Russia's war economy at its limit: civilian sector is collapsing!

Russia's war economy at its limit: civilian sector is collapsing!

The Russian economy is under pressure and is at the limit of its wartime economic capacity. According to official reports, as reported by finanzmarktwelt.de published shows that the civilian sector is increasingly taking a back seat while government spending on military purposes is increasing. This development results in a shrinking National Wealth Fund (NWF), whose liquid assets have fallen from 8.8 trillion rubles to just 3.39 trillion rubles. Experts fear that the NWF could be exhausted in about two years.

Although the Russian economy has not officially fallen into recession, the figures suggest real GDP growth of minus 9% since July 2023. The massive investments in the military, which according to the budget could account for around 40% of the budget, are not sufficient to stabilize the overall economy. Fossil fuel export revenues have fallen to less than 40% of prewar levels, suffering from Western sanctions and falling commodity prices. In this context, Russian Defense Minister Sergei Shoigu declared his commitment to expanding the defense industry.

War economy and its consequences

A war economy that subordinates everything to the goal of war leads to enormous economic structural changes. Deutschlandfunk reports that Russia invests around seven percent of its economic output in the military, which is about twice as much as before the start of the conflict. Despite these investments, certain features of a comprehensive war economy, such as those seen in World War I and World War II, are still not fully present in Russia, according to economist Janis Kluge.

The military sector has created numerous jobs since the start of the war; It is estimated that around half a million jobs have been created in the defense industry. However, this is happening in an environment of persistent inflation, which is rising despite a key interest rate of 21%, and an estimated monthly inflation rate that varies between 15 and 17%. The civil sector of the economy has been stagnating for over a year and real growth remains negative.

Long-term prospects of the Russian economy

Analysts warn that without diversifying the economy, Russia could slide into insignificance. Demand for fossil fuels will stagnate until 2030 and decline thereafter. This negatively impacts overall economic prosperity levels as the military budget remains unsustainable without a prosperous civilian economy. Russia could lose relevance in the global market, especially against China, one of its largest customers, which has reduced fossil fuel imports by 8% since February last year.

Current developments in Russia indicate that the effects of the war economy will have widespread and long-term consequences for the entire economy. The trend of stagnation and declining revenues from the export of raw materials is alarming and could significantly affect the country's resilience in an already tense geopolitical environment.