Russia’s Economy in ‘Death Zone’ amid War Spending

Russia’s Economy in ‘Death Zone’ amid War Spending

The Russian economy is facing severe, long-term damage as it prioritizes war spending, pushing it into a perilous state compared to a climber in the deadly “death zone” above 8,000 meters, according to a former Central Bank of Russia advisor. This analysis, detailed in an article by Alexandra Proenko for The Economist, suggests the nation is consuming its own resources and cannot sustain its current trajectory indefinitely.

The “death zone” analogy, borrowed from mountaineering, describes altitudes where oxygen is scarce and the human body deteriorates rapidly, even at rest. Similarly, Proenko argues, the Russian economy is functioning but is in a state of decline, burning through internal reserves. This situation is driven by a wartime economic model that splits the economy into two parts: a heavily funded military core and a neglected civilian periphery.

Wartime Economy Distorts Growth

The Kremlin is directly funding companies that support the war effort in Ukraine, shifting the economy toward defense production. This has led to significant growth in the military sector, with manufacturing output in defense-related industries rising by over 18% in the past three years. However, this focus comes at the direct expense of civilian businesses, which are struggling due to sanctions and a lack of resources.

Exporters face lost markets, and companies struggle to source necessary raw materials. This imbalance is distorting the overall economy. The article highlights that all current economic growth in Russia is linked to the war effort. Civilian production is shrinking while defense production expands, creating fundamental long-term damage to Russia’s commercial sector.

Oil and Gas Revenues Plummet

Historically reliant on oil and gas exports, Russia is now seeing these crucial revenue streams severely pressured. Budget revenues from oil and gas were down by half in January compared to the previous year. Russia is forced to offer discounts to countries like China and India to encourage them to buy its energy products, as these nations risk facing secondary sanctions from Western allies.

Global demand for Russian products has weakened considerably. This situation is characterized by rising government spending alongside falling revenues. The article notes that “oil rent”—income from selling natural resources abroad—has been replaced by “military rent.” This means the economy is now driven by internal redistribution of wealth through government spending on the war, rather than generating new foreign capital from exports.

Debt Mounts as Social Spending Suffers

Instead of solely relying on internal wealth, Russia is also increasing its debt. Projections indicate that by 2026, interest payments on Russian government debt will surpass combined spending on education and healthcare. The budget deficit is forecast to reach 5.6 trillion rubles, leading to higher borrowing costs and pressure on social services.

This shift toward debt servicing over essential public services poses a significant threat to Russia’s long-term economic growth prospects. The current situation is described not as a typical recession, which allows for recovery, but as “altitude sickness.” This implies a more serious condition with limited policy options, distorted fiscal stimulus, embedded militarization, and shrinking civilian capacity.

Five Conditions for ‘Descent’ Unlikely

The article outlines five conditions necessary for Russia to “descend” from the economic death zone, analogous to a climber returning to safety. These include credible security guarantees, mass demobilization and retraining of soldiers, partial sanctions relief, defense procurement reform, and reabsorption of small businesses into the economy. The author assesses the probability of all five conditions being met simultaneously as near zero.

Standard economic theory suggests that deteriorating conditions should prompt negotiation. However, Russia’s current perspective appears to be that by outlasting its adversaries—believing Europe is struggling, Ukraine is exhausted, and global growth is slowing—it can achieve a favorable outcome. The Kremlin, according to this view, is not acknowledging the severity of its economic situation.

Long-Term Damage and Uncertain Future

While the Russian economy may continue waging war for the foreseeable future due to a functioning war economy and a stabilized military sector, the structural damage is accumulating. The report does not predict an immediate collapse but questions what Russia will look like post-war.

The nation is likely to emerge with a smaller civilian base, a higher debt burden, a heavily militarized industry, and a significant risk of long-term stagnation. The prolonged focus on war spending, funded by internal resources, has drastically reduced revenue and increased costs. This shift away from supporting commercial and civilian businesses, which previously generated revenue for long-term growth, is seen as deeply damaging.

The analogy of a climber staying too long in the death zone, leading to irreversible damage, underscores the long-term consequences for Russia. When the country eventually emerges from the conflict, it will face fundamental problems, and the longer the war continues, the worse the long-term outlook becomes.

Source: RUSSIAN Economy Enters Death Zone (YouTube)