For Russia's economy, peace with Ukraine poses a threat

Against the odds, the Russian economy has weathered the war.

- Georgi Kantchev

The next economic storm on the horizon: peace.

Throughout the conflict in Ukraine, massive government spending on the military has propped up Russia's output and blunted the impact of Western sanctions. Weapons factories geared up, while outfits from clothing brands to bakeries retooled to make balaclavas and drones. The transformation has made Russia's economy reliant on the war for jobs, wages and growth. Weaning it off that military sustenance, in a peace deal being pushed by President Trump, is an economic risk for the Kremlin.

Stepping back from a war footing, economists say, would leave Russia's economy in a perilous position. Depleted by three years of conflict, it is grappling with stubborn inflation, labor shortages and few paths to growth, apart from the war.

If peace is agreed, any resulting reduction in Russia's military spending would likely leave a crater in the Kremlin's finances that would be tough to fill. At least 40% of its economic growth last year was directly driven by war-related production, not including the spillover effects of increased consumption resulting from higher salaries and war-related payouts, Heli Simola, senior economist at the Bank of Finland Institute for Emerging Economies, estimates. Further, payments to families of Russian soldiers fighting in Ukraine have raised the fortunes of some of the country's poorest areas. Stopping that stimulus would dent domestic consumption, economists say.

The question for the Russian government is how to transition from a war economy to a civilian economy when the entire economy has been mobilized to support the war effort." Maria Shagina, a Berlin-based senior fellow at the International Institute for Strategic Studies, a think tank.

Russia is in the grip of a brain drain, technological decline and economic stagnation, Shagina said. In that context, she added, "What will be the new source of economic growth?"