New Delhi: When Western economists predicted that Russia’s economy would implode under the combined weight of sanctions, battlefield costs, and isolation, their models seemed logical. After all, economic textbooks teach that prolonged war spending eventually destabilizes production, trade, and public morale. Yet, three and a half years after invading Ukraine, the Russian economy has not only avoided collapse—it has outperformed several major European economies like Germany and the UK. In his detailed analysis Why Russia’s War Economy Is Stronger Than You Think (Money & Macro, October 17, 2025), Dutch economist Dr. Joeri Schasfoort argues that this resilience is not accidental. It arises from deliberate adaptation: a transformation of Russia’s economy from a market-driven system into a centrally managed machine designed for war.
The reasons behind this shift, and its sustainability, reveal as much about Russia’s strategy as they do about the limits of sanctions and global economic warfare.
The Rise of a “Phase One” War Economy
From early 2022 to mid-2024, Russia entered what Schasfoort calls “Phase One” of a war economy—an activation of dormant capacity. Before the war, many Russian factories sat idle, unemployment was high, and consumption lagged due to restrictive monetary policies. The conflict—and subsequent sanctions—forced Moscow to inject vast fiscal stimulus into domestic industries. This burst of state spending, largely fueled by sovereign wealth funds, revived moribund sectors, reabsorbed labor, and raised output.
Add Zee News as a Preferred Source
This is a classic wartime mobilization pattern: idle resources suddenly become productive when central priorities shift from consumer comfort to military needs. The same occurred in Nazi Germany’s rearmament campaign in the 1930s and the U.S. build-up during World War II. For Russia, the immediate outcome was paradoxical. While global observers forecast economic collapse, Russians—by some measures—became richer on average, as employment soared and war-linked enterprises paid premium wages.
Fortress Russia and the Triangular Trade-off
The resilience of the ruble in the face of unprecedented sanctions was another surprise. This was primarily the work of Elvira Nabiullina, Governor of the Bank of Russia, who implemented Putin’s long-premeditated “Fortress Russia” doctrine. The approach recognized the “monetary trilemma” that no country can simultaneously maintain a fixed exchange rate, free capital flow, and sovereign monetary policy. Pre-war Russia sought free capital flows and stability, but this left its currency vulnerable to sanctions—just as Iran’s was in 2012.
When the West froze about USD 300 billion in Russian reserves, Nabiullina imposed strict capital controls, preventing money from leaving the country and stabilizing the ruble’s value. This move effectively ended Russia’s run on its currency and allowed the government to flood domestic markets with liquidity without causing hyperinflation. The Russian economy was thus restructured around isolation—autarky by design, stability through control.
Why Collapse Hasn’t Happened
Schasfoort identifies four common pathways to economic collapse—currency flight, import blockades, unsustainable debt, and social unrest—and systematically explains why Russia currently avoids each.
Currency flight is impossible with capital controls. Western investors cannot flee, and Russian corporations cannot remit foreign profits abroad. Ruble convertibility has become a managed illusion.
Import collapse has been mitigated by Russia’s resource base and Chinese partnerships. The country produces all its food and most of its energy, while Chinese companies substitute for Western suppliers.
Debt collapse remains remote because state and household leverage are extremely low. Russia’s government debt-to-GDP ratio stands below 20 Percent, and household borrowing is muted by high interest rates.
Popular revolt, the most unpredictable factor, is suppressed through authoritarian governance. Although inflation is now high (about 7 percent) and real wages are eroding, support for the war—sustained by nationalism and state media—remains stable.
This insulation, however, is not immunity. The economy functions through coercion: labor shifts from consumer industries to arms plants; profit-making companies are nationalized; and capital markets are sealed. It is a fortress, yes—but one with weakening foundations beneath its walls.
The Transition Toward “Phase Two” Militarization
The first phase of activation brought prosperity. The second, now unfolding, entails sacrifice. Moscow’s spending priorities increasingly divert resources from civilian to defense industries. The government spent nearly 8.5 trillion rubles ($100 billion) on defense in just the first half of 2025. Meanwhile, 67 of Russia’s 89 regions are running severe deficits as resources flow toward Moscow and military clusters in Tatarstan, the Urals, and Siberia.
Civilian production is shrinking. Only four of Russia’s twenty major manufacturing sectors are expanding—and three of these are directly war-related. Industrial hubs such as Samara or Nizhny Novgorod now rely on drone assembly lines, while auto plants have cut workweeks to four days. Inflation is surging past 7%, and national housing investment is down by nearly half. Even the Kremlin’s statistics agency, Rosstat, concedes that one-third of Russian enterprises are unprofitable.
The political response mirrors 20th-century precedents. As price increases threaten to ignite popular discontent, Moscow is preparing price controls on essentials like bread and fuel. These measures echo the managed economies of the Soviet Union and Nazi Germany. They limit inflation temporarily but ultimately suppress productivity.
The Numbers Behind the Stability
Despite this increasing strain, recent budgets confirm that the Kremlin remains committed to high military outlays. The 2025–2026 fiscal plan allocates about 8 percent of GDP to defense and security, the highest proportion since the Cold War. However, the underlying structure of spending is shifting—less through debt, more through taxation.
To fund war expenditures, the Kremlin has raised income and value-added taxes; the VAT now stands at 22 percent. This effectively shifts the cost of war onto the Russian population. The government’s macroeconomic forecast from the Finance Ministry anticipates GDP growth slowing from 4.3 percent in 2024 to just 1 percent in 2025 and about 1.3 percent in 2026. Inflation may settle near 4 percent, but only through high interest rates, falling investment, and declining private demand.
This configuration—low growth, moderate inflation, high state control—defines Russia’s new equilibrium. As one Carnegie analysis observed, Russia’s economy has become a “marathon runner on budget steroids.” It is sustained not by efficiency, but by endurance.
The Cracks Beneath the Surface
Although Russia’s economy appears structurally stable, its vulnerabilities are growing. Ukraine’s escalating campaign of drone strikes, launched in August 2025, has devastated Russian oil refineries and fuel depots. The International Energy Agency now expects Russia’s refinery throughput to remain suppressed into mid-2026. Fuel shortages have already triggered long queues across provincial cities and accelerated inflation.
Simultaneously, fiscal disparities inside Russia have intensified. Moscow’s incomes have increased by 11 percent, but regional earnings in Siberia and the Far East have risen by less than 2 percent. As a result, local budgets have collapsed while the Kremlin continues to “centralize profits,” effectively redistributing wealth from the periphery to sustain state-owned military operators.
The broader picture, as Russian economist Natalia Zubarevich notes, is one of hyper-centralization—a system that can preserve macroeconomic balance only by sacrificing regional stability.
Sustainability Through Control, Not Growth
In this architecture, stability does not stem from efficiency or innovation but from coercive control. Russia’s economic apparatus now mirrors its political one: tight, hierarchical, and insulated from feedback loops. Every aspect of production and consumption is subordinated to state objectives. While this makes it resilient to external shocks—like sanctions or capital flight—it also condemns it to stagnation.
A recent Chatham House report summarized this shift aptly: the “Fortress Russia” economy has adapted admirably to pressure but at the cost of long-term growth; real GDP is already 12 percent lower than it would have been without the war.
This trajectory points not to collapse but to decay. War economies rarely implode suddenly; they erode, over years, under the weight of inefficiency and political rigidity. The Soviet Union remained stable for decades under similar pressures before unraveling.
The Western Dilemma
Schasfoort concludes that Western strategies reliant on passive sanction regimes misunderstand this dynamic. Russia’s command economy, scarred but functional, can survive isolation far longer than predicted. As he argues, “simply waiting is not enough to stop the Russian war machine.” The implication is clear: if the West wants to protect Ukraine without triggering global economic upheaval, it must increase targeted economic and military support rather than rely solely on sanctions or wishful forecasts of collapse.
What this means, in practical terms, is that the war economy now defines Russia’s identity. It is the organizing logic of its fiscal system, its workforce, and its propaganda. As long as the Kremlin maintains central command and public discipline, collapse remains a distant prospect—even as everyday Russians quietly pay the price in inflation, shortages, and lost freedoms.
In essence, Putin’s Russia is not a failing economy. It is a thriving fortress built on moral exhaustion, political obedience, and economic regimentation. Its endurance may eventually crumble, but not soon—and not without deliberate external pressure.
The Trump administration has on many occasions blamed India for funding Russia’s war machine. However, the analysis above shows that the resilience of the Russian economy has little to do with India buying Russian oil and more to do with President Putin’s effective management of his wartime economy. According to recent reports by Reuters, Indian refiners are poised to sharply cut Russian oil imports amid American sanctions on Russian refineries. This move appears to be driven less by economic considerations and more by desperation.
This analysis captures the paradox at the heart of the Russian war economy in 2025: stronger than the West expected, weaker than the Kremlin admits, and sustained by control rather than prosperity. Waiting for its spontaneous collapse is fantasy; confronting it requires strategy.
Stay informed on all the , real-time updates, and follow all the important headlines in and on Zee News.