Russias Economy Has Slowed Over War in Ukraine but Remains Stable

Russia is now on the back foot in its war with Ukraine, having recently crossed the threshold of 1 million total casualties while its spring offensive collapses without having made any major gains. This is happening as Ukraine is ramping up its own attacks on Russian territory. But it's not just that Russia is losing momentum militarily; it's also facing economic headwinds.

Is Russia's wartime sugar rush over? How is the condition of Russia's labor market? Can Russia's war economy afford to stop fighting?

Those are just a few of the questions that came up in my recent conversation with FP economics columnist Adam Tooze on the podcast we co-host, Ones and Tooze. What follows is an excerpt, edited for length and clarity. For the full conversation, look for Ones and Tooze wherever you get your podcasts. And check out Adam's Substack newsletter.

Cameron Abadi: Is it fair to say that Russia is on this back foot economically right now?

Adam Tooze: There's certainly a slowdown. In 2023, 2024, the Russian economy grew by 4 percent. I mean, it's a $3 trillion economy. So those are substantial numbers. And yes, after contracting mildly in the first quarter of 2026, Russia's growth is now expected to be as little as 0.4 percent over the whole year, which is kind of in the same ballpark as Germany, for instance. So this is not an economy that's collapsing, but this is an economy which is no longer growing at the clip that it was earlier in the war. This is a surprise because oil prices are high as a result of the American and Israeli war in Iran. And you would expect that to be boosting Russian growth.

And the fact that it isn't then requires explanation. And the Kremlin has been working quite hard to provide explanations, blaming labor shortages, excessive government spending of the wrong type, namely relatively unproductive expenditure and Western sanctions for the Russian situation. And what we're seeing really is a considerable kind of consolidation of the Kremlin position. So they're putting out forecasts for 2029, which say that Russia is going to return to more rapid growth by then. They're keeping interest rates high to prevent inflation accelerating too much. Interest rates are as high as 14.5 percent. So the consequence of that is that investment is falling. The ruble is strong. And so we're not seeing any comprehensive loss of confidence, though, of course, the flow of money in and out of Russia is tightly controlled.

Overall, however, you have to say that Russia's fiscal position remains really quite conservative. The Russian deficit is 2.5 percent of GDP in the first four months of this year, which is less than half what America is running as a deficit. So it's a really mixed picture, is what one would say. It's just not growing at the rate that it was. It's disappointing. It's apparently causing political stress. [President Vladimir] Putin has called in the head honchos of his economic administration in the last couple of weeks to give them a dressing-down for the fact that the growth rates are low. And compared to Russia's optimism—it had in 2026 predicted that it would grow faster than the global average of 3.1 percent. In other words, at the rate it had been growing recently. All of that, I think, is out the window now.

But the important point to emphasize is that this is no kind of collapse. This is a slowdown, a shift in gear, and continuing pressure on every front within the economy as the demands of the war take their toll.

CA: Russia's labor market is running extremely hot right now. Seventy-three percent of businesses are reporting labor shortages. Unemployment rates are at record lows at 2.3 percent. This is all happening as Russia is continuing to lose men to this increasingly violent front of the war. What does the Russian labor market feel like for, say, a 35-year-old factory worker in a provincial Russian city?

AT: Well, it means you have options, right? I mean, you're in demand. As you're saying, the unemployment rate is incredibly low. This is a society which, amongst its older generation, still remembers the utterly bleak times of the 1990s where unemployment soared, and there was massive deindustrialization and deaths of despair is a huge epidemic. We don't perhaps generally think of Russia as an attractive economic magnet, but in fact, before the war, the Russian economy benefited from an influx of migrant workers from Ukraine, from the Central Asian republics that were key to the growth of the Russian economy. All of that labor has been put in jeopardy. There's many fewer migrants to Russia, and about 650,000 people left Russia in 2022 and have not generally returned. There is an awful lot of Russian migrants—along with Ukrainian migrants—in Germany who have no desire whatsoever to return.

So if you put that together with the demands of this incredibly manpower-intensive war on the Russian side and the losses that they're suffering, the Russian economists estimate that they are about 2.3 million workers short, of whom about 800,000 will be needed in manufacturing and another 1.5 million in services and construction. And so that's what generates this high-pressure economy that I was sketching in the first answer, a situation in which the economy is not growing particularly fast anymore, and yet everyone is employed. But the wage pressure is intense, to which the central bank responds by hiking interest rates, which make credit scarce. So it's an economy under pressure, but one in which, yes, if you're a worker, there are options.

And it's one which is increasingly turning to new sources of migrant labor. So again, we might find this surprising that these kinds of connections should exist, but there's apparently 65,000 Indian workers now in Russia doing jobs that Russians don't want to do, because they pay $600, $700 a month. But from the point of view of somebody from the countryside of a small town in India, of course, that's a really good salary for working in a, I don't know, a factory that packs vegetables or basic textiles or something like that. So there's an economy forming around Russia that is detached from what you might think of as global flows. But a $3 trillion economy with a relatively high standard of living is nevertheless attractive for many migrant workers in the countries that surround Russia.

CA: Ukraine has become a clear leader in the development of drone technology. At the same time, some traditional arms manufacturers in the West are dismissing that innovation. The CEO of Rheinmetall, the German arms manufacturer, described Ukraine's drones as “simplistic and improvised.†Does that illustrate a disconnect between traditional measures of military capability versus what's actually happening on contemporary battlefields now?

AT: Yeah, there's nothing quite like a senior German industrialist pouring scorn on the efforts of a country that's successfully fighting a war, which the Bundeswehr hasn't been asked to do in its entire history, mercifully. The reality is that when Ukrainian units deployed in Exercise Hedgehog that was conducted in Estonia in 2025 against 16,000 NATO troops from 12 countries, they completely annihilated them with this primitive, simplistic, improvised equipment that Rheinmetall has no time for.

So the reality here is it's the Ukrainian experience that's going to change the game on the battlefield. It's a different question altogether as to what happens with the political economy of massive rearmament spending, because it isn't battlefield criteria that necessarily decide what gets the big bucks. And there was a very active debate as recently as the Munich Security Conference earlier this year, an internal debate within Germany, in which on the one hand, indeed, there was Rheinmetall arguing the case for more conventional, more high-tech, more expensive weaponry and German experts speaking on behalf of Germany's burgeoning drone industry—firms like Helsing, which are unicorns now valued at over a billion euros—arguing for a much more high-tech vision that is much closer to the kind of swarms of drones that the Ukrainians are deploying.

And so this is just to say that as farcical as it is for some pompous German businessman to be dismissing Ukraine's efforts in the way that he was, this isn't confined just to the nuttier parts of the German industrial system. It's actually a major conversation ongoing within Europe about what lessons to learn and how to apply them to complex defense contracting systems, which frankly escape anyone's efforts to optimize. I mean, show me the efficient military industrial complex which reliably generates battlefield-tested weapons. And probably the only place you could look would be Ukraine. But of course, it's not a big-bucks European defense contractor's idea of what they would like to see happening, because it's shaped in a massively brutal Darwinian process by the immediate needs of a poor nation under huge stress. So it's an inherently difficult problem going forward, and it's not one that has simple solutions.

CA: Is there something like a postwar recession paradox at work right now, in the sense that if the war ends, Russia's economy could suffer? Its recession risks could increase in the short term; its defense industries would obviously be reducing their output; the labor market would cool off. Are there no clear economic off-ramps for Russia to exit this war, given the war economy it currently has?

AT: Yeah, I mean, this is a key part of the outside interpretation of what's been going on in Russia since the start of the war, that Russian society has accommodated itself to the fight. And that there have been winners. You know, 4 percent growth is very rapid. And several of us in the war Keynesianism camp, I would count myself in this camp, said that one of the effects of the war might very well be to jog Russia out of its hitherto extremely conservative macroeconomic regime, which was under-promoting growth in Russia and was overly concentrated on the fossil fuel sector.

But as much as I love an economic explanation, I don't think we should put the cart before the horse, right? Russia isn't fighting the war for economic reasons, and the war won't end for economic reasons, either. It's much more likely to end on the Ukrainian side for economic reasons, because they're exhausted. Russia is running a deficit smaller than that of America. It has 2 percent unemployment, and there's no pressure-cooker logic here. Were it to end the war, there is absolutely no doubt that it would cause an unwinding, a demobilization pressure of the type that you're talking about. But there might be countervailing tendencies. I mean, one would be that if Russia ends the war, it's quite likely to have to pay reparations on any conceivable deal that would be adequate to the Ukrainians.

And then the question is, how are those delivered? And one option would be for Russia itself to do reconstruction work in Ukraine, which would involve Russian firms. And one shouldn't forget, after all, what motivates the peace efforts of the Trump administration. I mean, they make no bones about the fact that ultimately one of the reasons they're pushing for peace is nothing to do with Ukraine or territorial aggrandizement but desiring to reconnect Russia to the global energy economy. And I think we should take that at face value, because it again confirms the war Keynesianism hypothesis. In other words, what might very well be a future of peace will be one in which Russia in fact returns to the overreliance on fossil fuels that characterized the prewar period in which people like [U.S. President Donald] Trump would welcome.

So I think there's a variety of different scenarios here, and there's no doubt that a demobilization would require putting a lot of Russia's current industrial policy into reverse. But I don't think we should expect that by itself to be a major obstacle to, in any case, the insuperably difficult process of looking for even a cease-fire, let alone a peace.