Despite the fact that many experts remain unsure whether or not Russia is interested in a ceasefire in Ukraine, Russian officials are preparing for the post-war situation and believe that the Russian defence industry should maintain high production even after a ceasefire. The defence industry became a driver of the Russian economy during the war years, however, the future development of the industry will face numerous problems, some of which can only be solved with government support.
The current state of Russia’s economy
Russia’s GDP grew by 4.1% in 2024. GDP growth was driven by industries related to the defence industry: manufacturing, mechanical engineering, IT, and chemicals. However, the federal budget deficit in 2024 amounted to RUB 3.485 trillion, or 1.7% of GDP, which was covered by the National Welfare Fund. During the three years of conflict, it has decreased by two-thirds. The inflation rate was 9.5% at the end of the year. As a result, 2024 became the year of exhaustion of the existing growth model based on budgetary increases in the face of sanctions.
As a result, according to the government’s Centre for Macroeconomic Analysis and Short-Term Forecasting, the Russian economy has moved into stagnation. The Russian economy is constrained by the fact that capacity utilisation in Russia has reached an extremely high 80%. There is a severe shortage of personnel and lack of access to modern global technologies. This imposes restrictions on the increase in labour productivity. Furthermore, tight monetary policy has slowed down investments. However, according to analysts, this will have little effect on the development of the Russian defence industry.
Budget expenditures
Russia’s total defence spending in 2024 increased by 42% to RUB 13.1 trillion, reaching 6.3% of GDP and 32.5% of the federal budget. It was assumed that the record increase in defence spending to RUB 10.8 trillion in 2024 would be a one-time increase, and then, according to the budget plan for the next two years, they would decrease to RUB 8.5 trillion in 2025 and RUB 7.4 trillion in 2026. However, in reality, in 2025, military spending should amount to about RUB 13.5 trillion in 2025 (which is 4.2 times more than in 2021), then expected to decrease slightly to RUB 12.8 trillion in 2026, and rising slightly to RUB 13 trillion in 2027. Russia has not spent so much since Soviet times. The government’s plans to live within its means are not justified by Putin’s interest in betting on war and the formation of a military economy.
After the ceasefire, according to Pavel Luzin, a military expert from the Center for European Policy Analysis, “there will be some reduction due to lower production rates and, consequently, working hours. Overworking will stop and the schedule will return to the standard 8-hour day on 5/2 [five weekdays worked, two weekend days off]. There is also an opportunity for relatively painless optimisation by sending retirees to retirement.”
In addition, “the Kremlin will be able to reduce the costs that are spent on direct support of the military operation in Ukraine, that is, about 2.5 trillion roubles, and partially military benefits, by stopping payments to the families of the victims, payments for participation in military operations, which may amount to about 1.5 trillion roubles out of the 3 trillion currently paid,” said economist Vyacheslav Inozemtsev.
This means that defence spending will decrease, but will remain high, while maintaining its leading values over other industries. After the ceasefire, defence industry enterprises will lobby in every possible way to maintain high costs by the need to replenish the depleted reserves of the Ministry of Defence (MoD) and export orders. Spending on national defence may remain at the level of RUB 10 trillion per year.
Defence exports
The Stockholm International Peace Research Institute (SIPRI) estimated that Russian arms exports halved between 2019 and 2023 compared with the previous five-year period. In 2019, Russia sold weapons to 31 countries – in 2023, that number dropped to 12, SIRPI found. Russian officials confirmed at the St Petersburg Economic Forum in 2024 that military exports are facing the negative impact of sanctions and a number of other foreign policy factors.
As a result of this, the maintenance of Russian weapons has become increasingly difficult for buyers. “Therefore, in order to protect themselves from uncertain service, countries are looking for more sellers that are reliable. In addition, the dependence of Russian companies on imported electronics and machine tools at the production stage also hinders exports,” says Pavel Luzin.
Luzin added, “of course, countries such as Iran, Myanmar, and others may want to buy Russian weapons, but Russia’s return to the global arms market, even in a limited form, will be difficult. Preferential loans, subsidies, discounts, etc. will be needed again. In other words, exports will ultimately be carried out largely at the expense of the Russian budget. Given its deficit and the occupation of the market by other players, Russia may not be able to regain its position in the foreign market”.
Reserve replacement
“Russia would be interested to continue exporting arms to reduce unit costs and bring home hard currency, but this is probably in conflict with the ambition to regain its own lost military capability as soon as possible,” says Tomas Malmlöf, Research Analyst at Swedish Defence Research Agency. Indeed, according to First Deputy Prime Minister Denis Manturov, “priority will be given to replenishing the reserves of the Ministry of Defence.” This replenishment is unlikely to be completed soon – according to Sergey Chemezov, it will take ten years to replenish the warehouses of the Ministry of Defence.
Taking into account personnel and sanctions restrictions, production will decrease, but it will remain disproportionately high relative to other industries. That is, after a ceasefire, Russia will not accelerate production and produce weapons at the same high rate as during the war. The production of 9M723 Iskander-M short-range ballistic missiles (SRBMs) is estimated to decrease to 150 per year; K4-47M2 Kinzhal aeroballistic missiles to 40; Kh-101 air-launched cruise missiles to 300; and Kalibr family cruise missiles to 170. Russia uses a stockpile of R95-300 engines to produce long-range cruise missiles, “however, the stockpile is not infinite, the production of TRDD-50 engine in different versions until 2022 was measured in the range of 100 per year, and it is hardly possible to increase it by 4-5 times, unless one or two more engine plants are reoriented to its production, which is not happening,” explained Pavel Luzin.
However, it is not clear what priorities Russia will have in replenishing its weapons stocks. “Russia’s future military equipment portfolio will be younger than the pre-war one, as so much heavy equipment has been destroyed in Ukraine, and the storage bases for tanks and armoured vehicles have been emptied of vehicles suitable for refurbishment or modernisation. As so much of the equipment of the ground forces will have to be built from scratch, it will at least push the time scale to the right,” said Tomas Malmlöf.
According to military expert Dmitry Smirnov, “the restoration of the Ministry of Defence’s reserves is a good way for companies and factories to secure contracts. Enterprises are interested in the longest possible inventory recovery process. They will justify the high costs of the defence industry, not only by replenishing reserves, but also by the need to maintain high salaries, social infrastructure, pensions and loans to hundreds of thousands of workers in this field, import substitution of equipment and components, as well as geopolitical challenges in the world”.
Civilian production within the defence industry
Back in 2017, President Putin set a goal to achieve 30% of civilian production within the defence industry by 2025 and 50% by 2030, and did not cancel it. According to First Deputy Prime Minister Denis Manturov, “Russia wants to preserve the defence industry as a driver of economic growth even after the end of military action; therefore, the defence industry will gradually release capacity for the production of civilian products.”
To meet the needs of the defence industry, Russia is aiming to increase its production of microelectronics, high-precision machining tools and robotics, aerospace technology, drones, medicines, telecommunications equipment and software, optics and electronics. To this end, RUB 3.6 billion will be allocated to create various parts for these industries by 2026. The government has also selected 160 projects from these industries with a total value of over RUB 210 billion, of which 10% will be funded through federal grants. The remaining expenses will be covered by defence industry investments.
However, according to Pavel Samuta, an engineer and former employee of an industry, “defence industry enterprises are not interested in civilian production, and will do everything possible to develop defence production, because only in this sector there are large incomes, and guaranteed buyers. Only 10-15% of enterprises will be able to produce dual-use products,” Samuta said.
Common industry problems
“Without discretionary income or leveraged financing, the defence industry will not be able to produce civilian products,” said Professor Anna Bakulina. Some defence industry enterprises take preferential loans from the Industrial Development Fund, in which case the government subsidises the bank rate. However, resources are limited, so most businesses have to obtain loans on general terms at current bank rates of 18-20%. At the same time, profitability in state defence orders does not exceed 3-5%. Accordingly, if an enterprise receives a long-term loan at a high rate, then, even after the final payment from the customer, it will still end up in the red.
Consequently, as Denis Manturov admitted, “there is almost no money for research and development work, and without this, it will not be possible to develop our own production of components and civilian production. There will also be no money for salary increases, which have grown not from income, but from loading enterprises with state defence orders.” With a reduction in state orders, salaries will decrease or stagnate; for example, Sevmash, a submarine manufacturing plant, is already cutting salaries, and elsewhere, the plants of the United Engine Corporation are laying off workers.
Dependence on foreign components remains high, it is not easy to find them, and all this affects the price of the final product. In other words, it will be impossible to compete with China. Therefore, several years ago, Alexey Belyaev, General Director of the Sarapul Electric Generating Plant, suggested that “the government take some protective measures against foreign competitors. [Otherwise], civilian production is not profitable for defence industry enterprises.”
Reflecting on the situation, Tomas Malmlöf noted, “However difficult it may be, the defence industry, according to Russian officials, has become the driver of the Russian economy. Therefore, the Russian regime will take great care not to end up in the same situation as in 1991, when the defence industry more or less collapsed and entered into a period of 20 years of depression due to weak demand and overcapacity”.
Vladimir Gutenev, State Duma deputy, and President of the League for Assistance to Defence Enterprises noted, “The efficiency of defence industry enterprises could be solved by reducing costs. However, it is not profitable. If the company reduces costs, then it gets the task planned from what it has achieved”. Consequently, the government is developing mechanisms to change cost calculations of products so that factories can make more profit.
In sum, a potential ceasefire will reduce the Russian budget for conducting military operations and save the industry from the costs associated with accelerating arms production. However, the Russian defence industry is unable to generate sufficient income on state orders to make investment loans worthwhile, and similarly, civilian production is not profitable for the defence industry. As such, Russian defence enterprises will look to preserve military production in every possible way. Since arms exports may not recover, the only thing left for the defence industry is to replenish the reserves of the Ministry of Defence. In turn, since the defence industry looks set to remain low-profit but is strategically important, the Russian government will aim to everything possible to support it with state funding; the dependence of the Russian economy on the defence industry has made this cycle inevitable.
Maxim Starchak
Author: Maxim Starchak is a Russian defence correspondent, and an independent expert on Russian nuclear policy, strategic weapons and defence industry. He is a Fellow at the Centre for International and Defence Policy of Queen’s University, Non-Resident Fellow at GWU’s The Russia Program.
