Over the past four years, the Russian economy has split into two distinct systems. The first comprises the military-industrial sector and related industries, which receive priority access to resources, capital, and labor and continue to expand. The second includes civilian industries, small businesses, and consumer sectors that have been marginalized. Industrial output has grown by 18.3% over three years, but nearly all of that growth stems from the military sector, while civilian industries have contracted.
The dangerous feature of this structure lies in its fuel: what may be called “military rent” — budget transfers to defense units that generate income and activity. Unlike the oil revenues of the 2000s, which flowed in from abroad and created multiplier effects, military rent is internal and devoted to producing destructive tools, akin to a body burning its own muscle for energy.
This is not a typical recession that can be remedied through monetary or fiscal policy. As The Economist explains, a recession resembles fatigue and improves with rest, whereas Russia’s economy resembles altitude sickness — the longer it persists, the worse it becomes.
The budget deficit reached 5.6 trillion rubles ($73 billion) in 2025 — 2.6% of GDP and the highest level since the pandemic. Interest payments on public debt have surpassed total spending on education and healthcare. Budgetary pressures have intensified with falling oil revenues, particularly given a 25–30% discount on Urals crude relative to Brent, pushing export revenues to their lowest level since 2020.
Global price weakness has compounded the strain: slowing inflation in China, stagnation in Europe, and U.S. trade wars have all added pressure. Russia is suffering the most, though other oil-producing countries also face difficult conditions. Under such circumstances, economic hardship would typically push a government toward negotiation and ending war. However, Vladimir Putin assesses not only Russia’s domestic situation but also the performance and weaknesses of other major powers.
Russia may be able to continue the war for some time, but no economy or institution can remain in the “death zone” indefinitely. Ending the war or initiating economic reforms is the minimal prerequisite for reconstruction. Each additional year in this state increases systemic risks, from financial crisis to institutional collapse. The key question for international policymakers is what kind of Russia will remain once decline sets in — and whether there is any plan to manage that outcome.
