Russia's "surprisingly resilient" war economy is nothing of the sort.
Russia's war expenditures for 2024 are estimated to be $149 billion (in current US dollars and exchange rates), or 7.1% of its GDP and 19% of its total government spending [1]. SIPRI notes that the Russian budget has become "increasingly opaque" with 30% marked as classified in 2024, meaning that the spending is likely higher than the estimate. Most of that spending went to arms industry to buy weapons and to subsidize some producers who were on the verge of bankruptcy. About $9.4 billion (to October) went to social support of military personnel (nearly double the budgeted amount). In other words, Russia spends at least 6% of its military budget on personnel.
Russia's federal budget deficit was 1.7% of GDP and was financed by domestic borrowing, oil and gas revenues, and drawing on the National Wealth Fund. Russia's debt-to-GDP is about 15%, one of the lowest in the world [2]. With high interest rates (key rate is currently 17%, down from 21%), the cost of servicing this debt will be 8% of the budget (compare to Britain's 8.3% spend on debt service despite carrying 96% debt-to-GDP).
Ukraine's are $64.7 billion, or 34% of GDP and 54% of total government spending [1]. Ukraine spent all of its tax revenues on the military, and all non-military spending was funded by foreign aid. In 2024, Ukraine received $60 billion in financial military aid. When this amount is factored in, Ukraine's war-spending is $125 billion. Ukraine spends about 3/4 of its military budget to personnel.
Ukraine's budget deficit in 2024 was 17.7% of GDP (lower than the planned 24.2%) and was financed through international aid, loans, and domestic bonds. Ukraine's debt-to-GDP ratio was 109%, an all time high [3]. Its key interest rate is 15.5%, slightly up from the 13% at the start of the year but below the 25% that it hit in the summer of 2022. Its debt service will absorb about 8-10% of the budget depending on grants [4].
Comparing these data seems to suggest that Russia is doing considerably better with its war economy than Ukraine (which of course is heavily dependent on foreign assistance). What magic is Nabiullina using to sustain the Kremlin's war effort and keep the economy in a decent shape despite massive sanctions?
There's no magic --- just hidden war finance.
Russia is simply keeping an astonishing amount of military finance -- between $210 and $250 billion -- off the official books. In mid 2022, the Kremlin created a system of "preferential loans" whereby the government directs domestic banks to loan money to producers it deems important for the war at very low rates (about 5% to 8%, or anywhere between 24% and 47% of the key rate) [5].
Accounting for this spending (the loans become additional military costs) and debt doubles Russia's military expenditures to $297 billion ($148 billion annualized hidden), which would be 14% of GDP and 38% of the budget. The deficit would increase to 6% of GDP and require 4.5 times more borrowing.
At 14% of GDP dedicated to military spending, Russia now approaches Soviet spending during the peak of the Afghan War (about 15% in the early 1980s). For comparison, the US peak military spending as percent of GDP has been:
- WW2: 37-42% (1944-45)
- Korean War: 14% (1952-53)
- Vietnam War: 9% (1968-69)
- Gulf War: 5% (1991)
- GWOT: 5.7% (2008-10)
How does it work?
The war demand from the military is massive and the defense industry is struggling to fulfill the orders despite working three shifts 24/7. Because the Kremlin wants to hide the true cost of the war, it does not allocate enough money to pay for all this production (the official budget expenditures) and so the companies have to borrow. Doing so at the very high interest rate that Nabiullina maintained to curb inflation (21% at peak) would have been ruinously expensive and so the Kremlin stepped in to force the banks to loan at ridiculously low rates. These debts are backed by the government.
The banks, forced to lend huge amounts to the defense industry, have had to curtail their lending to other companies. The market rates they have to use are too high, choking off credit for many small and medium enterprises, and driving many into bankruptcy. There has been a lot of pressure on the Kremlin to do something about this and Nabiulling finally relented a bit by lowering the interest rate to 17%. This is still too high, however, so the Kremlin stepped in with a decree that declared a bank holiday for 6 months, allowing small and medium enterprises not to service their debts contracted since 2024.
The domestic banks are thus now squeezed both by the unprofitable loans they have to make to the defense industry and the nonperforming loans they've made to the non-defense sector.
Here's where it gets problematic.
The defense sector's primary (and often sole) income source during the war are state contracts. (Russia has delayed deliveries of weapons to foreign countries because of the immense needs at the front.) As long as the war continues, these contracts will keep providing a steady cash flow, allowing the companies to service their debts, and so these loans will appear as performing on bank balance sheets. This creates the illusion of stability in the system and keeps the government budgets looking healthy.
What happens if the war were to end but the sanctions remained in place?
The state contracts will dry up, so the companies will not be able to keep servicing the loans, which will trigger a banking crisis as suddenly significant assets turn into liabilities. It will not be easy to replace the state contracts with foreign sales in the short term and the sanctions will block access to foreign capital markets. At 17% domestic interest rate, refinancing would not be viable. The only way out would be a massive government bailout that would recapitalize the banks. With corporate debt already exceeding oil and gas revenues (which are unlikely to increase given the tighter sanctions on the tanker fleet, India diversifying, and OPEC increasing production), the only way to generate the revenue would be through very serious hikes in taxation and drastic cuts in social spending. The government's deficit will suddenly balloon to reflect the true cost of the war finance as it absorbs these liabilities.
The shock to the Russian population will be severe: they will be hit with a banking crisis, higher taxes, and cuts to social programs all at once.
Without sanction relief, which does not appear to be forthcoming, the Kremlin is essentially gambling the entire Russian economy on Ukraine's resistance collapsing before its financial bubble bursts. Our strategy is clear: increase pressure on Russia by hitting their energy revenues while enabling Ukraine to attack its infrastructure and sustaining the Ukrainian economy.
Russia cannot win this war if the West plays its (very strong hand) right.
Sources:
[1]
https://sipri.org/sites/default/files/2025-04/2504_fs_milex_2024.pdf
[2]
https://reuters.com/markets/europe/russia-will-borrow-more-than-planned-2025-finance-minister-says-2025-09-09
[3]
https://ces.org.ua/wp-content/uploads/2024/12/eng-budget-2025.pdf
[4]
https://wilsoncenter.org/blog-post/ukraines-projected-2025-budget-expects-war-continue-0
[5]
https://cepa.org/article/putin-resorts-to-financial-smoke-and-mirrors
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