Bloomberg: Kremlin's War Machine Forced To Slow Down
- 29.01.2026, 13:08
The Russian authorities are facing a difficult choice.
Russia's defense industry may slow growth sharply this year. The Kremlin has prioritized increased spending on the war in Ukraine over economic stability and balanced finances.
The Bloomberg writes that according to a three-year forecast by the Russian Economy Ministry, sectors related to government defense orders, including military equipment and components, UAVs and ammunition, will show annual growth of 4-5% this year, down from about 30% in recent years.
The rapid growth in arms production, which has been fueled by government spending, round-the-clock shifts at factories and labor outflows from the civilian sector, is losing momentum for the first time in the four years of Russia's full-scale invasion of Ukraine. It demonstrates the authorities' response to growing strains in the Russian economy.
Defense, which remains the largest item of state budget spending, was the only major item to be cut, while overall spending is expected to rise in line with inflation. Overall, war-related spending will fall by nearly 11% this year after a more than 30% annual increase in 2025.
Russian authorities must make tough choices
Further increases in military spending in the face of declining revenues will require redirecting funds from other priority areas and increasing the debt burden. It would also increase inflationary pressures, which could lead to a longer period of high interest rates that would further strain the civilian sectors of the economy.
"Throughout this year, they will be at a crossroads - between pouring resources into the war and beginning the transition to paramilitary status," said Alexander Gabuev, director of the Carnegie Center for Russia and Eurasia in Berlin.
The key variables will be the outcome of the negotiations and the situation on the battlefield, he said.
Russia faces growing revenue constraints due to falling oil prices, heavy discounts on black gold and logistical problems exacerbated by sanctions. A strong ruble makes the situation even worse. At the same time, liquid reserves of the sovereign wealth fund appear to be close to the minimum needed to ensure financial stability, forcing the government to finance the budget deficit through new borrowing.
Russia's defense sector is slowing down
The Russian Economy Ministry estimates that production growth in the optoelectronics industry, which includes components for military equipment, has fallen from 28% in 2024 to 11% in 2025. Production of vehicles, including tanks and other combat equipment, has slowed to 27% from 34% a year ago, and production of fabricated metal products, including bombs and weapons, has slowed to 14% from 32%.
Structural economic obstacles also raise the cost of further defense industry expansion.
Active hiring by military plants, which have hired about 800,000 people over the past three years, has exacerbated labor shortages and intensified wage competition with civilian sectors. Rapid wage growth has exacerbated inflation, keeping interest rates at record highs for several months before they were gradually lowered.
At the same time, fiscal tightening may also give the central bank more room to ease monetary conditions and provide welcome relief for the broader economy.