Russia’s war effort is more political than economic consideration. Although the price of the war is high, Russia is willing to bear it, says Emil Wannheden, an economic analyst at the Swedish Defence Research Agency (Totalförsvarets forskningsinstitut, FOI), who attended the Russian conference of the Baltic Defence College.
Tetiana Fedosiuk: How have the three years of war footing transformed the Russian economy?
Emil Wannheden, economic analyst at the Swedish Defence Research Agency (Totalförsvarets forskningsinstitut, FOI): We need to realise that this war is an enormous economic effort for Russia. At the beginning, in 2022, they did not initially spend that much on the war because they hoped it would be short, quick, and easy. But as the war dragged on, they increased military spending. The latest estimate suggests that they will spend almost 9% of GDP on the military budget in 2025—this is a very heavy burden on the Russian economy.
As to what has changed, there have been many effects, for example, on the labour force. People are being sent to the front and many have emigrated, which contributes to labour shortages in Russia. This, in turn, makes everything more expensive because one needs to pay more money to recruit workers. Thus, wages have gone up, especially in certain sectors connected to the war effort, but so has inflation. Whereas some have been receiving higher wages, others have not. Prices have also been rising, so people who rely on financial support from the government, like pensioners, have been struggling more. The war has changed the structure of the Russian economy, with the military sector becoming the most important, privileged sector because this is where most of the state investment goes to the military.
TF: Can one separate Russia’s economy from the Russian war effort in 2025?
EW: No, one cannot. They are interconnected. The Russian economy has been so militarised that it is becoming more and more difficult to separate the military part from the civilian part. The construction industry, for example, is helping with fortifications and building infrastructure in the occupied regions of Ukraine. Since the civilian part of the economy needs to support the military, the whole economic development of Russia has been very degraded. Russians are paying a very high price for this war, too.
TF: For how much longer can the Kremlin afford to sustain its military campaign at a current pace without inflicting irreversible damage to the Russian economy?
EW: It is less about economics and more about politics. A state can always choose where to put the money. Yet, in a democracy, it is difficult to invest more resources into the military because people may not accept it and vote the government out of office, whilst in Russia, the situation is different. However, financing the budget is becoming more and more difficult each year for them. Russia has been running out of its financial reserves, which means that it has to borrow more money to sustain military expenditures. That may also become difficult, so they may have to print money, essentially, to continue financing the war effort—one can find ways. Yet, the longer one does it, the more negative consequences it will have on the rest of the economy.
Russia’s economic future is grim, given the decisions Russians have taken, and even more so with every passing month. From that point of view, it’s not sustainable. But from the other point of view, they might continue to prioritise military spending because they think it’s too important—and they can do that if they think it is worth it to pay this price.
There’s already been irreversible damage in many ways. Every ruble that they spend on the military today is a ruble they can’t spend on infrastructure, education, healthcare, and so on. Even Russian demographers admit that demographic effects have been catastrophic: fewer children are being born, the school system is suffering, and health is declining. All of it is happening at a time when Russia not only needs to maintain the old degrading infrastructure but also to build new one in order to increase trade with China. The longer Russia continues down this path, the more negative irreversible changes there will be.
TF: In the event of a ceasefire, what would happen to the Russian economy if Moscow deprioritises military spending and the defence industry?
EW: If they deprioritised military spending, it would help to start an economic recovery, of course, which people in Russia admit is necessary. I think it is unlikely that it will happen because even if there is a ceasefire, Russia will probably need to maintain its military in occupied parts of Ukraine. Russians also want to reconstitute the armed forces and even have plans to expand them. I think our assumption should be that they will continue with higher military spending. There is another aspect to it: the defence industry is now so strong and so important for the economy that it is difficult to lower military expenditures and convert to civilian production. So, there is a lock-in-effect. It will continue to be militarised even if there is a ceasefire. We shouldn’t assume that just because there is a ceasefire or a pause in Ukraine, Russia will demilitarise.
TF: How dependent has Russia become on China? Has the Russian economy pivoted to the east?
EW: Russia is now entirely dependent on trading with China, whereas before it traded with the west. This dependence is two-fold. First, China buys Russian oil. Russia needs this source of revenue in order to finance the state budget. Second, Russia is reliant on Chinese imports: it imports more consumer goods that it does not produce, such as cars, while mostly exporting natural resources.
This economic pivot to the East has happened to a certain degree. Yet bottlenecks persist, for example, in trade: most imported goods are transported from China via railways, while the rail infrastructure capacity in the area is not as big as Russia needs it to be. Then, there have been problems with payments and the financial system due to sanctions that the US has put in place. It is quite a precarious situation.
TF: The US has been trying to prevent a Russia-China axis and win Moscow as an ally in a potential confrontation (and it did not begin with this Administration). What makes Russia such a unique partner in the eyes of the US that it is willing to sacrifice the NATO alliance and transatlantic partnerships? What economic, military, and industrial assets can Russia offer and deliver?
EW: This line of reasoning existed in the US before, and we have seen some signs of it re-appearing: for example, news reports about talks about cooperation in the Arctic. This is based, in particular, on the idea that if Russia has more military presence in the Arctic and maybe in the Far East, close to the Chinese border, then China will also have to enhance its military presence there. At some level, the two states still do not trust each other, so they will need to balance one another. And if China increases its presence in the Arctic, it will have less presence in the Indo-Pacific region.
Regardless of the validity of the broader argument, it is very damaging to security in Europe to initiate this kind of cooperation with Russia, including easing the sanctions regime. Any economic cooperation with Russia today will inevitably strengthen Russia and make Russia a bigger threat to Europe. To me, this doesn’t make any sense. If the US pursues this strategy, they hope to lessen the threat in the Indo-Pacific, but if they do it, they will increase the threat in Europe. And after all, they also have an interest in maintaining security in Europe.
TF: As part of this courting campaign, the new Administration has signalled it is willing—if not eager—to ease economic restrictions on Russia, reportedly already drawing up a relief plan. What leverages does the coalition of the willing—the west minus the US—have at its disposal to exploit key vulnerabilities?
EW: I think this is a very unfortunate development because the US is very important for the sanctions due to the way the global financial system is set up. Americans have the ability to impose very powerful secondary sanctions by using transactions in the US dollar to influence trade between Russia and China, for example.
However, Europe definitely has leverages, too. For instance, most of Russia’s frozen reserves are in Europe. Most of the oil trade passes through Europe, in particular through the Baltic Sea. The EU could also do more by setting up more powerful and well-resourced agencies and structures for enforcing the existing sanctions, as it did during the Cold War. There are areas where additional sanctions could be introduced, for example, on LNG and other exports such as nuclear exports. There are still things that the EU could do.
If the US withdraws some of its sanctions, this is basically giving Russia what Russia is hoping for. Russians are in economic trouble, so for them, it is vital to get sanctions relief. We should realise that this is a very important bargaining chip that we possess—to give it away for nothing, or for very little, would be simply unwise.
Europe can continue on its own, without the US. However, the question is how effective such sanctions will be. In the worst-case scenario, for example, the US would start exporting technology to Russia. Europe could then maintain its ban on technology exports to Russia, but it wouldn’t help very much because then, trade would be rerouted via the US. Let’s see, it really depends on what kind of sanction relief is being discussed.
TF: Can Europeans target Russia’s shadow fleet, for example?
EW: Yes, we can. Especially since a large part of Russian oil export passes through the Baltic Sea. Europeans can try different methods such as vessel inspections and other means to stop this kind of sea traffic. There are ways to sanction the shadow fleet, too.
TF: There is another path of action that Ukraine has taken: targeting Russian oil refineries and petroleum infrastructure to cripple Russia’s war machine. Could Ukraine crush Russia’s back if provided with sufficient military capability to grow this type of pressure? What other tools and means of economic pressure are necessary to achieve that result?
EW: When we’re talking about sanctions or targeting Russia’s economy, there is no one single thing that we can do in order to break Russia’s back, so to speak. Instead, we should think in terms of adding more and more pressure—every little thing we do counts and builds that pressure. So, what Ukraine has been doing is smart from that perspective.
TF: On the contrary, what does Russia need—in terms of sanctions relief and beyond: access to —in order to recuperate?
EW: I think it’s interesting that Vladimir Putin held a meeting with his government on critical minerals, just a few days after the matter was discussed between US President Donald Trump and Ukraine’s President Volodymyr Zelensky. Russians are definitely looking into ways to get perhaps US investment because they do not have much money left for such purposes in Russia. So, in terms of relief, they really need foreign direct investment.
The next best thing for them would be getting access to Russian frozen reserves. Provided they manage to do it, that kind of money is enough to finance the Russian state budget over the next five to seven years as well as cover large deficits. Then, the easing of oil sanctions would help Russia a lot. Finally, of course, Russians badly need access to technology, machine tools, and equipment for their factories. This is another bargaining chip that the west has when dealing with Russia.
TF: How desperate is Russia for that at this point?
EW: Russians can manage without, but it would really help them if they could get some sanctions lifted. This is largely the aim behind these talks that Russia is now conducting with the US—to try to secure some kind of relief, maybe in exchange for a bad ceasefire deal in Ukraine. A ceasefire in Ukraine in itself could put Russia in a better position, but if at the same time, they could get a sanctions relief, it would be a fantastic outcome for them.
TF: How did we miss the signs Russia was preparing for the war: militarising and fortifying its economy in the years leading up to the full-scale invasion? And how not to dismiss them now?
EW: They were insulating their economy; they were preparing for a war. However, at the time, it could also be perceived as a sign of economic prudence. It was difficult to judge based on those measures to have predicted what would happen. They did, nevertheless, leave their foreign reserves in Europe—it was a mistake on their part. If they had pulled all the reserves back into Russia, that would have been a clear sign that they were up to something. Yet, this is an economist’s perspective. From a military analyst’s perspective, Russia should never have invaded just because it was such a stupid decision. Russians should have realised that it would be a much bigger war that would also be damaging for Russia itself. It was not a wise decision, but then they did it anyway. Our mistake was to believe that Russians are acting in a rational manner and thinking in the way that we think. This was the mirror imaging fallacy that we should avoid in the future.
Views expressed in ICDS publications are those of the author(s). This article was first published on Diplomaatia.