Russia’s full-scale war against Ukraine has lasted almost as long as the Soviet involvement in World War II and seems endless. But it must end sooner or later. Then Russia will face the task of putting its entirely militarized economy back onto a civilian footing and redistributing demand from military to civilian industries. At least, that is what the government’s economic bloc and the Central Bank would like to see, having warned repeatedly of accumulating risks and the threat of stagnation.

President Vladimir Putin, however, seems determined to keep waging war until he is victorious, regardless of sanctions, high inflation, a decline in living standards and structural imbalances. The conversion of the defense industry back to the production of civilian goods is not a priority, even if the war in Ukraine were to end in the foreseeable future. On the contrary: the Kremlin plans to rearm the military and replenish its depots, which will maintain demand for military-industrial complex products for at least the next three years.

There are certainly solid reasons for such a choice. Even if Putin wanted to return to a peacetime economy, the Kremlin has staked everything on the military sector and the mobilization model over the past three years, resulting in Russia becoming caught in a stagnation trap with low growth rates and chronic internal imbalances. Any attempt to rapidly cut spending will result in collapse. But nor can the military machine be fed indefinitely. Sooner or later, Russia will have to travel the difficult path back to civilian life through a synchronized restructuring on all fronts.

Over the past three years, Russia has developed a two-speed economy. War-related sectors are not just growing, but positively flourishing thanks to having priority access to limited resources: raw materials, finance, and technology. Meanwhile, the private sector, small and medium-sized businesses, and consumer industries are facing an artificial squeeze on opportunities due to sanctions, rising taxes, and limited access to capital.

This redistribution of resources from lower-priority sectors to strategically important ones creates structural imbalances. A clear example can be seen in metalware production statistics: output of weapons and ammunition has been growing at double-digit rates since the beginning of the war, while that of nonmilitary products has been declining.

Excessive militarization and protectionism dictated by the Kremlin are the main drivers of demand in the economy. Consumer demand is limited by inflation, while private investment demand is being squeezed by budget spending. The economy has already become entrenched in a model where military rent essentially performs the same function for some businesses and categories of people as oil and gas superprofits did in the 2000s.

The difference is that in the 2000s, superprofits from raw materials entered the economy from the outside and were redistributed largely through the state budget, simultaneously creating consumer and investment demand. Now the state is financing its war from the same raw material rent, only that rent is noticeably reduced, and is being spent on replacing tanks, drones, and shells destroyed in Ukraine, as well as on compensation for wounded military personnel and families of soldiers killed in action.

There may still be a foreign trade surplus, but oil and gas are being sold at a significant discount and, under the Western embargo, the geography of sales has moved to Asia and the Global South, giving new buyers powerful........

© The Moscow Times