Eurasia Press & News
How America and Europe Can Exploit Moscow’s Vulnerabilities
To sustain its war against Ukraine, Russia militarized its economy. Although—contrary to popular belief abroad—the Russian economy is not on a full wartime footing, the Kremlin has both splurged on weapons factories and begun trading more with China to evade Western sanctions. Over the past three years, the Russian economy has outperformed most forecasts thanks to extravagant government spending, high prices for commodities that Russia exports, and skilled economic management.
There are now two views of Russia’s economy. One, touted by Russian President Vladimir Putin, is that the Russian economy has proved surprisingly resilient and is strong enough to sustain his grandiose goals, which include not only maintaining Russia’s war in Ukraine but also expanding and upgrading its military so that it could one day take on NATO. Since U.S. President Donald Trump returned to the White House in January, Putin has ramped up his tests of the alliance’s resolve. In September, Russian drones violated Poland’s airspace and Russian fighter jets intruded into Estonia’s. Putin has faith in his own resources: since 2022, Russia has expanded its weapons output even in the face of severe sanctions.
The other view of Russia’s economy is that it is bound to one day collapse. But neither is entirely correct. Russia’s ability to build a strong-enough military to truly challenge NATO over the long run is constrained by mounting fiscal pressures, an overstretched labor market, sanctions that block access to critical technologies, and a defense industry already working at full capacity. According to defense experts, it will probably take Russia between seven and ten years to reconstitute its military forces—that is, replenish depleted weapons stockpiles, replace heavy equipment losses, and rebuild troop strength and combat readiness. Yet in the meantime, Russia can harass NATO members on the cheap with cyberattacks and sabotage, and it may decide on an outright attack even sooner, given that European countries are rushing to upgrade their defenses.
After three and a half years of full-scale conflict, the contours of Russia’s political economy reveal the boundaries of what the Kremlin can achieve. To defeat Putin’s grand goals, the United States and European countries must get a better grasp on the specific long-term vulnerabilities of the Russian economy and start exploiting them now.
TREADING WATER
Despite sanctions and isolation, Russia has managed to keep its war machine running. In 2021, the Kremlin spent around 22 percent of the federal budget on the military. Today, it spends nearly 40 percent, or about eight percent of GDP (including spending on domestic security). The government has expanded its drone and ammunition manufacturing, refurbished stockpiles of Soviet-era equipment, and offered generous financial incentives to encourage men to join the army. Moscow was able to sustain the invasion without putting the entire economy on a full wartime footing by declaring a partial mobilization and encouraging existing defense factories to run around the clock. Parallel imports—goods sold to Russia by a third party without the manufacturer’s permission—and Chinese suppliers have covered gaps in critical components caused by sanctions. In the short term, this patchwork approach has been enough to replenish frontline forces and keep Russia in the war.
But these achievements are less impressive than they appear. As the military analyst Dara Massicot has noted, Russia’s defense-industrial capacity had largely plateaued by 2024, apart from drone production. Most of the equipment it is now delivering to the Ukrainian front is refurbished, not new, and is often inferior to NATO systems. Corruption and inefficiency in the military and defense sectors remain endemic, and although marginal gains in efficiency are possible, they cannot generate the scale of resources required for rapid force expansion.
Russia has demonstrated resilience and adaptability by tapping into its so-called industry mobilization reserve (standby production capacity that can be rapidly activated during wartime), as well as by expanding its infrastructure somewhat, such as by building ammunition factories. But the country has exhausted its reserves of manufacturing capacity and manpower. To produce substantially more equipment or recruit and train far more soldiers, Moscow would have to shift to a more comprehensive war footing by directing all available resources toward military needs, as it did during World War II, or commandeering civilian production lines for military purposes. Car factories, for example, could be made to produce only military vehicles. But the government has resisted doing so because it feared social unrest and shortages of consumer goods.
FLASHING RED
Russia’s war economy works, but only up to a point. The Kremlin is limited not only by short-term production bottlenecks but also by fiscal strain, an overstretched labor market, technological isolation, and a fragmented defense-industrial base. In effect, defense spending functions like a disposable-goods economy: factories operate at full capacity, workers earn wages, and demand for inputs surges, but the output is designed to vanish almost immediately. Tanks, drones, and shells are produced to be destroyed on the battlefield, and the state pays out lifetime pensions to injured soldiers and death benefits to the families of those killed. This cycle sustains employment and industrial activity in the short term but generates no lasting assets—such as highways, power plants, or schools—or productivity gains, leaving the economy busier yet poorer with each passing year of war.
Russia’s fiscal indicators are flashing red. Oil and gas revenues are declining because of lower prices, rising logistical costs, volatile exchange rates, and the threat of expanded sanctions. In the first half of 2025, federal revenues contracted by 16.9 percent. The Finance Ministry designed its 2026 budget around an assumed oil price of $59 per barrel, down from $67 in the previous draft budget, and will likely revise the estimated price even lower.
Non-oil revenues are rising but not nearly fast enough to compensate, especially as Russia’s economic growth slows. GDP expanded by just 1.1 percent over the first seven months of the year, a sharp deceleration after two years of overheating. Russia’s GDP grew by 3.6 percent in 2023 and 4.1 percent in 2024 because of massive state expenditures that also fueled higher consumer prices. The overheating was unsustainable, but today’s deceleration exposes the fragility of a war economy that depends on continuous fiscal stimulus to mask underlying structural weaknesses. To close the revenue gap, the government is resorting to what it calls “revenue mobilization”—expanding fines, penalties, and state fees. In 2024, the government raised taxes on incomes and corporations. Now, according to a draft budget, the Kremlin is considering a two percentage point increase to the country’s value-added tax, which could generate $14.3 billion. In addition to raising the VAT to 22 percent, authorities plan a sixfold reduction of the revenue threshold at which businesses must begin paying the VAT, thereby expanding the taxpayer base by a large margin.
For the first time since the war began, Russia’s military spending is set to stop growing.Defense Minister Andrei Belousov, an economist by training, has reassured Putin that sustained defense spending in 2026 and beyond, combined with improved government procurement, will drive broader economic growth and potentially stimulate the civilian economy. His strategy involves expanding procurement to include smaller private enterprises and the Rubicon Center of Advanced Unmanned Systems, a drone research and development organization, through simplified contracting and direct funding for dual-use technologies.
In Belousov’s thinking, when the state creates substantial industrial demand for military purposes, factories start mass-producing new technologies, causing them to become cheaper and more reliable. That process occurred in the United States in the 1960s. As the Pentagon and NASA pushed to procure materials for the Minuteman II missile program and the Apollo space missions, they created a sustained demand for integrated circuits, allowing manufacturers to achieve the production volumes necessary to drive down costs. That is, in part, how the United States came to be home to the modern computing industry.
Russia’s economic structure, however, fundamentally differs from the open American system that enabled such spillover effects. Putin’s drive toward autarky has created a semiclosed economy in which every injection of liquidity or subsidized credit generates demand that crashes against rigid supply constraints. Russian firms cannot rapidly scale up production because of logistical bottlenecks, technological limitations, and chronic workforce shortages. Rather than creating more outputs, excess monetary stimulus inflates prices, widening the gap between demand and supply and driving inflation—a dynamic that undermines the very growth objectives that defense spending was intended to achieve.
In the 2026 draft budget, for the first time since the war began, military spending is set to stop growing and could even fall slightly. The goal is economic rebalancing, not peace. But a modest decrease in military spending will not fix Russia’s structural problems. Russia is caught in a bind: any attempt to rapidly cut defense expenditures would trigger economic collapse, but maintaining current military spending levels would perpetuate stagnation. Moscow can neither sustain indefinite military spending nor safely transition back to a civilian economy without demobilizing and getting some relief from sanctions.
WE’RE HIRING
Russia also suffers from a tight labor market. By the end of 2024, Russian firms faced a labor deficit of 2.2 million workers and 70 percent of Russian businesses reported they were short on employees. Defense production now competes with construction, transportation, and agriculture for scarce manpower. Restrictions on migration compound the problem. Migrants can work in just a handful of low-paid sectors, and they face discriminatory laws. Their children, for instance, have limited access to schools.
Meanwhile, demographic pressures are intensifying: people over 65 already account for 18 percent of Russia’s population, a proportion expected to rise to 24 percent by the middle of the twenty-first century. The war has worsened this demographic crisis. According to estimates from August by the BBC and Mediazona, an independent Russian news outlet, at least 219,000 Russian soldiers have been killed so far in Ukraine, most of them working-age men. Hundreds of thousands more have permanently withdrawn from the labor force because of injury. Contract soldiers on the frontlines make up approximately 0.5 percent of the workforce. In theory, the economy will reabsorb these workers when the war ends, but combat skills don’t always translate to civilian jobs, and many veterans will require retraining and ongoing medical care.
Russia’s defense industry now looks like a patchwork quilt. U.S. and European export controls have cut off Russia’s supply of advanced components such as high-end semiconductors, precision bearings, and specialized machine tools, forcing its economy into costly substitution. For Russia to make domestic alternatives, it needs to build new production facilities from scratch. The result tends to be a worse product at a higher cost. Parallel imports and Chinese supplies can temporarily plug critical gaps in electronics and machinery, but the quality of these products is often lower. Russia can assemble weapons, but it cannot rebuild the sophisticated industrial base needed for long-term competitiveness. Russia has come to depend on China not only for components but also for machine tools and industrial robots, affording Beijing significant leverage over Moscow when it comes to pricing on consumer and industrial goods. In many ways, Russia is now subordinate to China and operates primarily as a resource supplier rather than a technological equal.
Russia’s defense industry now looks like a patchwork quilt. There are state giants such as Rostec, a defense group, regional workshops, and small, even garage-sized firms producing drones and equipment. This decentralized mobilization has proved surprisingly effective in wartime, as small shops can often work faster and more cheaply than traditional large contractors. Yet once the war ends, the Russian government will not be able to keep these firms going. It will be easier for the Kremlin to instead restore the Soviet-style system of centralized plants, bloated procurement, and entrenched corruption. The collapse of these innovative small firms could slow the pace of technological development and implementation, as they are beat out by sluggish state monopolies.
There is also squabbling between Belousov, who supports the small shops (also known as the people’s military-industrial complex), and Putin’s cronies—such as Rostec CEO Sergey Chemezov, an old friend, and Alexei Dyumin, Putin’s former bodyguard—who lobby for the traditional defense firms. The two sides fight not only over how to develop the defense-industrial base but also over control of revenue streams and lucrative chunks of an increasingly militarized economy. Since 2008, for example, Chemezov has helped consolidate Rostec’s control over state-owned and privatized Soviet-era defense manufacturers by pressuring shareholders and managers to join his industrial empire. Russia’s innovative defense entrepreneurs might be met with similar intimidation, resulting in conflicts, delays, and cost overruns.
KICK ’EM WHILE THEY’RE DOWN
The United States and Europe cannot bank on Russia’s economy simply falling apart. But the structural limits on Russia’s economic growth suggest that its planned military resurgence will be slow, uneven, and costly—which provides its adversaries a window of opportunity to hinder its military buildup. Sanctions and export controls, for example, can still hurt Moscow. They have already compelled Russia to substitute imports and develop a dependence on China. If U.S. and European policymakers tighten controls on components—such as optics, semiconductors, and advanced machine tools—and continue to sanction Russia’s oil exports and financial system, they can put even more pressure on Russia’s economy and industrial base. They could also make it harder for Moscow to preserve the flow of imported consumer goods (such as electronics, clothing, and household items) that underpin middle-class lifestyles.
U.S. and European policymakers should anticipate the Kremlin’s adaptations. Russia might further militarize its economy by converting more civilian industries to meet military production needs, building new plants, and attracting more people to the defense industry through higher wages, draft exemptions, and expanded recruitment campaigns. Such actions would be politically risky for Putin because they would force ordinary Russians to make sacrifices. Consumer factories could close, goods might be rationed, and companies could lose their employees to war-related sectors. Putin so far has maintained his public’s acquiescence to his grand military ambitions by preserving the normalcy of daily life. A full mobilization could make more people feel the war’s effects. But from Putin’s perspective, the potential payoff—subjugating Ukraine and eroding NATO—may justify the gamble.
When it comes to thwarting Putin’s ambitions to confront NATO, timing is everything. Russia can make up for its losses over the next two to three years, but fully restoring its military will take much longer. The paradox of Russia’s war economy is that it is simultaneously strong and brittle. The United States and Europe must act with urgency: pressing their advantages while Russia remains constrained rather than waiting for the Kremlin to get back on its feet.
