Kremlin’s War Economy Driving Recession in Russia’s Regions

Executive Summary:

• Official economic data on the first six months of 2025 indicates that Russia’s war economy is stagnating as military industries absorb resources from civilian sectors. 
• In the first half of 2025, 67 of Russia’s 89 regions reported severe budget deficits, with industrial hubs and resource-rich regions facing especially steep declines, highlighting the fragility of Russia’s economy.
• The Kremlin spent 8.5 trillion rubles (about $100 billion) on the military in the first six months of this year, while sanctions and falling profits from exports of natural resources erode Russia’s traditional income base.

The Kremlin’s full-scale invasion of Ukraine, which has been going on for more than three and a half years, seems to have entered its symbolic “autumn” phase. Military analysts do not expect any major offensives from either side, as they have both exhausted much of their resources. If Ukraine continues to receive international economic support to defend its borders, then Russia, whose authorities have driven the Kremlin into isolation from most developed countries, will enter a deepened economic crisis (see Strategic Snapshot, May 8; see EDM, July 7).

Two years ago, Russian experts claimed that the country was successfully coping with global sanctions, and that the military-industrial transformation of the economy was yielding net profits (Higher School of Economics, April 7, 2023; Kommersant, December 15, 2023). The ostensible economic resilience of the Russian economy in the face of the costs of its war against Ukraine and attendant sanctions, however, was only possible in the short term. Military industries have some ability to stimulate civilian economic development. For example, governments initiated fields including space exploration and the Internet in the 20th century as defense projects. The problem for the Kremlin, however, is that economic militarization in Russia has become an end in itself. Instead of complementing civilian industries, the military extracts resources from them without concern for the sustainability of other sectors of the economy.

German Gref, head of Russia’s largest bank, Sberbank, euphemistically calls the current state of affairs a “cooling of the economy” and “technical stagnation” (RBC, September 4). Even though the militarization of Russia’s economy largely insulated it from the effects of sanctions and unsustainable wartime spending after the Kremlin’s full-scale invasion of Ukraine, the exhaustion of Russia’s financial buffers has become more obvious throughout 2025 (see EDM, September 24). Signs of economic trouble are especially noticeable in civilian industries.

Rosstat, the Kremlin’s statistics agency, admits that a third of Russian enterprises have become unprofitable (Gazeta.ru, September 2). Of the 20 major manufacturing industries, growth is observed in only four, three of which are directly related to the military. There is a flow of labor into military industries. Technically uncomplicated, “screwdriver” assembly of drones has become especially popular (Re: Russia, September 12). Weapons manufacturing, however, is not stimulating the economy as a whole. Russian auto factories are sending employees on forced leave and transferring them to a four-day work week (The Moscow Times, August 13). The Central Bank predicts inflation of up to 7 percent by the end of this year and up to 12 percent next year (Vedomosti, September 2). Developers have reduced investments in real estate by 44 percent (KO, August 28).

In the first half of 2025, Russia spent a record amount on the military—almost 8.5 trillion rubles (about $100 billion) (Oboz.ua, August 28). The Kremlin is increasingly nationalizing civilian companies, from Domodedovo Airport to parts of one of Russia’s largest agribusiness groups, Rusagro Holding, citing “wartime needs” (Radio Svoboda, June 21; Vazhnie Istorii, July 29). From 2022 to 2024, the regime confiscated more than 180 large enterprises. Nationalizing some companies is not discernibly bolstering the economy—on the contrary, production of essential consumer goods in Russia is declining and food purchases from abroad are increasing (The Moscow Times, September 11 [1], [2]).

Russia’s economic crisis is most acutely reflected at the regional level (see EDM, September 23). Despite centralized statistics indicating at least some gross domestic product (GDP) growth, this generalized data hides a deep imbalance between Russian regions. The majority of Russia’s regions, 67 out of the official 89, displayed a severe budget deficit in the first half of 2025 (Okno, September 4). Natalia Zubarevich, an economist from Moscow State University, asserts that the Russian economy’s hyper-centralization drives regional inequalities (Radio Svoboda, September 9). According to her data, only incomes in Moscow have substantially increased by about 11 percent over the past year. In the northwestern and Siberian regions of Russia, incomes grew by a maximum of 2 percent. For the third consecutive year, transfers from the federal center to the regions have been decreasing, thereby amplifying regional disparities. Simultaneously, Moscow continues to exploit the regions’ natural resources while centralizing profits (see EDM, September 9). Igor Lipsits, a former lecturer at the Higher School of Economics who lives in Lithuania after the Kremlin banned his books, asserts that “Moscow started the war, but Tatarstan will pay the price” (Idel Realii, September 9). Tatarstan’s oil exports to Europe have practically ceased, and Russian President Vladimir Putin’s war against Ukraine now forces the region to instead produce Shahed/Geran (Геранъ, Geranium) attack drones (see EDM, March 6, 2023, March 4, May 14, September 18, October 16, 2024, June 4; Meduza, July 21).

In September, the Expert Rating Agency, Russia’s oldest credit rating agency, published a generally “optimistic” monitoring of regional budgets (Expert Reytingovoe Agentstvo, September 2). Independent media outlets, however, saw a completely different picture in the figures provided—more than half of Russia’s regions have fallen into an industrial recession (The Moscow Times, September 2). In some republics and oblasts, the economic decline is precipitous—year-over-year income tax revenue for the first six months of 2025 declined by 53.9 percent in the Komi Republic and 33.3 percent in the Chelyabinsk oblast, two large industrial hubs.

Profits from natural resource exports, Russia’s primary source of income since at least the 1970s, are sharply declining. This decline is not solely due to European sanctions. The Kremlin’s “strategic partnership” with the People’s Republic of China (PRC) has not eased competition on the export market. For example, PRC coal is cheaper than Russian coal, and the coal-rich Russian Kuzbass/Kuznetsk Basin would have to set prices below cost to export to the PRC. The Russian Republic of Karelia used to send trains of timber to its neighboring country, Finland, but EU sanctions have halted this. The PRC is interested in Russia’s timber, but the cost of transportation through the gigantic Eurasian space makes Karelian timber prices “golden” (Radio Svoboda, September 9).

Russia’s regions neighboring the European Union, including the Republic of Karelia and the Kaliningrad, Leningrad, and Pskov oblasts, traditionally conducted border trade with European countries and developed mutual tourism (see EDM, March 21, 2023, January 17, 2024). The war eliminated these opportunities. Now, instead of developing from their unique economic strengths, the Kremlin is forcing these regions to militarize their economies to fuel Putin’s war against Ukraine, which does not profit local budgets (see EDM, June 16, 2022, April 18, 2023). Russian regions cannot abandon the war-centric economy. Industry is so consumed by military production that a sharp cessation would cause mass unemployment and social crisis (see Strategic Snapshot, May 8; see EDM, July 7). There is a Russian and Ukrainian proverb: Count your chickens in autumn. If Russia’s economic situation continues to deteriorate in the coming months and years, one cannot rule out that a new wave of economic, rather than political, Russian refugees will enter Europe.