Putin’s War Economy Faces Reckoning as Russia’s Fiscal Reserves Dwindle

The Russian economy, once a global energy powerhouse, has been fundamentally restructured into a militarized state that is increasingly cannibalizing its own future. By February 2026, the 'Fortress Russia' strategy—designed to weather Western sanctions through import substitution and a pivot to Eastern markets—has reached a breaking point. The primary driver of this decline is the sheer scale of military spending, which has surged to an estimated 7.5% of GDP, a level unseen since the height of the Soviet era. While this 'military Keynesianism' initially provided a superficial boost to GDP figures, it has created a hollowed-out economy characterized by rampant inflation, a decimated labor force, and the rapid depletion of the National Wealth Fund (NWF).

Central to the crisis is the distortion of the Russian labor market. With hundreds of thousands of working-age men mobilized for the front and millions more absorbed into the defense-industrial complex, the civilian sector is facing a catastrophic labor shortage. Estimates suggest a deficit of nearly five million workers across non-defense industries, ranging from agriculture to high-tech services. This shortage has forced the Central Bank of Russia to maintain punishingly high interest rates to combat wage-push inflation, further stifling the private investment needed to modernize an aging industrial base. The result is a 'two-speed' economy where the defense sector thrives on state handouts while the consumer economy withers under the weight of rising costs and limited supply.

“

The primary driver of this decline is the sheer scale of military spending, which has surged to an estimated 7.5% of GDP, a level unseen since the height of the Soviet era.

On the revenue side, the Kremlin’s pivot to Asia has proven to be a double-edged sword. While Russia has successfully redirected its oil and gas exports to China and India, it has done so at a significant 'geopolitical discount.' The loss of the lucrative European pipeline market has not been fully offset by these new arrangements, which often require massive capital expenditure on new infrastructure that Russia can ill afford. Furthermore, the reliance on the Chinese yuan for international trade has left Russia vulnerable to the policy shifts of Beijing, effectively turning the Russian economy into a junior partner in a lopsided strategic alliance. The lack of access to Western high-tech components continues to degrade the quality of Russian manufacturing, leading to a 'reverse industrialization' where older, less efficient technologies are being reintroduced.

Looking ahead, the fiscal math for the Kremlin is becoming increasingly precarious. The liquid portion of the National Wealth Fund has been drawn down by more than 50% since the start of the invasion, leaving a narrowing buffer against future external shocks. If global energy prices soften or if the cost of the war continues to escalate, the Russian government may be forced to choose between unpopular tax hikes, further cuts to social services, or the dangerous path of printing money to cover the deficit. Analysts suggest that even if the conflict were to freeze tomorrow, the structural damage—including the brain drain of the country’s most talented professionals and the total isolation from global capital markets—has set the Russian economy on a trajectory of stagnation that could last a generation. The 'war economy' has become a trap from which there is no easy exit without a fundamental shift in political direction.