Political and Economic Implications of the Evolution of Russia’s Military-Industrial Complex during the War with Ukraine
The Fletcher Russia and Eurasia Program hosted a lunch seminar featuring Dr. Pavel Luzin, a Visiting Scholar at The Fletcher School and a Senior Fellow at the Center for European Policy Analysis, and Saratoga Foundation.
In his talk, Dr. Luzin examined Russia’s wartime economy and the outlook for the defense-industrial base through 2026, focusing on whether current production levels can be sustained.
Dr. Luzin began by highlighting a central problem: the quality of the Russian source base. Many key statistics, such as the Ministry of Defense budget, are partially classified. Those that are published are frequently manipulated for propaganda purposes, for example by understating actual expenditure.
However, not all figures can be fully manipulated. Some information must remain public for authorities at different levels, for industry to function, and for firms to make decisions. In this sense, industry data are comparatively more reliable: financial reporting and contractual obligations make it difficult for large companies to hide internal revenue and spending completely. These industry-level indicators provide a key entry point for serious analysis.
The Answer: Estimating the Defense Budget and Production Ceiling
Using this imperfect but still informative set of sources, Dr. Luzin derived approximate figures for Russia’s national defense budget and for the output of state-owned and aligned defense enterprises such as Rostec.
Since the start of the full-scale war in 2022, official numbers have not been fully published. Dr. Luzin therefore combined official statements with indirect approximations to estimate a headline defense budget of around 14 trillion rubles. He argued that this is likely an undercount and that the real figure is closer to 15 trillion rubles.
He also emphasized that the defense budget is not a fixed, transparent number. Rather, it is the product of a continuous “24/7 bureaucratic negotiation,” in which new spending is added and reallocated over time. Even senior military officials, he suggested, may not have a precise, up-to-date picture of total expenditures.
Despite these uncertainties, the estimate is analytically useful because it helps identify a hard cap on Russia’s actual production capacity. Roughly half of the defense budget is consumed by salaries, facility and equipment maintenance, and bonuses for new contract soldiers. These costs are essential just to keep the system running. This means that only the remaining portion of the budget can be devoted to producing new weapons and equipment, which places a structural limit on how far Russia can expand its military output.
The Defense Industry: Rostec’s Revenues and Productivity
Turning to the defense-industrial base, Dr. Luzin argued that industry-level data offer a clearer lens for understanding wartime production. He focused in particular on Rostec, the major state-owned defense conglomerate that manufactures nearly all categories of military equipment.
By tracking Rostec’s financial indicators over time, he assessed how the largest defense producer—and by extension, the wider industrial base—is performing. Officially, Rostec has reported sizable revenues of about 4 trillion rubles. However, once these figures are adjusted with a deflator to account for wartime inflation, the real growth in revenue is only about 60%, even amid a dramatic increase in government spending on weapons.
Employment and personnel data further underscore the limits of this expansion. Rostec has significantly increased its workforce by around 27 percent, yet revenue per employee has remained remarkably stable. This suggests that efficiency per worker has not meaningfully improved. According to Dr. Luzin, the observed increase in wartime production stems primarily from hiring more workers and extending working hours, not from technological upgrades or more efficient production methods. In other words, Russia is extracting higher output by intensifying labor use, rather than by modernizing its industrial processes.
Production and Stockpiles: The Role of Soviet-Era Equipment
Dr. Luzin then examined the composition of Russian wartime production, with particular attention to the use of legacy Soviet stockpiles. Much of the equipment currently deployed is not newly manufactured but consists of reactivated Soviet-era materiel.
This process involves withdrawing old tanks, armored vehicles, and other systems from storage bases, refitting them at repair facilities, and then sending them to the front. While this practice has been widely discussed for years, Dr. Luzin highlighted that current evidence suggests by 2026 most Soviet storage yards will be effectively depleted. Once these stockpiles are exhausted, the defense industry’s ability to sustain output by reactivation will drop sharply, forcing a shift toward genuinely new production.
So far, however, the Russian military-industrial complex has struggled to generate the necessary increases in new-built equipment. This looming depletion of Soviet reserves therefore poses a serious challenge to the sustainability of Russia’s current wartime production levels.
Financial Constraints on the Defense Industry
Using comparative data, Dr. Luzin also assessed the broader financial health of the defense industry, and his conclusions were pessimistic about its long-term sustainability.
He pointed out that headline revenue figures are misleading, because substantial portions of reported income are not derived from profitable sales but from government loans issued to cover losses. These loans keep companies operational in the short term but must eventually be repaid—either by the firms themselves or by the state. In both scenarios, they constitute a drag on the sector’s financial health and constrain its ability to sustain high levels of military production over time.
In effect, the defense industry is being propped up by state intervention, masking underlying weaknesses and pushing financial risks into the future.
Post-War Impacts: Regional Dependence and Regime Stability
Finally, Dr. Luzin turned to the post-war outlook for Russia’s defense industry, with a particular focus on regime stability.
Drawing on financial data, demographic trends, and electricity consumption patterns, he argued that many regions heavily dependent on military production are experiencing population decline. At the same time, Russia’s defense sector is unable to produce competitive civilian goods and faces rising costs of arms manufacturing. In addition, it has lost most of its foreign clients. As a result, it is completely dependent on the national defense budget. This combination means that any significant slowdown in defense production would have catastrophic consequences for the sector and for the economic health of the regions, potentially triggering unemployment, social discontent, and instability.
These structural dependencies shape the political incentives of the central government. Dr. Luzin concluded that the Russian state is therefore likely to maintain high levels of defense spending even after the war, in order to preserve salaries and economic viability in key regions. However, this strategy will place increasing strain on the overall Russian economy, as resources are diverted to sustain the military-industrial complex rather than broader economic development.
In sum, Dr. Luzin’s lecture presented a sobering assessment: Russia’s current wartime production is being maintained through opaque budgeting, intensive labor use, the drawdown of Soviet-era stockpiles, and substantial state financial support. These mechanisms enable short- to medium-term resilience but raise serious doubts about the long-term sustainability of Russia’s military-industrial effort.