Is Russia's war-driven economy approaching its 1989 moment?

Irish Times

a day ago

Speculation that
Russia
's economy would crash under the weight of western sanctions has proved wide of the mark.
In 2023 and 2024, the economy grew by 3.6 and 4.1 per cent in GDP (gross domestic product) terms, nine and four times the rate of growth recorded by the EU, one of the main architects of the sanctions.
There is of course the devalued rouble, elevated inflation (running at 10 per cent) and the central bank's prohibitive 20 per cent interest rate (which has caused a liquidity crisis in the private sector) to contend with.
But the economy isn't exactly hanging by a thread as many of Moscow's opponents might have hoped.
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Nonetheless, within this seeming resilience lies a trap, the same trap that contributed to the collapse of the
Soviet Union
in the 1980s and a trap that
Vladimir Putin
cannot easily walk back from.
It may be the reason why the Russian president has, to date, resisted
US overtures to sign up to a truce
, even one that would be favourable to Moscow's strategic ambitions.
Since the
2022 invasion of Ukraine
, Russia has turned itself into a wartime economy, devoting an ever-increasing volume of resources to its military campaign in Ukraine.
According to the International Institute for Strategic Studies' latest Military Balance report, Russia's military expenditure last year was forecast at 13.1 trillion roubles (€143 billion), or 6.7 per cent of the country's GDP, 40 per cent up on the previous year.
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This accelerated level of military spending has generated a multiplier effect across the economy, creating what some economists call 'military Keynesianism'.
The transformation has allowed Russia keep growing in simple GDP terms with companies such as Rostec, the state-owned defence conglomerate, doubling production but at the expense of creating a heavily distorted economy concentrated around hydrocarbons and the military-industrial complex.
According to estimates from the Institute for Economics and Peace, about 30-35 per cent of Russian economic growth in 2023 was directly attributable to military production.
And therein lies the trap. Russia needs to be at war to keep the economy moving but it can't keep this level of military spending up indefinitely, particularly if oil and gas prices keep falling, and the EU, formerly one of the main buyers of Russian energy, keeps boycotting; and with the anchor of western sanctions.
As historian Niall Ferguson argues: 'The USSR was not defeated militarily, but collapsed under the weight of its own economic contradictions, mainly the unsustainable level of military spending.'
Rough estimates suggest Soviet military spending rose to 10-20 per cent of GDP in the 1980s as the USSR tried to keep pace, militarily, with the US. Technological innovation that might have supported post-Soviet Russia was rerouted into defence industries.
According to the Russian Association
for Electronic Communications, some 70,000 IT
specialists fled the country at the start of the Ukraine war, a significant brain drain.
Converting Russia's militarised economy back into a normal civilian economy without triggering a huge economic reversal will be extremely difficult.
The US did it after the second World War but only with access to foreign markets, significant investment from abroad and a robust private sector, things that Russia cannot rely on given its pariah status globally.
Putin may have backed himself into an economic cul-de-sac.
Military misadventures have also historically been a precursor to revolution in Russia.
Tsar Nicholas II's botched military campaigns in Asia, culminating in the disastrous Russo-Japan war of 1904-05, activated conditions for the Russian Revolution of 1917, which toppled the tsarist regime.
The Soviet Union's 1979 invasion of Afghanistan, which resulted in heavy casualties and a humiliating climbdown, was a significant factor in the collapse of that regime in 1989.
Peace is potentially more of a threat to the economy than war even if the casualty count is colossal
It is impossible to gauge what is going on inside Russia politically, given the regime's stranglehold on power and the Kremlin's near complete control of the media.
That said, Wagner chief Yevgeny Prigozhin's
unimpeded march
on Moscow in 2023 cast Putin's hold on power in a different light.
Just how vulnerable the Russian president has made himself by invading Ukraine is impossible to say.
But Russia's militaristic spiral means peace is potentially more of a threat to the economy than war even if the casualty count is colossal (according to one estimate, 250,000 Russian soldiers have been killed). Hence there are incentives for the Kremlin to draw out the conflict, deter US-led peace initiatives and/or open up new military fronts.
Countries such as Moldova, Georgia and Kazakhstan sit uneasily in the crosshairs of Putin's revanchist agenda.
A more immediate problem for Moscow and a potential check on its war ambitions comes from oil and gas prices, which, at least before Israel's attack on Iran's nuclear programme, had been weakening consistently.
The net profits of Russian oil and gas firms fell to $9.9 billion in the first quarter of 2025, down from $18 billion for the same period of 2024, according to data from Russia's statistics agency Rosstat. A third of Russia's budget comes from the oil and gas sector.
Western governments were caught off guard by the sudden collapse of the USSR in 1989. It's conceivable that Putin's regime, riven by the same contradictions, is on a similar trajectory.