Economy
The Kremlin Choses Guns Over Butter
May 6, 2025
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Sergei Shelin
Journalist, independent analyst
Journalist Sergei Shelin argues that after three years of war and with militarization of the economy only getting started, Russians are starting to pay for ongoing growth in military spending with a lower standard of living.
The original text in Russian was published in the Moscow Times and is being reprinted here with the author’s permission.
Since 2022, the Russian leadership has insisted the “special military operation” need not be considered a real war and require serious material sacrifices from the Russian population – on the contrary, the war would deliver prosperity.
Russian economic growth is no fantasy
In 2022-24, Russian GDP rose 6.9%, on official estimates. Household wealth supposedly improved even more, with the improvement widespread: 65% of households surveyed by the Central Bank reported an increase in real income in the three years of war.
This has led some economic experts – primarily those who remain in Russia but sometimes also those in exile – to suggest that it was precisely war and international isolation that the Russian economy needed to flourish.
Hidden reserves were tapped into, import substitution was ramped up and the deluge of military spending turned out to be good for the majority’s standard of living. Skillfully applied “military Keynesianism” (see Russia. Post here) had worked a miracle.
This is no fantasy – rather just an exaggeration.
Since 2022, the Russian leadership has insisted the “special military operation” need not be considered a real war and require serious material sacrifices from the Russian population – on the contrary, the war would deliver prosperity.
Russian economic growth is no fantasy
In 2022-24, Russian GDP rose 6.9%, on official estimates. Household wealth supposedly improved even more, with the improvement widespread: 65% of households surveyed by the Central Bank reported an increase in real income in the three years of war.
This has led some economic experts – primarily those who remain in Russia but sometimes also those in exile – to suggest that it was precisely war and international isolation that the Russian economy needed to flourish.
Hidden reserves were tapped into, import substitution was ramped up and the deluge of military spending turned out to be good for the majority’s standard of living. Skillfully applied “military Keynesianism” (see Russia. Post here) had worked a miracle.
This is no fantasy – rather just an exaggeration.
“The Russian economy proved rather robust, and the population gave state economic managers a long leash.”
The 9K720 Iskander mobile short-range ballistic missile system.
Source: Wiki Commons
Source: Wiki Commons
Indeed, production seems to have risen in the last three years, though not as much as Rosstat claims. This growth was driven by the military economy. As for nonmilitary goods, there was rather stagnation, though not decline, until the middle or even the end of 2024. More and more guns were being made, but butter did not seem to be affected. Life went on as before.
Militarization only getting started
Russia’s military spending has risen steadily. The Stockholm International Peace Research Institute (SIPRI) estimates that it reached $149 billion (7.1% of GDP) in 2024, up $83 billion versus the prewar 2021. In my view, if the war continues, military spending will grow another quarter or even another third in 2025 to reach $200 billion (8.0% of GDP).
Even a halt to the war is unlikely to seriously slow down the regime’s military buildup, which it needs not only to ensure superiority over Ukraine but also to pressure “newer” NATO members (from Bulgaria to Estonia) and the “newest” ones (Finland and Sweden).
The ultimatum that NATO must leave Eastern Europe issued by Putin in December 2021, on the eve of the invasion of Ukraine, remains in effect. It is affirmed and repeated time and again by regime officials and mouthpieces.
These threats should not be taken as figures of speech. Railways are already being built along the borders of Estonia and Finland, military bases are being expanded and new units are being readied for deployment. In 2022-24, the “newer” and “newest” NATO members, shocked by the Russia-Ukraine war, increased their military spending by $37 billion (according to SIPRI). Putin clearly believes that he can and must ensure military superiority over them as well.
Is the growth in Russian military spending translating into a real increase in military power? Not everyone thinks so. “In recent months, Putin has been skillfully masking the sad state of affairs in Russia with upbeat accounts about the power of his army and the success of the economy. Russia is not winning the war – we are in the phase of Russia’s weakening.” This is from a review of what pro-Ukraine Western experts are saying. But it is not only Russia that is weakening.
Russian production of armored vehicles does not seem to compensate for its losses in the war, but Western supplies of armored vehicles to Ukraine are much smaller. Meanwhile, Russia’s shortage of shells – because of which, Moscow has had to turn to Pyongyang for help – makes sense to contextualize: US and European shell production capacity is much lower than Russia’s.
Militarization only getting started
Russia’s military spending has risen steadily. The Stockholm International Peace Research Institute (SIPRI) estimates that it reached $149 billion (7.1% of GDP) in 2024, up $83 billion versus the prewar 2021. In my view, if the war continues, military spending will grow another quarter or even another third in 2025 to reach $200 billion (8.0% of GDP).
Even a halt to the war is unlikely to seriously slow down the regime’s military buildup, which it needs not only to ensure superiority over Ukraine but also to pressure “newer” NATO members (from Bulgaria to Estonia) and the “newest” ones (Finland and Sweden).
The ultimatum that NATO must leave Eastern Europe issued by Putin in December 2021, on the eve of the invasion of Ukraine, remains in effect. It is affirmed and repeated time and again by regime officials and mouthpieces.
These threats should not be taken as figures of speech. Railways are already being built along the borders of Estonia and Finland, military bases are being expanded and new units are being readied for deployment. In 2022-24, the “newer” and “newest” NATO members, shocked by the Russia-Ukraine war, increased their military spending by $37 billion (according to SIPRI). Putin clearly believes that he can and must ensure military superiority over them as well.
Is the growth in Russian military spending translating into a real increase in military power? Not everyone thinks so. “In recent months, Putin has been skillfully masking the sad state of affairs in Russia with upbeat accounts about the power of his army and the success of the economy. Russia is not winning the war – we are in the phase of Russia’s weakening.” This is from a review of what pro-Ukraine Western experts are saying. But it is not only Russia that is weakening.
Russian production of armored vehicles does not seem to compensate for its losses in the war, but Western supplies of armored vehicles to Ukraine are much smaller. Meanwhile, Russia’s shortage of shells – because of which, Moscow has had to turn to Pyongyang for help – makes sense to contextualize: US and European shell production capacity is much lower than Russia’s.
“In Putin’s eyes, therefore, the military-economic competition with the West does not look hopeless at all. It is absorbing increasingly more resources, though.”
And the Russian economy has already reached the limit of its potential and is very overheated.
Cooling the economy reinforces militarization
To cool the economy and avert a spike in inflation, the Central Bank has raised its key interest rate to 21%. Though at first there was disarray, in recent months the new rules for how the economy will work have kicked in.
Since the beginning of this year, the Russian industrial production index (adjusted for seasonality) has been declining each month. Because of the extremely high interest rates, the nonmilitary side of the economy is cutting back production of goods and services. On the subsidized military side, however, there is no decline in output.
“For industrial output excluding sectors where the military-industrial complex has a dominant stake, we can speak of a move toward recession,” argues the Center for Macroeconomic Analysis and Short-term Forecasting (CMASF), a government-affiliated think tank. “The volume of nonmilitary production in the first quarter decreased 0.8% per month (seasonally adjusted). As a result, output reached its lowest levels since April 2023.”
According to the CMASF, the overall industrial production index (adjusted for the difference in the number of working days) was 100.3% in March 2025 versus a year before, while that for nonmilitary sectors was 97.9%. In other words: the civilian side of the economy shrank in the last year, while the military side continued to expand. This is how the efforts to cool the economy have helped redirect resources away from butter and into guns.
The Telegram channel MMI (@russianmacro) says the same: “the February statistics showed that thanks to the military-industrial complex, industry was at its maximum [output]; in nonmilitary sectors, the decline had already begun. In March, we see a further drop...”
At the same time, the Russian market is receiving less imported goods: in the first quarter, the value of goods imports fell to $64.9 billion from $67.1 billion in the same period last year. In physical terms, the decrease is much bigger due to dollar inflation. Quality is also suffering: imports of goods from Europe slid 9% year over year, with their share in overall imports falling to 24%.
Everything is falling
Only in a few nonmilitary sectors, thanks to inertia from import substitution, is there still growth (adjusted for seasonality) – for example, in production of medicine and textiles.
Cooling the economy reinforces militarization
To cool the economy and avert a spike in inflation, the Central Bank has raised its key interest rate to 21%. Though at first there was disarray, in recent months the new rules for how the economy will work have kicked in.
Since the beginning of this year, the Russian industrial production index (adjusted for seasonality) has been declining each month. Because of the extremely high interest rates, the nonmilitary side of the economy is cutting back production of goods and services. On the subsidized military side, however, there is no decline in output.
“For industrial output excluding sectors where the military-industrial complex has a dominant stake, we can speak of a move toward recession,” argues the Center for Macroeconomic Analysis and Short-term Forecasting (CMASF), a government-affiliated think tank. “The volume of nonmilitary production in the first quarter decreased 0.8% per month (seasonally adjusted). As a result, output reached its lowest levels since April 2023.”
According to the CMASF, the overall industrial production index (adjusted for the difference in the number of working days) was 100.3% in March 2025 versus a year before, while that for nonmilitary sectors was 97.9%. In other words: the civilian side of the economy shrank in the last year, while the military side continued to expand. This is how the efforts to cool the economy have helped redirect resources away from butter and into guns.
The Telegram channel MMI (@russianmacro) says the same: “the February statistics showed that thanks to the military-industrial complex, industry was at its maximum [output]; in nonmilitary sectors, the decline had already begun. In March, we see a further drop...”
At the same time, the Russian market is receiving less imported goods: in the first quarter, the value of goods imports fell to $64.9 billion from $67.1 billion in the same period last year. In physical terms, the decrease is much bigger due to dollar inflation. Quality is also suffering: imports of goods from Europe slid 9% year over year, with their share in overall imports falling to 24%.
Everything is falling
Only in a few nonmilitary sectors, thanks to inertia from import substitution, is there still growth (adjusted for seasonality) – for example, in production of medicine and textiles.
“But most nonmilitary sectors, after years of growth, now find themselves in the grip of decline, from building materials to food.”
A Russian T-14 Armata tank. It cost $5.0-7.1 million in 2022. Source: Wiki Commons
By the way, about building materials: because state statisticians have yet to master fudging data systematically, even though the output of building materials reportedly fell, housing construction was said to have boomed in the first quarter (at a blistering 8.9% year-over-year pace).
This “growth” was the result of an actual sharp decline in completions of apartment buildings (by 17%) and a fabricated jump in the construction of individual houses (by 20%). The latter was driven by furious registration of existing dachas as supposedly newly built houses. Only the rise in individual house construction in Tuva and Ryazan regions, key suppliers of cannon fodder for the war, looks plausible, however.
In the first quarter of 2025, mortgage issuance plummeted 43.7% year over year, while new construction projects dropped 25.0%. The housing downturn is only just beginning.
Meanwhile, the car market is again in turmoil. Thanks to a flood of Chinese cars and a partial recovery of domestic production, in 2024 new car sales bounced back to the prewar 2021 level. Now, in the first quarter of 2025, new car sales sank 25% year over year, with the contraction accelerating to 45.5% in March.
Purchases of other expensive and not so expensive durable goods are also down. Physical sales of smartphones plunged 26% year over year in the first quarter.
Kick the can down the road
The reasons for the general decline in demand for nonfood items are hotly debated. There is no consensus. But the issue is probably not a lack of cash in Russians’ pockets but rather attractively high rates on deposits and repulsively high rates on loans, combined with rising expectations of sanctions being lifted and “real” brands coming back, as well as some other trivial, perhaps even more naïve, considerations.
Whatever the explanation, declining demand, together with a temporarily stronger ruble, dampened nonfood inflation in March. If Russians try to purchase as many goods and services as they did last year, inflation will spike, acting as a correction mechanism. The bottom line is the Russian economy can no longer provide the population with as much butter as before.
This “growth” was the result of an actual sharp decline in completions of apartment buildings (by 17%) and a fabricated jump in the construction of individual houses (by 20%). The latter was driven by furious registration of existing dachas as supposedly newly built houses. Only the rise in individual house construction in Tuva and Ryazan regions, key suppliers of cannon fodder for the war, looks plausible, however.
In the first quarter of 2025, mortgage issuance plummeted 43.7% year over year, while new construction projects dropped 25.0%. The housing downturn is only just beginning.
Meanwhile, the car market is again in turmoil. Thanks to a flood of Chinese cars and a partial recovery of domestic production, in 2024 new car sales bounced back to the prewar 2021 level. Now, in the first quarter of 2025, new car sales sank 25% year over year, with the contraction accelerating to 45.5% in March.
Purchases of other expensive and not so expensive durable goods are also down. Physical sales of smartphones plunged 26% year over year in the first quarter.
Kick the can down the road
The reasons for the general decline in demand for nonfood items are hotly debated. There is no consensus. But the issue is probably not a lack of cash in Russians’ pockets but rather attractively high rates on deposits and repulsively high rates on loans, combined with rising expectations of sanctions being lifted and “real” brands coming back, as well as some other trivial, perhaps even more naïve, considerations.
Whatever the explanation, declining demand, together with a temporarily stronger ruble, dampened nonfood inflation in March. If Russians try to purchase as many goods and services as they did last year, inflation will spike, acting as a correction mechanism. The bottom line is the Russian economy can no longer provide the population with as much butter as before.
“The regime has chosen guns and is quietly winding down its demagoguery.”
All its megaprojects have been put on hold.
An example is the RUB 2 trillion Moscow-St Petersburg high-speed railway. Thirteen months ago, Putin personally and with great fanfare launched its construction. Despite this, the “launched” construction has yet to start. The transport minister repeated the other day that work will get underway in mid-2025. Of course, nothing will stop bureaucrats from waiting longer in the hope that the war will end and the currently scarce money for the project will multiply.
Russia has now crossed the line beyond which its military buildup can be effected only by taking away resources from ordinary Russians. The methods for doing that may change, but the regime has already spent all its other reserves.
It is time to ask: how much are Russians willing to give Putin?
An example is the RUB 2 trillion Moscow-St Petersburg high-speed railway. Thirteen months ago, Putin personally and with great fanfare launched its construction. Despite this, the “launched” construction has yet to start. The transport minister repeated the other day that work will get underway in mid-2025. Of course, nothing will stop bureaucrats from waiting longer in the hope that the war will end and the currently scarce money for the project will multiply.
Russia has now crossed the line beyond which its military buildup can be effected only by taking away resources from ordinary Russians. The methods for doing that may change, but the regime has already spent all its other reserves.
It is time to ask: how much are Russians willing to give Putin?
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