Russia's war spending set to drop 11% as economic troubles deepen

Bloomberg reported the information.

Russia's defense industry boom is grinding to a halt as the country enters the fourth year of its invasion of Ukraine, according to the Economy Ministry's three-year forecast. The shift marks a stark reversal from the breakneck military expansion that has defined Moscow's economic policy since February 2022.

Sectors tied to state defense orders—including military equipment, components, drones and ammunition—will experience sharply reduced growth compared to the explosive increases of recent years. The slowdown comes as leader Vladimir Putin continues to make maximalist demands for Ukrainian territory at U.S.-led peace negotiations.

War-related spending is projected to drop nearly 11% this year following a more than 30% surge in 2024. Defense remains the largest budget category, but it was the only major line item officials reduced in the budget, even as overall government expenditure is expected to rise with inflation.

The policy shift reflects warnings from top economic officials that Russia has reached the limits of sustainable military spending. "Government spending has reached levels that can be considered near the limit for the current state of the Russian economy," said Alexander Shirov, director of the Institute of Economic Forecasting at the Russian Academy of Sciences.

Finance Minister Anton Siluanov, who two years ago declared fiscal policy was in the service of "financing victory," has recast the government's goals around maintaining a balanced budget resilient to lower oil prices and sanctions.

First Deputy Prime Minister Denis Manturov told Putin at a meeting in January that civilian products now account for more than 30% of output at defense plants, with plans to expand non-military production further.

"There is a very simple explanation for the Economy Ministry's forecast. In 2026, fiscal policy will become contractionary," said Tatiana Orlova, lead economist at Oxford Economics.

Monthly data already shows the defense sector slowing. Production growth in optics and electronics—including military equipment components—eased to 11% in 2025 from 28% the previous year. Output of tanks and combat vehicles slowed to 27% from 34%, while production of finished metal goods, including bombs and weapons, decelerated to 14% from 32%.

The pullback stems from multiple economic pressures converging on the Kremlin. Russia faces mounting revenue constraints due to lower oil prices, wider discounts on crude exports, and logistical bottlenecks from tighter sanctions. A strong ruble has compounded the pressure, while the sovereign wealth fund's liquid reserves appear close to minimum levels needed for financial stability, forcing the government to finance budget deficits solely through borrowing.

Defense factories absorbed roughly 800,000 workers over the past three years, deepening labor shortages and triggering wage competition with civilian sectors. Rapid salary growth contributed to an inflation surge that kept interest rates at record highs for months.

"Throughout this year they will remain at a crossroads—between continuing to pour resources into the war or beginning to dial it back toward a semi-war footing," said Alexander Gabuev, Berlin-based director of the Carnegie Russia Eurasia Center, citing battlefield developments and negotiation outcomes as key variables.

The fiscal tightening may provide the central bank greater room to ease monetary policy and offer relief to the broader economy. "Overall, state demand in the economy will be less intense than it was in previous years," said Sergey Konygin, chief economist at Sinara Bank. "The supportive factor this year will be ongoing monetary easing, which will spur investment activity amid industries."