situation in 2026.

Labor Shortages and Technological Dependence

The Russian military-industrial complex is grappling with a critical labor shortage, stemming from demographic challenges, conscription, and the emigration of skilled workers. Unemployment rates reached a historically low 3% in 2023 RFE/RL. The Russian economy remains heavily reliant on foreign-produced components, raising concerns about its technological advancement.

Threat of Stagnation and Recession

Analysts warn that Russia’s economy is in a precarious position. GDP growth, which averaged around 4% in 2023-2024, has slowed to between 0.5-1% at the end of 2025 The Guardian. The liquid assets of the National Welfare Fund have significantly diminished, and revenues from oil and gas exports are nearly half of what was projected. Some experts predict a full-fledged recession as early as 2026, characterizing the Russian economy as resembling a pyramid scheme that relies on the continuation of the war for stability.

Military Spending Growth

Global military spending has surged since the start of the war in Ukraine. In 2022, it reached $2.24 trillion, a 3.7% increase in real terms. This rose to $2.443 trillion in 2023 (a 6.8% increase) and further to $2.718 trillion in 2024, representing a 9.4% increase year-over-year UIAMP. Ukraine’s military spending experienced a dramatic increase, soaring from approximately $5-6 billion in 2021 to $44.0 billion in 2022, a 640% increase – the largest annual rise recorded since 1949 UIAMP. In 2024, Ukraine’s military spending reached $64.7 billion, representing 34% of its GDP.