When Russia launched its full-scale attack on Ukraine in February 2022 and the Western powers retaliatedwith the harshest sanctions in history, few economists believed the aggressor country could survive that pressure. In contrast, we have both continuously argued that Russia is probably “too big to fail” and that sanctions are not capable of undermining its economy but instead could actually backfire against the West itself, developing this argument in a paper that argued Russia’s economy has been, and will remain for quite a long time, “Putin’s reliable rear.”
It took some time for many of our colleagues to come to terms with the fact that during the three years of war Russia’s economy still continued to grow, and the wellbeing of the average Russian citizen did not deteriorate. By early 2024, gloomy forecasts became less widespread as observers became largely disillusioned with sanctions and became preoccupied with looking for other factors to emerge that might cause Russia’s imminent economic demise.
Donald Trump’s return to the White House and his attempts to push for a stable and long-term ceasefire between Russia and Ukraine has significantly changed the situation—as well as the mood of many experts. While in both 2023 and 2024 the prevailing tendency was to insist that Putin cannot afford such a war, in recent headlines the tone has changed significantly, turning to questioning whether Putin can afford the peace.
After the Fighting, the Slump?
Why has the mood of the analysts changed so far and so radically? The most important factor is the accepted assumption that an economic depression usually follows major wars in most market economies (in most cases, the postwar economic downturn ranged from 40 to 80 percent of the scale of the military spending cuts). The US economy, for example, had contracted by 6.9 percent in 1920-21 after World War I and by 10.9 percent in 1946 following the end of World War II: Between 1945 and 1946, as the US military spending declined from 41 to 23 percent of GDP, the accompanying contraction of the economy was almost inevitable.
The history of the Soviet Union also proves that dismemberment of its militarized economy in late 1980sprovoked a tremendous crisis as high-tech industries had lost the state funds that were channeled into them for decades, and the most qualified workers and engineers were fired. However—with the exception of the Soviet case where the turn from a military to a civil economy overlapped with the post-Communist transition and therefore became quite unique—the economic downturns were never deep or lasted long enough to cause serious political problems.
Furthermore, dictatorships like one built by President Vladimir Putin are capable of sustaining any such challenges better than most democracies. So therefore, we would like to present a more balanced view on whether the end of the war in Ukraine could undermine Putin’s economy.
Moderate Expansion
As a result of the extraordinary growth in the budget (between 2021 and 2025 it increased by 3.79 times, or by 10.1 trillion rubles) inflation has soared, forcing the Bank of Russia to maintain the key rate at 21.0 percent. While this did not dampen consumer prices on hold (on the contrary, annual inflation hit 10.34 percent in April), but it caused an effective “cooling” of economic activity as industrial production slowed down to 1.1 percent in Q1 2025 from 4.6 percent for 2024.
Combined with the decline in global oil prices, all this caused a serious contraction of budget revenues by the end of Q1 2025 that forced the finance ministry to revise its forecasts for the entire year, elevating the planned federal budget deficit from 0.5 to more than 1.7 percent of GDP, or 3.8 trillion rubles. Meanwhile, the economy in general continued its moderate expansion—fueled by the rise in output in the military-industrial sector.
Thus, the overall outlook was rather grim. But then came US President Donald Trump’s first phone call to Russian President Vladimir Putin on March 18 and the markets suddenly realized that the ceasefire—and the end of the war—might be in sight. On this news, the stock market started to make gains (in fact continuing on the gains made since Trump’s election in November 2024). By late March, the RTS stock index was 36.7 percent above its November 1, 2024 reading. The ruble skyrocketed—but less due to the prospects of peace and more due to the extra high interest rates of up to 22 percent, which drove the funds to the Russian banks (both private and corporate investors exchanged their hard currency into rubles in order to place them in Russian banks, including some Russian businessmen who had preferred to keep their funds abroad).
These trends made the ruble the world’s best performing currency in Q1 2025, and even while this had caused a problem for the government (the oil prices in rubles—which are crucial for filling the budget coffers—fell 40 percent below the budgeted level in the last six months), the ruble still remained stable at around 80 to 82 rubles to the dollar as of mid-May 2025. The individual deposits in the Russian banks hit an all-time high of 60 trillion rubles (or 15 times the projected federal budget deficit for 2025) in April.
Not Highly Militarized
What lies behind all these developments? We would argue that this is largely down to the government spending tremendous sums of money in recent years as it funded the army, the military-industrial complex, and paid large lump sums both to the newly enlisted military personnel and to the relatives of those killed (these payments amounted to up to 3 trillion rubles, or 1.5 percent of GDP, per year). At the same time, this money went to both Russian citizens and Russian businesses.
Meanwhile, private bank deposits have grown, and the net financial result of the Russian businesses (overall profits minus overall losses) have been substantial, amounting to 33.3 trillion rubles in 2023 and to 30.8 trillion rubles in 2024, with not much of it being reinvested because of uncertainty about the government’s policies and the country’s future. The war may have made the Russian state poorer, but it has enriched both Russian private businesses and individuals. It is likely that some of that money will be used for investment purposes if the war ends and life returns to normal.
What also speaks for the future of Russia’s economy is that it is not highly militarized now—and isn’t considered as such by Russians. Even as Russia wages a full-scale war against a large neighboring country, its war-related expenditures do not exceed 8 percent of its GDP (which is only half the level of the US military expenditures in 1953, at the end of Korean war, when they reached 14.5 percent of GDP). In contrast the Soviet Union’s military-related expenses toward the end of the Cold War were most often evaluated at between 16 and 21 percent of GDP, and had remained at around these levels for up to 20 years.
In the case of the United States during World War II, the military budget for 1943-1945 equaled 38 percent of GDP on average, and the federal government allowed the budget deficit to reach 26.9 percent of GDP in 1943to finance these needs. In both cases, the salaries of servicemen constituted a small share of overall expenses.
There is clearly a significant difference between 6-7 percent of GDP, and 16-22 or 38 percent. So, even if the budget allocations after a ceasefire with Ukraine were to fall by half, this would hardly drive the Russian economy into a full-scale recession, if all the counterfactors are taken into account. We should add here that the loss of armaments and ammunition the Russian army has experienced in Ukraine is so huge that there will be no significant decline in military production—Putin had famously said last year that military companies will be filled by orders for up to coming five, if not 10, years.
Does this all mean that the Russian economy that supposedly did so well during the war, will do even better after it stops? No, such a straightforward statement would be, to our mind, an exaggeration, but a collapse should not be expected either.
The Return to a Peace Economy
What would happen if Russia and Ukraine were to broker a peace deal?
First, Russia’s military allocations will decline—but not dramatically. We predict that the Kremlin will not announce an immediate demobilization: on the one hand, it would be too risky to send around 400,000 mercenaries back home where they most probably would find no appropriate jobs and could commit violent crimes (since the start of the war, thousands of criminal cases were recorded involving the veterans of the war in Ukraine, who have killed or badly injured more than 750 people so far); on the other hand, it’s hard to believe Putin would give up his dreams of further con-frontation with the West (it is no coincidence that the number of servicemen on active duty in the Russian army was increased during the war from 1.01 to 1.5 million people).
The Kremlin could reduce the size of the army a bit and offer the current soldiers the opportunity to stay in its ranks, paying them a salary comparable to what they are earning today but without much of the current risks. The money spent on the military production would also not be cut significantly—only reducing the funds that are now used for military logistics. We expect the overall financial burden associated with the military to decline from the current 13-14 trillion rubles to around 10 trillion rubles in the first year of peace, with a likely further annual decline of around 1 trillion rubles. This decline will not have a devastating effect on the national economy. It could, however, almost completely eliminate the federal budget deficit at it largest 2025 projections even if the investment into the occupied territories will remain at its current level of around 350 billion rubles per year.
Second, the end of the war would lead to the postponement or lifting of many restrictions, primarily in foreign trade and financial transactions. In recent years, Russian imports have remained subdued, and the return of peace would revive foreign trade (despite the likely devaluation of the ruble which usually leads to the reduction of imports). Most probably it will increase the demand for foreign currency (which is now in obvious oversupply) and lead to the depreciation of the ruble.
The Russian Central Bank might soften its monetary policy in order to boost the economy and lower the borrowing costs for both the government and the businesses—as a result, the deposit rates will go down, and investors will diversify from the ruble-denominated assets. Altogether, these moves will bring the exchange rate significantly down, propelling the dollar above 100 rubles to the dollar threshold, and probably push it closer to 120 rubles. Such a trend might encourage businesses to invest and individuals to increase their consumer spending, fearing rising prices.
Moreover, the devaluation will lower the dollar-denominated labor costs in Russia which have risen tremendously during the war years (the median wage increased from 35,200 rubles in 2021 to 77,200 rubles in March 2025 while the ruble exchange rate remained almost unchanged).
The lowering of the key rate will become a strong incentive for both businesses and consumers since high rates decreased their activity (in January-March 2025, the volume of new car loans declined by 45 percent compared to the same period of 2024; mortgage lending fell by 41 percent, and the volume of consumer credit decreased even in nominal terms—for the first time since 2008, households were repaying more loans than they were taking on). As a result, new construction fell by 23 percent in early 2025, while new passenger car sales decreased by 25.3 percent. All of these trends might reverse if there are changes in the credit markets.
Third, the money will flow from bank deposits to the stock market and real estate; in both cases even the initial flows would provoke a rather strong incentive to invest in both sectors. Since the start of the war, the ruble-denominated Moscow Exchange stock index fell by roughly 40 percent, while housing prices have remained relatively flat, even despite the increase in mortgage financing between 2022 and 2024.
The “return to normalcy” may well transform into a revival of the Russian stock market and real estate market with more investment money coming into both sectors fueling economic growth. Once again, we would reiterate that at least 40-50 trillion rubles that are now “on the margins” of the market may change the overall economic picture much more than the 13 trillion rubles paid annually to the army and to the military industry. Russian “military Keynesianism,” to our mind, looks seriously exhausted these days, primarily because almost all the reserve funds are already “used” and are starting to bite into businesses’ and consumers’ money.
Fourth, the overall normalization will benefit Russian export industries, primarily the oil and gas sector. Russia might resume its gas and oil shipments to Europe where the profits have been the highest; the differentials between the Russian oil products and international ones will decrease, as will the transaction costs. Several industries that have been hit hard with the sanctions, like the coal or timber industry, may revive, as well as non-ferrous metal processing and fertilizer production. Overall, the “peace dividend” could amount to up to $30-40 billion a year due to increased exports—and there could be a comparable effect if Western restrictions on supplying Russia with spare parts and components are lifted.
Fifth, the end of the war could result in serious changes in the distribution of the Russian funds abroad. Under the current sanctions regime, Russian companies have developed a network of foreign accounts where they had parked significant funds—both for avoiding the foreign currency sell-off commanded by the government and for facilitating import payments as in many cases they couldn’t be made from Russian accounts. No one knows precisely how much money has been kept in these accounts, but it may well reach $200 billion.
Moreover, since Russia has been running huge trade surpluses with some of its partners—most notably India—billions of dollars might be immobilized in local currency and/or in other non-convertible financial instruments that might be cashed out more easily if peace is restored and sanctions are lifted.
Limiting Factors
Of course, there are some limitations to Russia benefiting from the changing conditions. During the period of rapid growth that lasted from 2023 to the first half of 2024, the Russian economy reached the maximum, critical utilization of all factors of production. In certain months, unemployment dropped to just 2.3 percent of the active workforce, and capacity utilization exceeded 80 percent—compared to the historical norm of 60-65 percent. The number of part-time jobs declined, total annual hours worked increased, a significant share of employees who had reached retirement age during the war remained in the workforce, and some who had previously retired returned to work.
No economy can sustain such a state for long. It drives up inflation, increases employee turnover, reducesworkforce motivation, hampers equipment maintenance, and so on. This leads to doubts about a possible expansion that becomes even more problematic if one takes into account the dramatic change in attitudes to the foreign guestworkers that had occurred in recent years as the government introduced many new laws complicating their stay in the country (in 2024, the average number of foreign workers has declined to the record low seen in 2013, and the number of naturalizations in Russia fell by more than 2.5 times compared to 2023, to just 209,000 people). Without increasing competition in the labor market, the ruble devaluation would definitely not be enough to secure the rise in the overall efficienies of Russian businesses and provide economic growth.
The End of “Military Keynesianism”
We are not arguing that the Russian economy would prosper and develop high growth rates immediately after—and because of—the end of Putin’s war in Ukraine. As before, it faces multiple problems and it will not eliminate all the difficulties that emerged during the war years within just a few months.
However, we want to emphasize the fact that it would definitely do better if the war were to end than if it were to continue, with the budget channeling ever growing amounts of funds into military production and supplying the armed forces, with the state likely attempting to seize property from investors, and the country encountering new sanctions that the Western powers have promised to impose if the war continues.
We reiterate our assessment from last year about Russia’s remaining capacity to finance the ongoing war for several more years, but such efforts would require a significant underinvestment in critical infrastructure as well as defunding some social security programs—in addition to running increasing budget deficits.
The obvious problem in 2025 lies in the exhaustion of the Russian “military Keynesianism,” which seemingly can no longer provide any more significant growth. The only means of reviving would be to find new sources of funds that could be spent by the state (it is no coincidence that many experts are now talking about freezing the private bank accounts or confiscating deposited money) but there are no good options here since any forced action would completely undermine people’s trust in the government. We believe that all the negative economic consequences of peace are reversible and fairly manageable: by reducing government procurement related to military spending, the government can significantly boost both consumer and investment demand simply by lowering the interest rate and reinstating the programs that were suspended when the economy began to overheat.
The “peace economy,” in other words, might not cure all the existing problems, but it looks a preferable alternative to the “war economy,” and there isn’t a single reason to believe that a transfer to the former from the latter could undermine the Kremlin’s powers or be regarded as something it cannot “afford.”
Vladislav Inozemtsev is a co-founder of the Center for Analysis and Strategies in Europe (CASE), a Cyprus-based independent think tank.
Dmitry Nekrasov, a Russian exiled economist, serves as CASE’s director.
