The Russian economy has been relatively strong despite the war with Ukraine. The entire Russian economy has pivoted around military goods due to the war with Ukraine, sustaining industrial production, which has not only created jobs but also helped in wage increases. As a result, some analyses suggest that the peace agreement with Ukraine, pushed by U.S. President Donald Trump, could actually threaten the Russian economy.
According to Helly Shimola, chief economist at the Bank of Finland's Emerging Economy Research Institute, at least 40% of Russia's GDP growth last year was driven by war-related production. Considering that the multiplier effect of wage increases and rising consumption due to war-related payments is not included, the impact of war-related GDP growth in Russia could be even greater. In other words, if a peace agreement is reached and Russia's defense expenditure decreases, the Russian economy could suffer.
Moreover, the money given to Russian soldiers’ families fighting in Ukraine has increased the wealth of some of the poorest regions in Russia. The so-called "death economics" refers to the wages paid to soldiers, compensation for those killed or injured in combat, and other payments, which accounted for 1.5% of Russia's GDP as of mid-2024. It also represents more than 3% of total consumption expenditure.
Economists believe that halting war-related payments will lead to a recession in domestic consumption in Russia. Vasily Astrov, an economist at the Vienna Institute for International Economic Studies, noted to the Wall Street Journal (WSJ), "In the second half of last year, war-related payments increased further, becoming more significant for the Russian economy. Reducing these payments will deliver a negative shock to private consumption and GDP growth."
The Russian economy defied expectations of a recession following its invasion of Ukraine in February 2022. Russia's GDP contracted by only 1.4% in 2022, and it grew by 4.1% each in 2023 and 2024. This is the result of combined war-related expenditure and oil export revenues. Janis Kluge, a Russia expert at the German Institute for International and Security Affairs, predicted, "If military expenditure is reduced, job losses will occur in many regions of Russia."
Of course, if the war ends, some sanctions against Russia may be lifted, trade could improve, and corporate confidence may increase. In addition, Russia will need to continue investing in its defense sector for some time to recover combat capabilities lost due to the war with Ukraine. Some believe that ending the war could lead to a soft landing for the economy.
However, there are projections that it will be difficult to maintain the current level of military expenditure during peacetime. The Russian government has budgeted 13.5 trillion rubles (approximately 233.82 trillion won) for defense spending this year. This exceeds 6% of GDP and matches the highest levels seen during the Soviet era. Russia has been running a fiscal deficit throughout the war and has depleted two-thirds of its national reserves since the invasion of Ukraine.
Russian officials expect that if relations between Russia and the United States improve, American corporations will return to Russia, but the likelihood is slim. Maria Shagina, a senior researcher at the International Institute for Strategic Studies (ISS) in Berlin, pointed out, "American investors may be reluctant to return to Russia due to chronic issues such as geopolitical risks, reputation, cumbersome procedures, and weak property rights," stating, "The challenge facing the Russian government is how to transition from a wartime economy, mobilized to support the war effort, to a civilian economy."