War and the “Deadly Gifts” of the Russian Economy: Should We Expect a Hard Landing?

The state of the Russian economy during a full-scale war causes contradictory assessments by analysts. How does Russia finance the military-industrial complex, and where does it get the resources to maintain relative economic stability? 

Estimates range from conditionally optimistic to apocalyptic.

This article attempts to figure it out using objective indicators.

Key Economic Indicators 

Let’s analyze Russia’s macroeconomic indicators for the period of the full-scale war. We will see that Russia has not yet used the so-called “deadly gifts” which means the critical impact of these factors on the economy as a whole) to finance its military aggression. 

There are three such “deadly gifts”:

The size of the budget deficit.

The dynamics of public debt.

Policy on the rates of major taxes that directly or indirectly affect the population. 

Let's look at the dynamics of these indicators over the past three years (2023-2024).

The first “deadly gift” of financing the war is an increase in the state budget deficit:

2022 - 2.3% of GDP

2023 - 1,9%

2024 - 1,7%

It should be noted here that during the pandemic, the Russian budget deficit was much higher: 4% in 2020.

So, the first conclusion is that Russia is not financing a full-scale war by increasing the federal budget deficit, because otherwise, the deficit would have risen to 20% of GDP and higher.

The second “deadly gift” is the dynamics of public debt:

2022 - 16% OF GDP

2023 - 14,9%

2024 - 16,95%

It should be noted that the public debt ratio of 16-17% is extremely low compared to other countries. Moreover, the debt burden (debt-to-GDP ratio) during a full-scale war in the Russian Federation is lower than before the war (17.6% in 2021).

The data from the Russian State Statistics Service can be used with certain reservations, but they generally reflect the general trend.

As for the level of taxes, the third “deadly gift” of war financing, we can take the new scale of progressive income tax for individuals as an example: income of individuals with a tax base of up to 2.4 million rubles (equivalent to $28,400) per year is taxed at a rate of 13%, and in the range of 2.4-5 million rubles ($28,400-59,000) at a rate of 15%, which is relatively low.

How does Russia Finance its own Military-Industrial Programs?

These are mainly oil and gas revenues from oil and natural gas exports, as well as corporate lending from the banking system.

At the same time, even in the absence of “deadly gifts” to finance the war, Russia is gradually approaching a “landing of the economy” (transition from a GDP growth rate of 4% to 1-1.5%).

One of the signs of this is that Russian industrial production has reached a plateau of development opportunities.

The Center for Macroeconomic Analysis and Short-Term Forecasting of the Russian Federation has recently published an analysis of the Russian economy's reaching a plateau of opportunities. 

Here are the most illustrative fragments of the study on the dynamics of industrial production:

“The transition to stagnation has taken place. 

According to Rosstat, the sharp decline in January (2025 - note) at -3.2%, covered both the jump in December (+2.4%) and most of the growth in the previous two months. 

As a result, output returned to about the level of early fall (2024). 

Compared to the same period of the previous year, the index in January was only 102.2%. 

The January correction in production was expected.

.... The industrial “warm-up” at the end of last year mainly reflected the closure of orders in industries related to the military-industrial complex. 

.... Civilian sectors have been stagnating since almost mid-2023. 

There are currently factors at work to “cool” the situation (the main one is a tighter monetary policy, and an additional one is the tightening of external non-trade sanctions). 

The key open question today is whether the near-stagnation dynamics will be consolidated or whether output will continue to decline.

At the level of individual industries, the following peculiarities of output dynamics were additionally highlighted at the beginning of the year 

a) continued decline in mineral production primarily due to a decrease in gas production (-2.3% by December) with “almost stable” oil production (-0.2%) and an increase in coal production (+1.8%); 

b) a pause in the recovery of oil refining volumes (-0.3% y-o-y in January after +2.4% in December); the current level is about 2% below the average monthly historical highs (adjusted for seasonality, the industry operated in the most intensive mode in the second half of 2019, as well as in the spring of 2023) 

c) continued growth trend in chemical production (+1.3% in January after 1.2% in December and 0.7% on average per month in the fourth quarter); 

It should be noted that this is the only major segment with a positive trend: the driver is the rapidly growing production of mineral fertilizers; 

d) acceleration of the decline in construction materials production; the output of “other non-metallic mineral products” decreased by 1.7% in January compared to December, after a 0.6% monthly average decline in the fourth quarter; 

At the same time, the negative dynamics at the beginning of the year was even more pronounced for basic building materials (-2.9%); 

e) continued decline in production in the automotive industry; the phase of renewed growth ended in the industry in the first half of 2024 and since mid-summer there has been a gradual decline in production (-1.8% per month), which accelerated sharply in January (-7.5%); 

... the main negative contribution is primarily made by the decline in the production of trucks, while the production of passenger cars is relatively stable (although at a level about 2.5 times lower than the pre-crisis level (2019); 

f) a decline in heat and electricity generation due to unusually warm weather (which led to an additional decline in the general industrial index in January by 0.2-0.3 percentage points).”

Possible Crisis Scenarios 

Thus, according to the above data, we are seeing a plateau of opportunities both in the construction sector (due to a sharp drop in the volume of preferential mortgages) and in the industrial production sector (primarily in the production of cars).

There is also a certain pre-crisis situation in the gas sector and oil refining (both sanctions and Ukraine's strikes on Russian refineries played a role here, although we are likely to see a certain convergence of the impact of these two factors).

As a result, the growth dynamics of the Russian economy is likely to shift from the high growth rate of 4% in 2023-2024 to a “soft landing” phase with GDP growth rates of 1-2%. 

At the same time, against the backdrop of inflationary risks and the Central Bank's tight monetary policy, there is a certain probability of a “hard landing” of the Russian economy with a reduction in growth rates to 0%.

Ukraine should consider the likelihood of all these scenarios.

Industrial stagnation in the Russian Federation will not stop the war shortly, but it can significantly reduce Russia's potential to escalate hostilities.

Thus, if Ukraine survives the war in 2022-2024, when the industrial potential of the Russian Federation, in particular the Russian military-industrial complex, was growing, Ukraine will be even more likely to outlast the industrial stagnation of the Russian Federation in the future.

Oleksiy Kushch, financial analyst, economist, expert at United Ukraine Think Tank