The Ultimate Trap: Russia is Headed for Crisis, War or No War

 

Moscow's "success" is built on a house of cards: war spending keeps GDP alive, but ending this war means ending the only fuel keeping the Russian engine running. In plain English, the so-called "economic growth" under Putin's regime is nothing but a mirage, powered by unsustainable war spending—peace will only expose the hollowness of Russia's economic model.

Russia may be digging its own economic grave—and the shovel is the war. In the current geopolitical landscape, Vladimir Putin is essentially playing a game of "war or collapse," with the stakes being Russia's entire economy. The war in Ukraine, which has entered its third year, is costing Moscow dearly. Yet, paradoxically, it has also become the life support for Russia's fragile economy. In a twist of fate, pulling the plug on the war might just send Russia into a tailspin of economic chaos it cannot escape.

Putin’s war in Ukraine has been many things—costly, controversial, and deeply tragic—but one thing it undeniably is, is an economic prop for Moscow. With an estimated 6% of the GDP allocated to military spending in 2024, the war effort has essentially pumped steroids into an otherwise stagnating Russian economy. The IMF predicts a 3.6% GDP growth for Russia in 2024, which is impressive given the global economic climate and Western sanctions strangling Moscow. Yet the price of this growth is unsustainable; as soon as Russia tries to withdraw, its economic scaffolding starts to crumble. It’s like a man who needs a cane to walk but can’t afford the cane forever. Eventually, Putin might have to decide whether to walk without it and fall flat or lean on it forever at an enormous cost.

For a country battling Western sanctions and seeing its sovereign wealth fund deplete, war spending has turned into a desperate gamble to stave off economic collapse. The Russian National Welfare Fund, a kind of piggy bank for hard times, has had 44% of its liquid assets wiped out since the start of the Ukraine invasion. What's more, around a million Russians have fled the country, leaving a severe shortage of labor and skills. Putin's government has had to crank up interest rates to a whopping 21% in October 2024, a frantic attempt to control rising inflation, which is running at 8.6%, well above target. Yet despite all these signs, the Russian economy hasn’t yet sunk entirely, in part because war is an effective—albeit dangerous—economic stimulant. But therein lies the dilemma: either stay in the fight and bleed slowly or pull out and risk rapid hemorrhage.

As if that weren’t enough, Russia’s problems go far beyond sanctions. Western economic sanctions have severely hampered Russia's ability to attract international trade partners for its oil and gas. The Arctic gas project, a flagship energy endeavor, is struggling to find customers. Satellite images and ship-tracking data suggest that U.S. sanctions have effectively driven away potential buyers, casting a dark shadow over Russia's energy future. Russia also faces a Catch-22 when it comes to energy dependence; the covert trade channels it set up with India to evade sanctions reveal the fragility of its economic maneuvering, as it resorts to spending oil revenue on procuring sensitive electronics essential for its war effort. This is a far cry from a stable, self-sufficient economy.

And what happens if the war continues? Putin’s resolve to achieve a so-called historic victory in Ukraine keeps the military-industrial complex churning, employing millions, re-opening factories in Russia’s rust belt, and keeping the GDP afloat. But here’s the catch: the Kremlin is running out of resources. Labor shortages are a growing concern, and if Western sanctions are any indication, the economic vise is tightening. The deployment of North Korean troops to Russia’s Kursk region is a testament to how dire things are getting on the ground. These troops might be more symbolic than substantive in their military utility, but they reveal just how far Putin is willing to go to maintain a narrative of strength. However, strength on the battlefield doesn't always translate to strength on the economic front.

Now, imagine if Putin were to end the war. The immediate effect would be like removing the adrenaline shot that's keeping the economy alive. The record-breaking defense budget—the so-called Keynesian crutch—would vanish, and the aftermath could be dire. Moscow has already exhausted most economic tricks to prop up its currency and stabilize the economy. The central bank's severe interest rate hike is just one in a series of emergency measures designed to keep the country afloat amidst what seems like an impending economic avalanche. Moreover, ending the war might mean admitting defeat—something that is likely unacceptable for Putin and the Russian elite. It’s a classic case of being stuck between the devil and the deep blue sea: keep up the war and face potential prolonged economic stagnation, or retreat and risk economic collapse almost instantly.

The labor shortages are not just about economics; they are also about demographics. Russia faces a looming demographic crisis, worsened by the exodus of about one million people in the early days of the war. A shrinking, aging population will pose challenges that go far beyond the immediate economics of war or peace. This demographic reality could compound into social instability—a perfect storm that even Putin’s iron grip might not be able to control.

The strangest irony is that while Russia's economy is overheated with military spending, it also suffers from a de-industrialization problem. As old Soviet factories are repurposed to produce military hardware, other sectors languish, particularly those that require high technology or international cooperation. This neglect has a domino effect on the broader economy, impacting technological growth and creating an economic model that is increasingly backward-looking—relying on military might and resource extraction rather than diversification and innovation. A country with a shrinking workforce, tightening economic sanctions, and internal political strain is bound to find itself between a rock and a hard place. Indeed, Moscow's struggle to modernize even while flexing its military muscles might be the downfall of its ambitions on the world stage.

Western leaders are aware of Russia’s predicament and are keen to keep it contained. The G7 has threatened China with additional sanctions over its support for Russia, while the U.S. has taken further steps to strangle Moscow’s financial networks, including halting foreign exchange trading involving the dollar and euro. Russia has had to resort to desperate measures, including clandestine sourcing of old Western-made machinery for its defense industry. The longer Putin prolongs the war, the more reliant Russia becomes on under-the-table deals and evasive economic maneuvering. And the risks keep piling up.

One thing is certain—regardless of whether Putin ends or continues the war, the future for Russia looks grim. On the one hand, Putin faces an economy increasingly dependent on military expenditures and in danger of overheating. On the other hand, a retreat from Ukraine would strip away the defense budget stimulus and lay bare the inadequacies and vulnerabilities of the Russian economic framework. Either way, Putin seems to have walked into a self-made trap, and there’s no easy way out. Some might say he’s damned if he does, and damned if he doesn’t.

For a man whose power hinges on projecting strength, this economic predicament looks suspiciously like the endgame of a chess match where the only remaining moves are those that ensure defeat. Maybe it's true what they say: when you go to bed with a war, don’t be surprised if you wake up with a crisis.