Our analysis proceeds from the assumption that the war between Russia and Ukraine will end within the period under consideration. Of course, it is impossible to completely rule out a scenario in which the war continues for another ten years, possibly spreading to other regions, but exploring such a scenario would lead us into numerous political contingencies, taking us ever further from economic issues and beyond the scope of our focus area and expertise.
The end of the Ukraine war—regardless of when it occurs—will inevitably bring changes to the Russian economy as labor and production capacities will be freed up. However, the scale of these changes should not be overestimated, since during the war the Russian economy never truly shifted to a “war footing” and, indeed, could not have done so. To understand what a “wartime economy” is and what challenges accompany its transition to peace, the most appropriate comparison would be the United States during World War II, as in that case, too, military operations did not directly affect the country’s main territory, and prior to the war the U.S. economy was entirely market-based.
Wartime Economy 1.0
During World War II, the economic landscape of the U.S. underwent radical transformation, marked by unprecedented government intervention that placed military production above all else. Price and wage controls, strict restrictions on civilian production, and massive government procurement fundamentally distorted the structure of the economy. This led to a sharp increase in the share of the defense sector within the economy and significant sacrifices from non-military industries.
In 1939, just ahead of the war in Europe, U.S. defense spending accounted for a relatively small share of the country’s gross domestic product (GDP)—estimated at between 1.4% and 1.7%. By 1943, at the height of wartime mobilization, the share of the defense sector had surged to over 37% of GDP, and by 1944, according to some estimates, it had risen even higher.
This led to severe restrictions on the production of many civilian-use automobiles. In 1939, the U.S. manufactured about 2.9 million cars. By February 1942, the production had been completely halted. The manufacture of refrigerators and washing machines was drastically reduced, as raw materials such as steel, copper, and rubber were redirected to meet wartime needs. Housing construction also plummeted from over $2.7 billion in 1939 to about $0.7 billion in 1944, a decline of roughly 74%.
The first months after the war ended proved to be a challenging test for the U.S. economy. The abrupt collapse of military procurement led to the shutdown of many industries and a drop in tax revenues. In 1946, tax receipts were 13% lower than in 1945 and did not surpass that level until 1950. Massive demobilization caused unemployment to rise from 1.9% at the end of the war to 3.9% by mid-1946.
Subsequently, pent-up consumer demand became the driving force that pulled the U.S. economy out of the post-war recession. Between the conclusion of World War II and the end of 1949, Americans purchased a total of 21.4 million automobiles and 20 million refrigerators (in 1945, the total population was 140 million). In 1950, the number of newly built homes rose to 1.7 million versus 114,000 in 1944.
What Is in Store for Russia?
A brief look at the American experience shows that it has little in common with what is unfolding in the Russian economy. Unlike the U.S. during World War II, after its invasion of Ukraine, Russia has not undertaken any serious measures restricting economic freedom. Prices have not been frozen, nor has the production, sale, or purchase of goods been limited, apart from the currency control regulations introduced in March 2022, which restricted access to foreign currency. Thus, the Russian government has not constrained the operation of non-military sectors of the economy; in some cases, they have even facilitated it (e.g., by permitting parallel imports, allowing the use of cryptocurrency in foreign trade transactions, lifting intellectual property protections, etc.).
The main channel of the government’s influence on the structural changes in Russia’s wartime economy has been the growth of military production, primarily at already existing enterprises. Statistics show the first wave of increased defense production from early 2023 through the summer of that year. To achieve this, defense industry plants had to hire additional workers and switch to two- or three-shift operations. The second wave of production growth, which began in late 2023 and now appears to be nearing its limit, was associated with the launch of assembly lines for new types of weapons and military equipment that do not require large investments or complex machinery (such as the production of drones, electronic warfare systems, and armor protection).
We found no evidence that, to expand military production, the Russian authorities forced private companies to abandon civilian production. In any case, if such a policy existed, its scale must have been limited: its effects are not detectable in the statistical data.
At the end of World War II, the population of the U.S. was about 140 million, roughly comparable to that of modern Russia. By June 1947, the U.S. had reduced their army roster by 10.5 million, which amounted to just under one-quarter of the country’s total workforce. Considering those employed in defense industries, roughly 20 million Americans needed to find new jobs.
To some extent, this task was eased by the fact that during the war about six million women had entered the workforce, and about half of them returned to their prewar way of life once men came back and reentered the labor market. Nevertheless, by any measure, the number of workers suddenly released into the civilian economy was enormous.
The potential scale of labor force release in Russia after the war ends is an order of magnitude smaller. Since the invasion of Ukraine, the regular strength of the Russian armed forces has increased by 486,000 personnel. During the same period, employment in defense industry companies rose from two million to 3.8 million people. Thus, if both return to their prewar levels, the maximum release of labor could amount to about 2.2–2.3 million people.
We can add a portion of the approximately 500,000 individuals who emigrated from Russia out of fear of being mobilized and who might be willing to return home once that threat disappears. Altogether, this sets the upper limit of the potential labor force release at around 2.5 million people, equivalent to about 3.5% of the country’s total workforce.
At the same time, a significant easing of tension in the labor market should not be expected. On one hand, the army may wish to retain some portion of servicemen who have seen combat experience. On the other hand, the decline in workloads at defense industry companies will lead to lower wages, making continued employment in that sector unappealing for people approaching retirement age.
Moreover, not all of the discharged soldiers will be ready or able to return to regular work in the civilian sector, and the government will have to address the issues of their social reintegration and deal with a likely rise in crime. If we also take into account the growing antiimmigrant sentiment in both the Kremlin and society at large—which will likely result in new restrictions on labor migration and migrant integration—then it seems quite plausible that the labor market will remain strained even after the war ends.
Macroeconomic Corridor
Forecasts for the Russian economy are often built around various scenarios and external macroeconomic factors, such as oil prices, the budget deficit, and the ruble exchange rate. In our view, while this approach is entirely justified over the short term (one to two years), it is far less effective in the long run.
Firstly, no one can realistically or consistently predict external factors or the global economic environment. Secondly, any government can respond relatively quickly to deteriorating conditions by making macroeconomic policy adjustments, while businesses adapt rapidly at the micro level, smoothing out the overall trajectory. Thirdly—and perhaps most importantly—the events of recent years, beginning with Putin’s re-election in 2012, show that the Russian authorities operate within a well-established macroeconomic paradigm. This paradigm assumes a conservative approach to the use of macroeconomic policy tools and enjoys Putin’s full support. The cornerstones of this policy include minimal use of budget deficits as a stimulus instrument, the accumulation of fiscal reserves during periods of high oil prices, and a floating ruble exchange rate, which implies that the Bank of Russia refrains from currency interventions.
Over the 22 years of Putin’s rule preceding the war, the Russian government pursued an extremely conservative fiscal policy. From 2000 to 2022, the federal budget consistently ran a surplus, averaging 0.9% of GDP. During this period, Russia’s public debt fell dramatically from 111.8% of GDP in early 2000 to just 15.5% by the end of 2021.17
17 — See Russia’s Finance Ministry: A Blueprint for Fiscal, Tax and Tariff Policy for 2026 and the Projected Period of 2027–2028.
The “fiscal rule,” which mandates the accumulation of surplus revenues during periods of high oil prices, was introduced in 2004 and remains in place today, although the cut-off oil price has since risen from $20 to $60 per barrel. The second part of the rule, however— requiring the automatic transfer of funds from reserve accounts to the budget when oil prices fall—has been suspended by the government every time it was supposed to take effect. Under the 2026 budget, the finance ministry has announced a plan to gradually reduce the cut-off price over the next five years, signaling the authorities’intent to restore the mechanism for replenishing fiscal reserves.
The Bank of Russia ceased foreign exchange interventions in the spring of 2015, after spending $180 billion over the preceding two years in a failed attempt to prevent ruble devaluation, eventually accepting its inevitability. Since then, monetary authorities have refrained from buying or selling foreign currency to influence the exchange rate, relying instead at times on currency swap operations—providing banks with short-term foreign currency loans during periods when market supply lagged sharply behind demand.
This policy framework created what has often been called “Putin’s financial fortress,” a key factor behind the resilience of Russia’s economy and federal budget during the first year and a half of the war in Ukraine.
In considering the time horizon we have selected, we proceed from the assumption that the macroeconomic policy principles established under Putin will remain in place throughout his tenure18, leaving only a limited range of options in fiscal policy. The finance ministry’s conservative stance envisions either a balanced federal budget or a small surplus, which will require ongoing fiscal consolidation—meaning higher tax pressure and a gradual reduction in real spending.
18 — A turning point may come in March 2028, when Elvira Nabiullina’s official tenure as chair of the Central Bank of Russia expires. However, Putin has the option of amending the law and reappointing her to this role for another six years until the spring of 2034.
According to the Finance Ministry, the “peace dividend”—the reduction in military spending after the war ends—should be used only to a limited extent to finance non-military expenditures. Advocates of a more flexible approach, while not rejecting tax increases, would prefer to use both the “peace dividend” and a budget deficit of up to 2% of GDP to fund social programs and initiatives aimed at stimulating economic development.
From the standpoint of economic policy beyond budgetary spending, we see little difference between these two fiscal approaches. Likewise, we see no major obstacles for the finance ministry in bridging a potential budget deficit through domestic borrowing—since internal savings in the economy are more than sufficient for that purpose.
Rebuild Options
The end of the Ukraine war will leave the Kremlin confronted with the question of what to do with the expanded army and the skyrocketed military spending, which, in the consolidated budget for 2025–2026, have begun to nibble away from education and healthcare expenses. If those military expenditures are slashed, how much of the newly available budgetary funds could be redirected toward non-military programs?
Assuming that Putin’s government will not abandon its established macroeconomic paradigm, the limits of what is possible can be defined quite clearly.
On one hand, the government could choose to leave things as they are: keeping the army at its current size and maintaining the current levels of military production. Even in that case, military spending would decline slightly from its current level, due to the normalization of military allowances outside of the active-duty tours, the cessation of payments to the wounded and death gratuity packages, reduced logistics costs, and the scrapping of the field medical and other support services.
Under this scenario, inflationary pressures would remain elevated, the civilian sector of the economy would stay in a depressed state, and the federal budget would run a deficit of about 1% to 2% of GDP, a level that would not pose any serious financing issues. Moreover, higher inflation would erode the nominal value of the accumulated public debt, artificially improving the appearance of the economy’s overall condition.
On the other hand, they could flip-flop on the current policy by reducing the size of the military and rolling the defense spending back to pre-war levels. The ramifications are also easy to predict: a one-time drop in industrial output, a decline in GDP of around 2.5% over four to six quarters, and a dip in household incomes of about 3–5%, as well as a temporary rise in unemployment back to the pre-war level of 5%.
The upside of this scenario is that the government might find some room in the budget to finance social programs and infrastructure projects. The economy would receive a modest acceleration because the non-military sector would absorb the newly available labor and financial resources, but these resources would be insufficient for large-scale investments, and access to advanced technologies would remain severely limited.
In any case, the potential impact of reducing military procurement on the economy— as a factor determining GDP decline—should not be overstated. Before the war, Russian budget defense expenditures amounted to about 3% of GDP; under the 2025 federal budget act, they have risen to 6.1% of GDP.19 About 40% of this increase (1.25%–1.3% of GDP) represents payments to military personnel and their families.
19 — The Stockholm International Peace Research Institute (SIPRI), assessing Russia’s military expenditures according to NATO’s classification—which includes spending on military pensions, welfare programs, the National Guard (Rosgvardiya), closed administrative-territorial entities (ZATOs), and Baikonur—estimates them at 7.2% of GDP in 2025. For the period of 2017–2021, SIPRI’s estimate was 3.9% of GDP. Thus, SIPRI’s assessment of the increase in Russia’s military spending (3.3% of GDP) differs only slightly from the figures published by the Russian Ministry of Finance.
Thus, a complete rollback of the defense contracts to pre-war levels could result in a GDP loss of about 1.6%–1.8% over a period of one and a half to two years. After the war ends, the finance ministry will still need to make certain one-time payments to discharged personnel; compensation for the wounded and for families of the deceased will continue for some time, and disabled veterans and military retirees will receive pensions on a regular basis. As a working assumption, we can estimate that in the first two years after the war, up to half of the funds currently allocated for wartime-related payments to servicemen and their families (about 0.6%–0.7% of GDP) will still be spent for these purposes. Consequently, the reduction in private demand will likely be limited to roughly the same magnitude.
Thus, we can prognosticate a potential decline in demand of, at most, 2% to 2.5% of GDP, spread over two years. This scenario is unlikely to devolve into a full-scale recession, since the end of the war will also trigger a number of countervailing processes. The government budget will use part of the freed-up funds to complete some of the investment projects postponed during the war; the Central Bank’s key interest rate will likely be reduced, stimulating consumer demand and the mortgage market; businesses will face fewer war-related risks and enjoy a longer planning horizon; and there may even be some easing of sanctions pressure. All these factors will likely offset the reduction in the military-related demand.
The most probable outcome appears to be an intermediate scenario, in which defense industry enterprises will return from two- or three-shift operations to standard working hours; forcibly mobilized soldiers and those unwilling to renew their contracts at lower pay will be discharged, while those ready to remain under different conditions will stay in the ranks. As First Deputy Prime Minister Denis Manturov stated back in September 2024, “<…> the government armament program post-special military operation will definitely include the replenishment of equipment reserves, which in total will take no less than three to four years according to the plan.”
A gradual reduction in military spending will allow the government to return to a balanced budget: if not in the first, then by the second or third year after the end of the war. It will likely result in stagnation or a modest GDP decline of about 1% per year during the first two years of the post-war period.
We see no grounds to expect a post-war economic boom in Russia: anything even remotely comparable to the U.S. scenario after the end of World War II. The components of the American boom were pent-up consumer demand, the availability of a large workforce, and a significant amount of idle non-military production capabilities that had been mothballed during the war.
The only comparable factor that could generate a modest “mini-boom” in Russia is the release of the labor force under the second scenario. Admittedly, one could speak of pentup demand for quality automobiles, household appliances, furniture, international travel, and so on. But this demand will be met primarily through imports, which means it cannot serve as an impetus for domestic economic growth.