We will now address some of the consequences of the war that are currently eluding public attention, as well as the factors influencing the Russian economy that depend on the actions of the regime and the Russian elite as a whole.
Deterioration of Economic Institutions
By the 2010s, the Russian economy had achieved a relatively high level—at least, compared to earlier periods—of efficiency in managing current processes at both the micro and macro levels.
For more than two decades, the Russian business scene was evolving in a highly competitive environment that fostered intense natural selection among business owners and executives. The individuals who came to control business operations had grown up in the relative poverty of the late Soviet period and had survived the harsh, often violent competitive feuds of the 1990s and 2000s. In a sense, they can be compared to the robber barons of the U.S. economic boom in the late 19th and early 20th centuries. The specific personal qualities and motivations shaped by such a background allowed many Russian businesses to significantly increase their efficiency.
In the 2000s, the quality of Russia’s government economic institutions improved dramatically. This was due in part to the fact that, in the early years of his presidency, Putin was reluctant to interfere in economic affairs, leaving them largely in the hands of Prime Minister Mikhail Kasyanov. It was also partly the result of circumstance: many of the people from Putin’s St. Petersburg mayoral team who surrounded him at the time were liberal-leaning economists.
Russia’s economic officials personally experienced several acute crises—events that their Western counterparts could only read about in textbooks. In the 1990s, under the combined pressure of public opinion and forces opposed to market reforms, the Russian government often failed to follow the IMF guidelines on fiscal discipline and monetary restraint. Today, however, members of the Russian government could practically lecture their Western colleagues on the importance of adhering to rules that Russia has only recently learned the hard way, the rules that the following decades of prosperity, the West has to some extent forgotten.
This positive dynamic was first derailed by the global financial crisis of 2007–2009, the aftermath of which was painful for Russia and lasted over three years. But shortly after the economy had bounced back to its pre-crisis level, Putin’s regime embarked on a largescale confrontation with the West, triggered by the annexation of Crimea and immeasurably intensified after the Russian army’s invasion of Ukraine in February 2022.
Contrary to many predictions, the Russian economy has not collapsed as the Soviet Union’s did in the late 1980s, and much credit goes to Russia’s executive economic elite, which has so far remained committed to the fundamental principle of maintaining equilibrium in a market economy through free pricing.
A wide range of politically motivated decisions, such as attempts to carry out large-scale import substitution using budgetary funds, the complete centralization of the budget process, the near-total nationalization of the banking system, restrictions on the ruble’s convertibility, and the nationalization of major assets on dubious legal grounds that further undermine the already weak system of property rights protection, have dented the economy’s efficiency but have yet to erode its structural foundations.
The growing influence of political factors on the quality of economic decision-making inevitably leads to a decline in the quality of economic policy and an increase in the number of errors. The direction of these negative changes is clearly visible; the only question is how fast they will unfold.
In 2000, more than 22% of Russians’monetary income came from property and entrepreneurial activity, but by the first half of 2025 this share had fallen to 15.8% despite significant overall economic growth and a recent sharp rise in bank deposit returns. Without this temporary boost in interest income, the decline would appear even steeper. Such a dramatic change in income structure reflects a fundamental erosion of motivation for entrepreneurship, which is becoming both less profitable and more dangerous. Entrepreneurs find themselves imprisoned, lose their businesses to extortion by officials and security agencies, or emigrate— all of which steadily undermines the economy’s development potential.
Over the past 15 years, the degree to which Russian businesses comply with various technical norms and regulations has soared. On one hand, this has produced positive effects. On the other hand, government agencies have shifted from the deregulatory approach of the 2000s toward tightening an ever-expanding range of standards and quality requirements, often overriding economic rationality.
The broadening scope of regulatory control and the high level of enforcement demand much higher legislative quality. Yet under a political system where the legislative branch is fully subordinated to the executive, the possibility of meaningful feedback in lawmaking— and thus the prevention of costly mistakes—has virtually disappeared.
A person close to the Russian government once commented to one of the co-authors, “In the 1990s, our problem was that laws weren’t enforced. Today, it’s that they are.”
The dominant traditionalist and militarist rhetoric in Russia’s political landscape, along with the growing influence of the intelligence apparatus, stands in sharp contrast to the liberal economic approach still guiding the country’s financial and economic authorities. This tension increasingly pits Russia’s economic policymakers against the rest of the bureaucracy.
One of the most conspicuous examples of this divide is the immigration policy. Top security officials, citing largely fabricated claims about high crime rates among migrants, advocate for tighter restrictions on immigration. Meanwhile, top economic officials argue that the Russian economy urgently needs additional labor force to sustain production and demographic stability.
The continued presence of liberal economists in positions of influence is sustained solely by the president’s personal support. Given the current trajectory of the political system, a replacement of these liberals with proponents of other economic models could occur at any moment.
The institutional quality and market practices inherited from the reforms of the 1990s and early 2000s allowed Russia’s economy to withstand the surge in military spending and Western sanctions after the invasion of Ukraine. Conversely, the gradual degradation of economic governance now underway is politically determined and may eventually erode these very foundations.
This deterioration may unfold slowly and imperceptibly, with its main effects becoming evident only post-2035. But it could also accelerate suddenly. This remains one of the greatest uncertainties for Russia’s economic future—and its potential impact is impossible to quantify.
The War’s Economic Aftertaste
The war has changed many aspects of the Russian economy, forcing it to bear unjustified additional expenses. Some of these—related to transport logistics or international transactions— will gradually decrease, while others may remain permanently. First and foremost, this refers to the already evident costs brought about by heightened security requirements.
In today’s world, the costs of pre-emting risks often far exceed the actual damage ever caused by their materialization. According to the U.S. Government Accountability Office, the direct damage from the September 11 terrorist attacks is estimated at $83 billion. Meanwhile, between 2001 and 2022, U.S. federal spending on counterterrorism and other domestic security measures reached $1.1 trillion. In 2011, during the period of sharply increased Somali pirate activity in the Gulf of Aden, the direct losses from piracy amounted to no more than $300 million; however, the related expenses for private security, safety equipment, insurance, route changes, etc., cost shipowners approximately $5.3 billion.
The legacy of the war, where the enemy has carried out numerous strikes on Russian infrastructure far from the battlefield, will inevitably lead to additional security-related expenses that will burden the peacetime economy. Already today, anti-drone defenses are being installed not only at industrial and logistics facilities but even at kindergartens. The installation of such protective structures is largely funded by private businesses. However, these are not merely one-time capital expenditures. At production sites and facilities that the government, for whatever reason, deems to require enhanced security measures, personnel responsible for such security have already appeared or will soon appear—and their salaries will remain a financial burden on businesses for many a post-war year.
Cyberattacks perpetrated during the war for military purposes will compel ordinary civilian companies to spend much more money on cybersecurity than it would be reasonable from a purely commercial standpoint or than similar businesses would do in countries excluded from the geopolitical confrontation. The infrastructure required to suppress internet access and GPS signals is built at the expense of the state, which collects taxes from the entire economy. Meanwhile, businesses are forced to establish alternative communication channels with customers to function amid intermittent or disrupted mobile internet service. These alternative systems not only entail additional costs but also inevitably reduce service quality for customers and operational efficiency for businesses. A vivid example of this occurred recently, when taxi drivers and their clients, accustomed to finding each other through mobile apps, suddenly had to return to long-forgotten and far less efficient means of interaction.
Mobile phones, computers, and operating systems used in government agencies and large corporations are already being reprogrammed and “secured” against potential hostile interference. This entails additional expenses (a few years ago, an “FSB-secured” PC could cost three times as much as an equivalent “unsecured” one) and sometimes a loss of functionality. There is little doubt that the use of such “secured” devices will gradually be imposed on an ever-wider circle of users.
Today’s war has inevitably propelled the number of various inspections and inspectors, while the time losses of those being inspected are neither counted nor attended to. Heightened security requirements are now being extended to a wider range of institutions and businesses.
A largely similar effect was observed in the post-war Soviet Union. Many buildings were designed to withstand the destructive force of WMD. This increased the amount of required rebar and raised the cost of any investment. Projects were routinely required to include bomb shelters and other facilities for military use. Any unused space adds to the cost of both construction and the operation of every usable square meter.
Of course, history knows no identical replicas. The Russian economy today is structurally different from the Soviet one, with a much larger share of services. Therefore, a significant portion of the new security-related costs will not be measured in additional tons of needlessly used reinforced concrete, but in billions of person-hours spent each year on economically meaningless activities dictated by endless security protocols. The scale of these costs will depend on the pace of institutional change. If the mindset of those from security and defense backgrounds prevails over that of the economic elite, such costs will grow exponentially.
Economic and Political Coalitions
Suppose that, for some unknown reason, the geopolitical situation will suddenly change dramatically. Russia’s relations with the West will improve significantly, while its ties with China will, on the contrary, cool down. How realistic, in such a scenario, would be the prospect of returning economic relations with the West to a “business as usual” footing?
On one hand, this scenario cannot be ruled out entirely. It would not necessarily take decades to mend. Investors have short memories. One can recall that the “Crimea shock” had largely faded by late 2016, when it seemed that Putin had calmed down and was no longer pursuing aggressive plans. If the Kremlin and Washington/Brussels were to move toward easing tensions in their mutual relations, then before long—though not on the same scale as in the 2000s—Western businesses willing to see Russia as a potential destination for capital investment would reappear.
On the other hand, beyond geopolitical risks, potential investors would be seriously concerned about the issue of property rights protection. Over the three and a half years of war, a narrow stratum of “economic vultures” has taken shape in Russia, those persuading the Kremlin of the need for radical redistribution of assets. The list of major companies whose owners have lost their businesses through government action grows each week, and the scale of similar processes in Russia’s regions is only a matter of guesswork.
Normalization of political relations with the West and efforts to once again attract Western business to economic cooperation would inevitably be accompanied by a surge in lawsuits against the Russian authorities from investors who have lost their assets. The consideration of such cases would take years, and regardless of whether the Russian government decides to pay any compensation, this process would create a lasting negative informational backdrop that would deter new seekers of “gold mines” across the vast expanse of Russia.
In Russia’s public discourse—and in Putin’s own mind—the dominant belief has become that the country’s future economic growth can be achieved through a policy of “self-reliance.” The idea of building an import-independent Russian economy has become the leitmotif of many of the president’s speeches. The absence in his inner circle of people willing to explain the utopian nature of this idea has led to his growing conviction, with each passing day, that the chosen course is the right one.
This mindset is upheld by a fairly large and influential lobby. There are the same “economic vultures” who buy up the assets of foreign companies at bargain prices. But then there are Russian companies that are unable to compete with foreign firms even domestically and, therefore, throw their enthusiastic support behind the import-substitution slogans as they are aware of the various obstacles that will be set up to hinder the competition. This group includes, above all, software developers, who also receive strong legislative and budgetary support from the government. Indirectly, representatives of the defense industry serve as lobbyists for this policy as well, since the end of the war would create enormous organizational and financial difficulties for them.
Finding opponents of the policy of “self-reliance”—that is, supporters of an opendoor policy toward Western investment—in or around the Kremlin would be difficult even if political tensions were to ease. Such “daredevils” would have to directly challenge Putin and his rhetoric of “eternal confrontation.” Therefore, even in the event of a sudden and sharp warming of political relations with the West and a willingness on the part of Western businesses to resume cooperation under Putin, any investments from Western countries in Russia would be scrutinized under a microscope, and Western companies would face a variety of obstacles in their operations.
The potential advocates of an “economic thaw” are not consolidated in any way. No one represents their interests either within the Russian government or in the public sphere. The combination of these circumstances makes it clear that even if there were to be a dramatic geopolitical shift, the dominant ideas in Russia and the entrenched coalitions of economic and political actors would make it difficult to reverse course—from East to West—which would, in turn, further deepen technological backwardness and stagnation in the Russian economy.