Russian Economy Collapse: Let Me Tell You When Will That Happen
Russia’s war economy is showing surprising resilience — but hidden risks like capital flight and sovereign wealth fund depletion threaten collapse.
Hey there 👋. Ever wondered how long Russia's economy can withstand the pressures of war? 🕵️♂️
In this week's edition of Polis Doxa: The Transitions Letter, we delve into the unexpected resilience of Russia's economy amidst ongoing conflict.
Discover how military spending is reshaping economic landscapes and what it means for global markets.
But here's the kicker: while some see strength, others warn of an impending collapse. 💣
1. What happens to an aggressor economy?
In the last posts we saw how countries can pile cash into tanks.
I called it “Keynesian stimulus.”
But that’s when countries stops at the border.
Invaders cross it.
So here’s today’s puzzle:
What happens inside an economy when its weapons fire abroad?
Does GDP sprint—or stumble?
Do households earn windfalls—or foot the bill?
History answers in blood and balance sheets.
Stick around.
By the end you’ll know the play-by-play—and how to win, either way.
2. The Two-Stroke Illusion
War economies look unstoppable at first.
Government orders pump factories.
Guns are “exported” to use in the invaded countries.
GDP climbs; jobless rates dive.
But the engine runs on two sources of fuel:
huge home-front deficits and loot stripped from the conquered territories.
Money jets out the invader economy through three leaks—
capital flight, import inflation, brain drain.
The starting boom survives a few budgets.
Then the leaks outrun the stimulus and the plunder.
History proves it: invaders always hit a fiscal cliff.
Your job is to spot the leaks early—
and move your cash, skills, and supply lines before they widen.
Here’s the real pattern: every invader juices GDP with deficit-fuelled orders and tops it up by stripping cash, grain, or gold from the conquered.
That double-hit feels like prosperity—until inflation, capital flight, and brain-drain punch through the façade.
This piece shows you how that cycle wrecked 19th-century France, 1930s Germany, and another examples (yes, I won’t forget about Russia.
You’ll leave with a Combat-Proof Plan to keep your savings, career, and business on the winning side of history, even when your country (or a neighbour) fires the first shot.
3. The Three War Leaks
On 4 Apr 25 I proved the War Economy as come to stay because imperialism is back and also proved Europe can fund fresh armor without gutting its welfare state.
On 11 Apr 25 I showed defense investment act as turbo-Keynesian fuel, pushing GDP faster than any green deal.
On 18 Apr 25 I warned that same fuel has a negative ROI; you must stop investing once it is enough to deter attacks.
So far I measured countries that stock weapons but keep them holstered.
Today we cross that border.
What happens when a nation transitions to war economy and actually invades? Actually starts wars?
History gives us a lot of crystal-clear answers— and I organized them into leaks that will affect those economies.
3.1 LEAK #1 – Capital & Currency Exodus
Napoleonic Britain (1793–1815)
Britain financed its war against Napoleon through unprecedented government borrowing—issuing bonds ("Consols") and inventing the modern income tax. This surge in government borrowing initially fueled rapid industrial expansion, particularly in shipbuilding and textiles.
But war inflation bit hard. Sterling lost about 15% of its purchasing power, pushing food prices sharply upward. Wealthy investors quietly moved gold and capital abroad to safer markets like Amsterdam, weakening Britain's financial core even as the nation celebrated victory (Brewer 1989).
Franco-Prussian War (1870–71)
Germany’s economy boomed during its rapid military victory over France.
Industrial stocks surged, especially in railroads and steel production, betting on military and post-war expansion.
France was forced to pay Germany a massive indemnity—5 billion gold francs, about 15% of French GDP at the time.
Initially, German markets soared as the reparations money flooded in, sparking a speculative bubble.
When the payments stopped, the bubble burst, triggering the devastating financial crash of 1873 ("Gründerkrach") that set back Germany's growth for years (Devereux 2007).
Russia’s Invasion of Ukraine (2022–)
When Russia attacked Ukraine, analysts predicted immediate economic collapse. Instead, Russia imposed severe capital controls, masking the damage initially.
But wealthy Russians quietly moved around $253 billion abroad, primarily to Dubai and Yerevan.
This silent capital flight, combined with sanctions, sent the ruble plunging nearly 50%, forcing Russia to restrict foreign currency use.
Despite official claims of stability, businesses and households now face painful shortages and black-market premiums on essential imports (IMF, 2024).
3.2 LEAK #2 – Import-Inflation Spiral
Union USA in the Civil War (1861–65)
The Union government financed the Civil War by printing large quantities of paper currency ("greenbacks") and borrowing heavily.
Federal spending skyrocketed from 2% to 15% of GDP, fueling wartime industrial growth, especially in the North’s iron and rail sectors.
But inflation soared—reaching nearly 75% by the war’s end.
Households saw living standards deteriorate dramatically as imported goods became scarce and expensive.
Many Americans hoarded gold, creating severe currency instability and widespread economic anxiety (Goldin & Lewis, 1975).
Nazi Germany (1933–39)
Under Hitler, Germany aggressively rearmed using concealed deficit spending, notably through "MeFo bills"—secret financial instruments that masked deficits equivalent to 8% of GDP annually.
Rearmament initially reduced unemployment dramatically, from 30% to less than 5%, creating a deceptive economic boom.
Yet the system unraveled by 1938.
Massive state spending drove up inflation, forcing Germany to raid private bank deposits to roll debt.
The cost of basic foods climbed sharply, rationing began even before World War II officially started, and Germans experienced deepening economic hardship (Gettysburg Historical Journal, 2018).
Iraq’s Invasion of Kuwait (1990–91)
Saddam Hussein's invasion of Kuwait initially seemed a bold economic strategy.
But international sanctions froze Iraq’s foreign reserves, halting essential imports overnight.
Inflation jumped 40% in just one year, essential goods vanished from shelves, and Iraq’s GDP plunged 20%.
The war economy turned sharply inward, impoverishing ordinary Iraqis while driving massive shortages and black-market profiteering (Al-Nasrawi, 2002).
3.3 LEAK #3 – Human-Capital Drain & Productivity Collapse
Argentina’s Triple-Alliance War (1865–70)
Argentina borrowed heavily from British banks to fight Paraguay.
Initially, the economy expanded rapidly, boosted by military procurement and exports of captured Paraguayan goods like cattle and yerba mate.
But war debt soon ballooned to 185% of export revenues, severely restricting future growth.
Argentina's economy stagnated under the debt burden, ultimately leading to the catastrophic Baring Crisis of 1890, when the government nearly defaulted and the nation spiraled into a severe financial depression (Mitchener & Weidenmier, 2007).
United States in Vietnam (1968–73)
At its peak, U.S. spending on the Vietnam War hit nearly 10% of GDP.
The draft diverted skilled workers and young professionals from civilian jobs to military service, reducing workforce productivity at home.
Wage-price spirals followed, causing inflationary pressures that lasted well beyond the war years.
By the mid-1970s, U.S. productivity was stagnating, unemployment rose, and the economy faced years of structural slowdown (IEP, 2011).
Argentina’s Falklands War (1982)
Argentina’s military junta launched the Falklands invasion expecting a quick political and economic victory.
Instead, war costs quickly depleted foreign exchange reserves and isolated the country from international markets.
Inflation shot past 200%, debt repayment became impossible, and the nation plunged into crisis.
The government fell, but Argentines continued to suffer economically for years, trapped in spiraling inflation and foreign debt default (PBS, 2002).
Snapshot: nine wars, three consistent leaks.
Every invading economy looks strong—until these holes widen.
These nine examples show invasions initially fuel false prosperity.
But inevitably, capital flees, inflation spikes, and skilled people leave.
In the next sections, we'll dive into Russia’s current experience, and how you can stay financially safe—and even profit—from understanding these timeless economic leaks.
4. Counterpoint: Doesn’t War Investment Create Breakthrough Innovations?
The classic pushback sounds compelling: wartime R&D gave us GPS, radar, jet engines, and even the early internet. Isn’t that reason enough to see a silver lining?
Yes, military research can yield incredible civilian benefits. GPS alone added an estimated $1.4 trillion in U.S. economic benefits since the 1980s (Gallaher, 2019).
But timing matters. Major civilian breakthroughs don’t usually come during the war.
They typically emerge afterward, often in countries that reduced military spending quickly to prioritize civilian innovation (Moretti et al., 2019).
Look at Nazi Germany again. Yes, German engineers developed groundbreaking technologies in aerodynamics and rocketry.
Take Nazi Germany's V-2 rocket program.
While technologically advanced, it consumed vast resources with minimal impact on the war's outcome.
Post-war, the U.S. and USSR capitalized on this technology, not Germany itself (Neufeld, 2012).
Similarly, US productivity soared in the post-WWII decades, not during wartime, as industries repurposed military tech into cars, home appliances, and consumer electronics (Field, 2008).
Today, Russia faces this same reality.
High-tech innovations like advanced drones or cyber warfare tools are emerging from their war machine—but the best Russian engineers flee abroad or dye in the Ukrainian frontlines, taking their innovation potential with them (IMF, 2024).
Innovation from war economies only pays dividends after peace returns.
Until then, countries locked in active conflicts lose talent and technology to more peaceful competitors.
5. So, When Will the Russian Economy Collapse? Anytime Soon? The Hidden Risks Behind Russia’s War Economy Collapse
Russia’s economy surprised almost everyone.
GDP shrank only 2.1% in 2022, rebounded 3.6% in 2023, and could grow 3.2% in 2024 (Reuters, 2024).
Unemployment fell to a historic 2.5% (Friends of Europe, 2024).
Real wages climbed 7.8%.
Factories roared at Soviet-era speeds.
But the boom has cracks you can’t ignore.
🔥 Leak #1: Budget Addiction - How Capital Flight Accelerates Russian Inflation
Military spending now eats 40% of the federal budget (Reuters, 2025a).
Defense industries employ one in every five workers.
Inflation just hit 9.5% (The Guardian, 2025).
The Central Bank’s key rate is frozen at a crushing 21% (Reuters, 2025b).
🔥 Leak #2: Sovereign Fund Depletion - Why Russia’s Sovereign Wealth Fund Is Failing
The National Wealth Fund (NWF)—Russia’s “rainy day” cash—fell from $175 billion in early 2022 to barely $57 billion by mid-2024 (Reuters, 2024b).
In just two years, Russia spent two-thirds of its reserves.
And half the remaining assets are illiquid—shares in domestic companies, not hard cash.
The NWF once cushioned deficits and social programs.
Now it's a life-support machine for endless war budgets.
🔥 Leak #3: Trade and Talent Drain
Chinese exports to Russia shrank by 6.9% in early 2025 (Reuters, 2025c).
Why? Domestic demand is cracking.
Meanwhile, 1 million+ highly skilled Russians have fled since 2022 (Learn more about Russia's capital flight trends in this IMF report: IMF, 2024).
Plus an undetermined number of tens of thousands soldiers died or got severely injured.
Some say this number is well on the way to reach one million this year.
The shortage of labor is so severe that experts forecast a 2–4 million worker gap by 2030 (Reuters, 2025a).
🎯 Two Future Scenarios
Scenario 1: War Drags On
If fighting continues, Russia becomes trapped in a “forever-war economy.”
Budget deficits widen, inflation accelerates, and the sovereign fund vanishes by 2026.
High interest rates choke private sector investment.
The military absorbs more workers, starving civilian industries.
By 2027, expect stagflation: high inflation + zero growth.
Capital flight worsens.
The ruble needs stricter controls to survive.
Ordinary Russians see falling real incomes and rationing by stealth.
Scenario 2: War Ends Abruptly
If Russia someone or something stops the war, GDP takes a short-term hit.
Demobilization would unleash massive unemployment.
Military factories would close or retool slowly.
Budget deficits spike initially because military orders vanish overnight.
Regions dependent on defense industries face recessions.
BUT: In 2–4 years, peace dividends start kicking in.
Russia could redirect capital stolen from Ukraine into housing, energy, and civilian tech—provided political and banking reforms happen fast.
Think chaotic 1990s?
Maybe.
But with modern tools—and a global economy desperate for cheap energy—a disciplined pivot could avoid total collapse.
Potential easing of sanctions and renewed foreign investment could pave the way for more sustainable economic growth in the long term.
Forecast:
Russia's collapse isn’t tomorrow.
But unless the war machine halts, it’s no longer if—only when.
Unless energy prices spike again or the Kremlin grabs far larger exportable assets from Ukraine, Russia faces a “slow-grind stall”—flat or negative real incomes by 2026, rising inflation, and a rouble that must be propped up with ever-tighter capital controls.
Honestly, I don’t believe even the Kremlin knows how will the economy endure some more years of fighting.
On the other hand, they seem to be clearly afraid of the consequences of hundreds of thousands of traumatized by war men returning home all at once.
But in the end of the day, I’m pretty sure about some things:
ukrainians pay a disproportionated price for this war;
russian families, particularly from non central regions and lower classes, pay a disproportionated price for this war;
taxpayers from all over the world will have to pay a lot to a new arms race, because every country feels the need to protect themselves from trolls, bullies and criminal regimes
a few people gain a lot with this transition to a war economy: the autocrats who get to stay in power, the shareholders of defense companies, the innovators who develop new military or DUAL-USE tech.
Where will you sit?
🧠 I Just Shared My Perspective—But I Might Be Wrong. What's Yours?
We've explored the resilience and vulnerabilities of Russia's war economy. But economic landscapes are complex and ever-changing.
🤔 Could Russia's economic model sustain prolonged conflict, or is a collapse inevitable?
💬 What indicators do you believe are most telling about an economy's tipping point?
📢 Join the conversation! Share your thoughts in the comments, on Substack Notes, or your favorite social platform.
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🔮 Coming Next Week:
We'll look into the historical parallels of economic policies, starting with:
"Globalization: What Was Hitler’s First 'Executive Order'? Yes, You Guessed It—Tariffs."
Today Portugal celebrates the 51st anniversary of the 1974 revolution, when we finally got rid of the fascist regime that wrecked the country in the 20th century.
It was also the 50th anniversary of the first free elections, that led the country towards democracy and started showing that the population wasn’t very motivated to follow “the path to socialism”.
On top of that, a couple of recent events made me think that in one of the next posts I should address a couple of myths very common in today’s political narratives, like:
fascism is a “extreme” form of capitalism
communism is an “extreme” form of welfare state or social democracy.
Do you think these are issues worth discussing? Let me know in the comments or private messages / email.