What Is a War Economy

Russia has transitioned to a war economy, which is typically far easier to achieve than the subsequent return to a civilian peacetime economy. Internal cohesion is more readily forged through the identification of an external enemy than through broad-based, mutual trust. The latter is particularly difficult to rebuild if the “spoils of war” prove smaller than the economic attrition imposed by the war economy itself, causing national prosperity and future opportunities to decline. Where, then, does Russia stand in this process, and what are the main scenarios this creates for the country?

This is the first article in a series of four examining the effects of the war in Ukraine on Russia:

1. What Is a War Economy
2. How the war calculus has evolved
3. The current state of the economy
4. The long-term outlook

Russia Has Transitioned to a War Economy

In December 2025, German Defence Minister Boris Pistorius stated that Russia had fully converted its economy to a war economy. Think tanks such as the Atlas Institute, ISW and Chatham House point to the same conclusion.

But what does a war economy actually mean, and what are its effects?

In a War Economy, Market Discipline Is Superseded by Politics …

The concept of a war economy refers to a situation in which the state and the military become the dominant sources of demand. Market discipline is thus replaced by political and strategic priorities. Objectives such as growth, efficiency, or welfare are subordinated to mobilisation and military capacity.

War economies typically emerge gradually through budgetary priorities, industrial policy, and regulation. They develop primarily out of security concerns rather than as the result of an explicit strategy or military ambition.

Today, institutions such as the IMF, the BIS, and the OECD describe economies as exhibiting war-economic characteristics when:

• Defence expenditure systematically dominates the state budget
• Economic growth is driven primarily by military demand
• The state accepts lower productivity and living standards
• Capital allocation is determined politically rather than by markets
• Industry is structurally reoriented towards military production

… and the Concept Is Therefore Relative

A war economy is thus a relative concept, reflecting how costly peace becomes. It concerns the extent to which economic stability depends on continued conflict. For how long is mobilisation reversible, and at what point does returning to a civilian, competition-driven growth model become prohibitively difficult? 

Political theorists such as Karl Polanyi, Charles Tilly, and Seymour Melman have emphasised that war economies often evolve into structural, state-forming systems rather than remaining temporary arrangements. This makes the transition back to a peace economy particularly fragile. Mutual trust must be rebuilt from the ground up. Without a shared external enemy, social cohesion becomes especially difficult to restore.

Wars Are Lost Primarily for Economic Reasons …

Sun Tzu’s central insight was that states collapse because they exhaust their capital and assets, not because they lose individual battles. A state’s greatest enemy is its own war expenditure rather than its military opponent. Prolonged wars are therefore often lost economically rather than militarily (for example Vietnam, Afghanistan, and the First and Second World Wars).

The optimal war, from this perspective, is one that is short and does not require large-scale economic reconstruction afterwards. The Art of War can be read as a treatise on how to limit the duration, scope, and cost of war. In the same vein, a country’s strategic autonomy is defined more by its economic resilience than by its military capacity.

… Because They Are Extremely Costly to Sustain, and …

From an economic standpoint, Sun Tzu’s logic leads to a simple conclusion: intelligence is the best investment in war. One correct piece of information can save an entire campaign. Conversely, a distorted perception of reality leads to flawed strategy.

Information, in this sense, is also capital. Misallocation of capital is therefore not merely wasteful; it produces incorrect interpretations of both present and past, and thus faulty strategies. Cyber warfare, sanctions, proxy wars, and strategic deterrence are all modern expressions of Sun Tzu’s logic.

… Because Decision-Making Is Gradually Distorted

Authoritarian regimes therefore tend to collapse for structural reasons rather than because they lose a decisive battle. In times of uncertainty, power is centralised and loyalty is valued above competence. This creates a systemic incentive to prevent bad news from travelling upwards. In authoritarian systems, course corrections often place the leader’s personal survival at risk. As a result, such regimes tend to escalate when confronted with adversity—to double down rather than back down. Strategy is reduced to a question of the leader’s will, and institutions are transformed from corrective mechanisms into instruments of obedience. Over time, even strong states begin to make manifestly irrational decisions, further eroding public trust.

Democracies, by contrast, survive because they possess feedback loops. Disagreement is a built-in feature. Leaders therefore receive bad news and are compelled to learn from it. After the World Wars, Western democracies deliberately constructed institutions to ensure coordination, learning, and correction. During the interwar period, U.S. Supreme Court Justice Louis Brandeis famously observed that “sunlight is the best disinfectant.”

Transitioning Back from a War Economy Is Difficult and Requires, Among Other Things, …

It is one thing to conduct a military campaign effectively; this depends primarily on strategy, doctrine, and firepower. From a societal perspective, mobilisation into a war economy is usually rapid and relatively straightforward. A war economy, however, cannot be maintained indefinitely without destabilising society, as it undermines overall prosperity.

… That the Population Believes the War Was Worthwhile …

The transition back to peace is therefore the most difficult phase. This is where the “war calculus” becomes transparent.

The spoils of war:What is the economic value of the territories that have been seized? Does conquest generate a sufficiently large economic return quickly enough to justify and prolong the population’s sense of victory?

• How quickly can resource extraction, such as mining, be restarted at competitive cost, and what scale of investment does this require?
• Can displaced civilians be rehoused without extensive reconstruction of the housing stock?
• Can agricultural land be cultivated immediately, or must it first be cleared of mines?
• Can industrial facilities be reused quickly and with limited refurbishment?
• Does the “victor” possess the financial and economic capacity to rebuild the occupied territories? In particular, does it have access to international capital markets and to imports of construction materials? Are domestic savers sufficiently long-term and patient, demographically speaking, or are they approaching retirement age?
• Historically, the spoils of war were often of substantial value. Today, the prosperity of advanced economies is not materially increased by additional wheat fields. The most valuable assets are increasingly technical and institutional in nature. Knowledge cannot be conquered through war. Taiwan is a case in point: TSMC’s fabrication plants are ultra-sensitive and require deeply specialised personnel. China would not be able to operate and maintain EUV machines without the support of the vast majority of TSMC’s existing workforce or without ASML’s technical servicing.

… And That the Economic Attrition of War Can Be Reversed …

Depleted assets:The military prioritisation inherent in a war economy typically comes at the expense of asset maintenance, including infrastructure and civilian innovation. This leads to gradual degradation that must later be rectified.

• To what extent has infrastructure deteriorated structurally? Does it require complete reconstruction?
• Has degradation and political centralisation opened the door to corruption?
• Does the country possess sufficient strategic autonomy to rebuild, or does it depend on imports of chips, rare earths, copper, or iron ore?
• How extensive is the innovation backlog created by the war? How much research has stalled, and how much tacit knowledge has been lost because specialists were conscripted?

… Including Mental and Social Depletion

What are the broader consequences of war?

• What are the social effects when demobilised soldiers return to civilian life? When the Soviet Union withdrew from Afghanistan in February 1989, returning soldiers often experienced negative resocialisation. The war was not recognised as legitimate, and there was a lack of veteran policy, psychological support, and civilian employment opportunities. More than one quarter of the 620,000 soldiers deployed between 1979 and 1989 were affected by the so-called “Afghanistan syndrome”, a pattern of social marginalisation that often led to political radicalisation, violence, and organised crime. This significantly increased social tensions ahead of the Soviet Union’s dissolution in December 1991.
• Relatives of the fallen often struggle to justify their personal losses against society’s overall gains and tend to gravitate towards political opposition.
• Deserters and refugees frequently become de facto stateless and later organise political opposition against their former regimes.
• If conscription has been uneven across regions, there is a risk of deep political mistrust arising from perceived inequality. In the United States, opposition to the Vietnam War was strongest among low-income groups and the Black population, from which disproportionately high numbers were drafted during the first seven years of the war.