Russia Keeps Its Economy on a War Footing but Faces Shortages of Labor and Technology

Russia has shifted its economy onto a war footing to sustain its campaign against Ukraine. Though the country is not operating under full mobilization, the Kremlin is pouring money into defense plants and expanding trade with China to circumvent sanctions. Over three years, the economy has performed better than expected thanks to massive state spending, favorable commodity prices, and prudent fiscal management.

There are two opposing interpretations: according to Vladimir Putin, the economy is resilient enough to wage war while expanding the military to a level that can challenge NATO. Since Donald Trump’s return to the White House in January, the Kremlin has increasingly tested the alliance’s cohesion (through drone incursions into Polish airspace and fighter flights near Estonia). Since 2022, Russia has indeed boosted arms production despite strict sanctions. The opposing view holds that the economy is doomed. The truth lies between them: long-term potential is constrained by rising fiscal burdens, a shrinking labor force, technological isolation, and an overstretched defense sector. Military analysts estimate it will take seven to ten years for Russia to rebuild its forces to NATO-level capability; in the meantime, Moscow can harm NATO through low-cost means—cyberattacks, sabotage—and might gamble on direct aggression as Europe accelerates its rearmament.

After three and a half years of full-scale war, the limits of Russia’s political economy are becoming clear. To thwart Putin’s plans, the U.S. and Europe must realistically assess its long-term vulnerabilities—and exploit them now.

Despite sanctions and isolation, Russia continues to sustain its war machine. The share of defense in the federal budget has risen from roughly 22% in 2021 to nearly 40% today (combined with internal security, about 8% of GDP). Drone and ammunition production has expanded, stockpiles of Soviet-era equipment have been replenished, and generous payments introduced to attract contract soldiers. The war is being waged without full mobilization—through partial conscription and round-the-clock work at defense factories. Shortages of components are covered by parallel imports through third countries and Chinese supplies—an improvisation that works only in the short term.

But the achievements are more modest than they appear. According to Dara Massicot, by 2024 the defense-industrial base had largely hit its ceiling (except in drones). Most of the equipment sent to the front is refurbished rather than new, often inferior to NATO systems; corruption and inefficiency remain endemic in both the military and the defense industry, and partial improvements do not provide the resources needed for rapid buildup.

Russia has tapped into its industrial mobilization reserves and partially expanded its infrastructure (for example, by building new shell-production facilities). But both industrial and labor reserves are close to exhaustion. A substantial increase in output would require a fully militarized economy—repurposing civilian industries as during World War II, even converting car factories into defense plants. The Kremlin avoids this, fearing shortages of consumer goods and social unrest.

The war economy is operating at full capacity, constrained by fiscal pressure, labor shortages, technological barriers, and a fragmented defense sector. In essence, it is a disposable-goods economy: factories are busy, wages are paid, and demand for materials grows—but the output is quickly consumed on the battlefield, while the state carries lifelong obligations to the wounded and to soldiers’ families. This cycle sustains employment in the short term but creates no lasting assets and does not raise productivity, leaving the country busy yet steadily poorer.

Fiscal indicators are worrying. Oil and gas revenues are falling due to prices, logistics, the exchange rate, and the risk of new sanctions; in the first half of 2025, federal revenues dropped by 16.9%. The draft budget for 2026 assumes an oil price of $59 per barrel (down from $67 previously) and is likely to be revised even lower.

Non-oil revenues are growing, but more slowly as the economy loses momentum: in the first seven months of the year, GDP expanded by just 1.1% after overheating in 2023–2024 (3.6% and 4.1%, respectively), fueled by government spending and inflation. The growth proved unsustainable; the current slowdown exposes the dependence on fiscal stimulus. To plug the deficit, the Kremlin has launched a “revenue mobilization” drive: fines and fees are rising; in 2024, personal and corporate income taxes increased; officials are now discussing a two-percentage-point VAT hike (to 22%), expected to raise about $14.3 billion, and a six-fold reduction in the revenue threshold for VAT payments—an abrupt broadening of the tax base.

Defense Minister Andrei Belousov assures Putin that high military spending in 2026 and beyond, combined with more efficient procurement, will stimulate the civilian sector by drawing small firms and organizations such as the Rubicon Center into defense contracts and dual-use technology funding. The logic is one of scale effects—akin to the 1960s United States, when Pentagon and NASA orders for the Minuteman II and Apollo programs led to mass production and cheaper integrated circuits, kick-starting the computer industry.

But Russia’s semi-closed model functions differently: any injection of liquidity collides with rigid supply constraints—logistics, technology, labor. The excess money spills into prices and inflation, undermining output targets. In the draft 2026 budget, for the first time since the war began, defense spending growth is expected to stop and perhaps edge down—not for the sake of peace, but for redistribution. Yet a slight adjustment will not solve structural issues: a sharp cut would risk collapse, while maintaining current levels would lock in chronic stagnation.

The labor shortage is acute: by the end of 2024, the economy was short roughly 2.2 million workers, with 70% of companies reporting a lack of personnel. Defense, construction, transport, and agriculture now compete for manpower. Migration offers limited relief—migrants are confined to low-paid sectors, and their rights are curtailed (including children’s access to schools).

Demographics add pressure: people aged 65 and older already make up 18% of the population and are projected to reach 24% by mid-century. The war compounds the problem: according to BBC and Mediazona estimates, at least 219,000 Russian servicemen have been killed—mostly working-age men; hundreds of thousands more are out of the economy due to injuries; contract soldiers at the front account for about 0.5% of the working-age population. Some will return after the war, but combat skills rarely translate into civilian professions; retraining and long-term rehabilitation will be required.

Export restrictions from the U.S. and Europe have cut off access to advanced technologies—semiconductors, precision bearings, machine tools. Import substitution means building new plants from scratch, producing costlier and lower-quality equivalents. Parallel imports and Chinese supplies temporarily patch the gaps, but quality remains below Western standards. Dependence on China is deepening—on components, equipment, and robotics—giving Beijing leverage over prices. Russia can assemble weapons but cannot rebuild the complex industrial base needed for long-term competitiveness.

The defense industry is a mosaic—from Rostec to regional workshops and garage drone startups. This decentralization has proven surprisingly effective in wartime: small producers are faster and cheaper than traditional contractors. But after the war, the state is unlikely to preserve them—it will be easier to revert to Soviet-style centralization with bloated procurement and corruption, slowing technological progress. Tensions are already growing: Defense Minister Belousov advocates a “people’s defense industry,” while Putin’s close allies—Sergey Chemezov and Alexei Dyumin—lobby for the interests of major corporations. Since 2008, Chemezov has consolidated Rostec, absorbing assets and pressuring shareholders and managers; similar tactics could push out new players, causing conflicts, delays, and cost overruns.

The U.S. and Europe should not expect Russia’s economy to collapse on its own. Its structural limits mean that military rearmament will be slow, uneven, and costly—creating a window of opportunity to hinder it further. Stricter controls on optics, semiconductors, and machine tools, along with pressure on oil exports and the financial sector, would raise costs while also constraining imports of consumer goods that sustain middle-class living standards.

The Kremlin’s likely response must be anticipated: deeper militarization—converting civilian industries to military production, building new plants, luring workers with higher pay, draft exemptions, and aggressive recruitment. Yet this path carries political risk for Putin: citizens would have to accept sacrifices, factory closures, shortages, and a drain of talent into defense. Until now, loyalty has rested on a semblance of everyday “normalcy”; full mobilization would shatter that balance. Still, the drive to subdue Ukraine and weaken NATO could outweigh the risk.

Timing is crucial. In two to three years, Russia may partly offset its losses, but rebuilding its military to full strength will take much longer. The paradox of its war economy lies in its simultaneous resilience and fragility. The U.S. and Europe should act now—leverage their advantages while the Kremlin’s capacity remains constrained, rather than wait for its next resurgence.