The war in Ukraine has stimulated Russia’s economy. What happens when it ends?
As negotiators attempt to broker a ceasefire between Russia and Ukraine, most of the attention is rightly on what any agreement could mean for Ukraine. After more than three years of defending its people against invasion, Ukraine now has to contend with Donald Trump, who has often appeared willing to capitulate to Russian interests. The US and Ukraine have now signed a deal that will give Washington access to latter’s natural resources, which some hope is a signal that Trump is now willing to place more pressure on Russia in ceasefire talks. On the one hand, a ceasefire might appear to be the victory Vladimir Putin has been seeking, because it will bring an end to an unexpectedly long and expensive war. But it could also bring an end to Russia’s economic illusion.
Since the 2022 full-scale invasion, Russia has been able to uphold the impression of prosperity. Despite the sanctions that have cut off its trade with Western countries, the freezing of its foreign exchange reserves and its isolation from much of the international banking system, Russia’s economy has been supported by the continued trade in its oil (which is capped in price rather than sanctioned, and which is exported to the world at a rate of more than €600m per day) and by high spending on the war itself.
This is “military Keynesianism”: in a (clearly limited) sense, war is an industrial activity that stimulates the economy. This has been the secret to Russia’s surprising growth in GDP and real wages. About a third of Russian government spending has been dedicated to the horrific necessities of war – munitions, fuel, vehicles, food, pay for soldiers and compensation to their families when they are killed – boosting economic activity in what my colleague Katie Stallard has described as “a grim form of stimulus”. The end of the war will bring an end to that stimulus, a rebalancing, and potentially an economic shock for Russia.
Matt Gertken, chief geopolitical strategist at BCA Research, told me that while a “single-digit contraction in GDP” would be a reasonable expectation as Russia transitions from a war economy, the country also risks a deeper recession caused by a recent surge in corporate borrowing. Using data from the Bank for International Settlements, Gertken and his team have identified a very large surge in “excess” public and private borrowing (meaning borrowing above previously established trends) in the last four years. “It really picks up when the mobilisation picks up in 2021, and it skyrockets in 2022,” he told me. His team estimates that this total excess borrowing has reached $560bn – $400bn of which is from the private sector. Gertken says this figure is conservative in comparison to other analyses.
If the very high pace of private borrowing in Russia also falls sharply with a ceasefire, this could change the nature of Russia’s postwar economy. “A recession with a credit contraction is a different type of recession from one in which credit remains ample,” Gertken told me. “As we know from recent credit busts in other economies, that can lead to a deep recession.”
The end of the war could also be transformative for Russia’s labour market. A slowdown in public spending and private borrowing might cause new redundancies at the same time as more than 600,000 troops currently deployed in Ukraine begin to return. This could be further complicated by the huge number of Russian soldiers injured; the UK Ministry of Defence estimates Russian casualties have reached 900,000 on the Russian side, with an estimated 200,000 to 250,000 killed.
The very large number of injured soldiers returning from Ukraine could create what Gertken calls the “Captain Kopeikin problem”, after the apocryphal soldier of Nikolai Gogol’s Dead Souls. In the story told about Kopeikin, he is said to have lost an arm and a leg in the Napoleonic Wars; when he returns to find that the state will not provide him with a pension, he takes the matter into his remaining hand by becoming the leader of a bandit group. The Russian media, he told me, are now explicitly covering concerns about “veterans who don’t have jobs, or veterans who are injured and don’t have enough benefits”.
If Russia does emerge from sanctions, it will be returning to a very different global economy to the one it left in 2022. Trump’s war on trade has profound implications for the US, which faces a real prospect of recession, and for China, whose factories are the main target of the White House’s tariffs. China is the biggest buyer of Russia’s main export, oil. “It’s probably not going to be a robust global growth backdrop that Russia is settling into,” said Gertken.
This does not mean Russia would be better off continuing to prosecute its war in Ukraine. Putin needs to secure a ceasefire, or risk the US and EU responding with more military support for Ukraine. If the Kremlin does not refocus on domestic spending soon, Gertken told me, “and instead they just plough forward [with the war], they’re going to have an unmanageable economic problem in the future. And the truth is, it probably already is unmanageable. But there’s a chance that if they take the ceasefire and pivot, maybe they can rehabilitate the economy in time to prevent devastating social unrest.”
Nevertheless, Gertken predicts that the war in Ukraine will have a long tail for the Russian economy and Russian society. He compared it to the Vietnam War, in which America suffered a similar level of casualties relative to the size of its population. “Even today, much of the polarisation that we experience, in part, took its root in Vietnam,” he told me. “So I think we’re going to have serious social unrest, which is normal in Russia in the wake of wars, especially offensive wars.” The scars left on Russia’s economy and society will, he predicts, “be very dangerous for the political regime”. No one can say what the outcome will be, but Gertken predicts that even if Putin is able to claim a victory in Ukraine, he will face “a power struggle at home” before the decade is over.
[See also: Friedrich Merz has emboldened Germany’s far right]
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