Russia’s wartime economy was already running on two separate tracks. Now they’re diverging even faster, and the gap is certain to widen still more.
On one side sits a state-subsidized, demand-guaranteed military-industrial complex, expanding at a pace that would be the envy of any peacetime planner. On the other hand, a civilian economy is slowly hollowing out, starved of labor, capital, and credit. New data on industrial output and a leaked Finance Ministry letter confirm what many had suspected: this economic divergence at the country’s economic heart is structural, worsening, and about to be turbocharged by a fresh surge in military expenditure.
April’s industrial output data from RosStat, the state statistics agency, shows headline growth of 1.9% year-on-year — modest but technically positive. In the first four months of this year, cumulative industrial growth stood at 0.7%, barely enough to offset the winter slump. The headline figure of modest expansion conceals, in effect, a tale of deviating economies.
Strip away the defense effect, and the picture deteriorates sharply. Production of “other transport equipment,” a category that encompasses aircraft and shipbuilding, the main recipients of state defense contracts, is up 57% compared with a year ago. Finished metal products — shells, cartridge cases, military hardware — have risen 23%. Semiconductor output, so necessary for drone production, in the first four months of the year was 2.8 times higher than in the same period of 2025.
The civilian side tells a different story. Half of all industrial sub-sectors are now in negative territory. Metallurgy is down 9% year-on-year. Oil refining has contracted. Construction materials have fallen 4%, with cement production off by 21% and brickmaking by 23%. The automobile sector has shrunk by 42% since 2021.
Production of elevators, glass, and civilian vehicles is declining. The construction boom that briefly cushioned Russia from the effects of sanctions has collapsed alongside the mortgage market, leaving metal companies without buyers from either auto manufacturers or infrastructure projects.
The structural divergence is about to deepen. According to the FT, the Finance Ministry is seeking an additional 2 trillion rubles ($28bn) for military and security spending this year, with a worst-case scenario of 4 trillion rubles.
Part of that increased spending appears to be driven by rising compensation costs for casualties. By the end of 2025, some 352,000 Russian soldiers had been killed since the February 2022 invasion, according to a joint investigation by Mediazona, the BBC Russia, and Meduza. (British spies say the death toll is approaching half a million). Federal payouts of 14.2 million rubles per confirmed death are rippling through the budget. Many regions add a further one to three million rubles on top.
Money might also be needed to sustain military production amid ongoing war and rising costs.
The financing of this additional spending will have consequences far beyond the military sector. Without cuts elsewhere, an extra 2 trillion rubles in borrowing would push total state debt issuance for the year to around 7.5 trillion rubles — a 7% increase on last year, itself a record. Russia’s long-term fixed-coupon government bonds, OFZs, are already selling poorly. At recent auctions, demand for 13-year bonds barely reached 70bn rubles, with the Finance Ministry meeting only half of the bids at ever-increasing premiums. The latest placement yielded 14.8%.
The Bank of Russia has made its position clear: if primary spending and the deficit rise further, monetary policy will tighten. Governor Elvira Nabiullina has explicitly said she is “less confident than before” in the budget’s disinflationary impact. With the base rate already elevated and the sanctions-driven ruble’s strength, which squeezes oil revenue in ruble terms, the room for maneuver is narrow. Issuing more floating-rate bonds, whose coupons track the base rate, would lock in high servicing costs if rates stay elevated. Issuing more fixed-rate bonds requires accepting higher yields to attract buyers. Either route makes debt more expensive to service.
The cost falls disproportionately on civilian firms. Defense enterprises benefit from guaranteed sales and preferential borrowing terms, with a portion of interest payments covered by the state. They are prioritized for utility connections, logistics support, and guaranteed state contracts. Civilian companies, by contrast, must compete for labor at war-inflated wages, borrow at commercial rates now approaching or exceeding 20%, and sell into a market where consumer demand is softening. The military-industrial complex is not simply growing alongside the civilian economy, but is crowding it out.
What is unfolding in Russia is not a cyclical fluctuation, but a deliberate, state-directed redirection of the economy toward war production. The longer this continues, the harder it becomes to reverse. Skills and capital locked into defense production do not easily migrate back to civilian manufacturing. Supply chains rebuilt around military requirements are not readily repurposed. Labor attracted to the defense sector at premium wages creates wage pressures that civilian firms cannot absorb.
The pattern in the output data — deindustrialization in construction, metals, refining, and consumer goods; rapid expansion in transport equipment, electronics, and munitions — reflects decisions made not by markets but by the state. Those decisions are now being reinforced by a further surge in military spending that will be deployed without parliamentary scrutiny, funded by a combination of opaque budget reallocation and increased borrowing at rising yields.
For Western policymakers and sanctions designers, the picture that emerges is one of an economy increasingly insulated from normal market discipline in its military core, but increasingly fragile in its civilian periphery. The gap between these two Russias is no longer a footnote to the war economy, but the defining feature of it, and on current trajectories, it is about to get considerably wider.
Alexander Kolyandr is a Non-Resident Senior Fellow at the Center for European Policy Analysis (CEPA), specializing in the Russian economy and politics. Previously, he was a journalist for the Wall Street Journal and a banker for Credit Suisse. He was born in Kharkiv, Ukraine, and lives in London.
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