National Interest

by Eric Rudenshiold

    The Ukraine War is slowly but surely eating away at the sources of Russia’s financial, energy, labor and diplomatic power.

Russia is not collapsing. It is undergoing a potentially more dangerous transformation: a great power slowly cannibalizing its own economic, demographic and geopolitical foundations to sustain a war it cannot afford to lose and clearly cannot win. Beneath the Kremlin’s patina of normalcy, Vladimir Lenin’s perennial question looms: Shto delat  What is to be done

    Since the Kremlin’s invasion of Ukraine in 2022, Western analysts have tended to vacillate between two flawed assumptions—that collapse is imminent or that Russia’s resilience is proof that sanctions failed. Both interpretations miss the larger story: the slow and steady erosion of Russia’s economic foundations.

    This war is undermining the very foundations of Russian power. The Kremlin is liquidating the economic, human and geopolitical assets that made Russia a great power. Today’s withering away of the Russian state is not the one Lenin foretold. Russian President Vladimir Putin’s control and expansion of state property is at the expense of the masses and not for their benefit.

• The Illusion of Russian Strength

    Today’s Russia remains capable of fighting and continues to produce weapons, recruit soldiers, export energy and withstand punishment at a level that would challenge many other states. Yet the war is increasingly transforming the Russian Federation into a system that survives by undermining the very foundations of its current and future power. The Kremlin has succeeded in converting economic resources into military output, but at great cost. Foreign investment has dried up, markets for Russian goods have significantly contracted and inflation is soaring as revenues crater. The question is whether enough of Russia’s economic vitality, human capital and geopolitical influence will remain once the war ends.

    This is not merely an economic story but also a political one. Russian elites have adapted to a wartime political economy in which oligarchs, defense industries and regional officials increasingly depend on military spending. Powerful constituencies now benefit from prolonging the conflict.

    After four years of seemingly unconstrained military spending, manpower mobilization, nationalist rhetoric and repression, the Kremlin appears to have inextricably tied its legitimacy to a continuing war. Apart from any face-saving settlement, ending this war would require not only demobilizing a resentful and demoralized military, but unraveling and reorienting the resilient political economy that sustains it.

• Russia’s System of Financial Incest

    For now, wartime spending masks many of these vulnerabilities. Since 2022, Russia’s economy has become increasingly dependent upon state-directed military expenditures. Defense and security spending now account for roughly 40–50 percent of federal expenditures and nearly 10 percent of GDP. Official growth figures remain positive, despite an economic downturn. But these factors do not equate with growing a healthy economy.

    Growth as measured by artillery shells, armored vehicles and military salaries does not create lasting prosperity. Moscow’s promotion of its military-industrial complex has spurred wage inflation by offering workers premium wages, which in turn force non-defense industries to raise their own wages to compete for the same labor pool. The economy increasingly resembles its Soviet predecessor, displaying apparent productivity on the surface but relying on anti-competitive state spending and control.

    The financial mechanisms that sustain this system reveal a growing fragility. Russia’s wartime economy is increasingly borrowing from itself. The state issues debt to finance war spending. Banks absorb that debt. Russia’s Central Bank then provides the liquidity necessary to sustain the process. Russia is effectively converting future economic capacity into present military power. Though not literally printing money, the Central Bank’s self-reinforcing fiscal loop is coming very close. “Russia is plugging its budget deficit by lending money to banks so they can lend money to the government so it can spend money it doesn’t have,” noted Center for European Policy Analysis (CEPA) Senior Fellow Jessica Berlin on X.

    The consequences are becoming visible. Russia’s National Wealth Fund equaled 6.5 percent of GDP before the war. By April 2026, its liquid assets had fallen to less than one-third of that level, sharply reducing Moscow’s principal fiscal room for maneuver. Key oil-and-gas revenues declined by roughly 45 percent compared to the previous year.

    Russia’s low sovereign debt means an immediate economic collapse is unlikely. But the war is becoming more expensive as Moscow shifts from reserves and energy revenues towards increased debt, higher inflation and fragile regional budgets. Even grobovye, the “coffin money” bounties paid to deceased soldiers’ families, are proving a strain. The Kremlin’s turn to banks for financing has led those institutions to assume riskier loans.

• The Costs of the Ukraine War Come Home

    Ordinary Russians are beginning to feel the burden, just as the EU prepares a new sanctions package. More than half of businesses surveyed reported declining sales, while rising household debt and loan defaults now pose what one European intelligence assessment describes as an “explosive risk.”

    The report describes record numbers of non-performing corporate loans and over 500,000 Russians declaring bankruptcy in 2025. Gasoline lines stretch for miles across the country, as shortages from Ukraine’s punishing drone attacks target Russian refineries and petroleum assets. Investment activity in small and medium-sized enterprises has fallen to stagnant levels not seen since the COVID-19 pandemic. The labor market tells a similar story.

    Labor shortages now affect non-military industries ranging from manufacturing to transportation and construction, as millions of workers have been drawn into defense industries, mobilized into military service, or emigrated abroad. As many as 1 million Russians—disproportionately young, educated and economically productive—have left the country since the invasion. This intellectual drain will have long-lasting effects on Russia’s economy, as few are expected ever to return. While rubles can be printed, machinists, ball bearings and avionics modules cannot. Russia’s principal chokepoint isn’t access to capital, but to workers, components and industrial capacity.

    In 2025, Kyiv shifted its strategy toward targeting the infrastructure underpinning Russia’s war economy. While much of the conflict has been measured by territorial gains, Ukraine’s most effective offensive may now be economic rather than geographic. Over the past two years, Ukrainian drone warfare has evolved from occasional symbolic strikes into a sustained campaign of kinetic sanctions targeting the infrastructure that underpins Russian military and economic power.

    Refineries, fuel depots, airfields, logistics centers, radar stations and industrial facilities have all become targets. These attacks matter not because any single refinery determines the outcome of the war, but because they impose cumulative costs. Unlike financial sanctions, these costs cannot be written off or circumvented, as they directly destroy productive capacity that must be repaired, defended, or replaced.

    Western observers have often misunderstood Russia’s capacity to transform suffering into strategic success. Russia defeated Napoleon and Hitler, but in wars of national survival that mobilized defenses against homeland invasion. The current conflict is fundamentally different, with Russia attempting to sustain an offensive war of choice and not one of national survival. The geopolitical consequences of its efforts are rippling across the former-Soviet sphere, far beyond Ukraine.

• Russia’s Eroding International Influence

    For decades, Moscow’s influence across Eurasia rested on a combination of military power, energy exports, economic integration and the perception that the Kremlin was the region’s indispensable security provider. That perception has significantly deteriorated. Armenia is distancing itself from Russia’s security architecture following Moscow’s inability or unwillingness to intervene during the collapse of Nagorno-Karabakh.

    Kazakhstan continues pursuing alternative export routes and greater connectivity across the Caspian Sea. Uzbekistan has steadily diversified its diplomatic relationships. Even Belarus, Moscow’s closest military ally, has carefully avoided being drawn into the war, particularly as Ukraine’s military strike capacity has grown.

    No single event marks this denouement of Russian influence. However, trade routes, energy corridors, investment and diplomacy are increasingly bypassing Moscow, while its reliance on retaliatory coercion has alienated many of the very neighbors it seeks to retain.

    Perhaps the clearest sign of Moscow’s changing fortunes is its dependence on once-junior partners. The Kremlin now relies heavily on North Korean artillery shells and ballistic missiles, Iranian drone technology and China’s industrial supply chains to help sustain its war economy. For a country that prided itself on strategic autonomy, a forced reliance on North Korea for ammunition is not adaptation, but humiliation.

    Although President Putin launched his invasion in part to resist perceived Western encroachment, four years later, Russia has surrendered much of its strategic autonomy and become more economically dependent on China than at any point since the collapse of the Soviet Union. The energy sector illustrates this transformation most clearly.

• Russian Energy’s Opportunity Costs

    For decades, oil and natural gas served not merely as revenue streams for Moscow but as instruments of its geopolitical power. Russia’s pipelines shaped European energy policy and its hydrocarbon exports both financed military modernization and solidified Moscow’s regional influence. That model is steadily diminishing. Successive sanctions have forced Russian energy firms, including Lukoil, Gazprom and Rosneft, to divest assets, restructure operations and retreat from major international markets.

    Russia will likely continue exporting energy for decades. Yet every lost European customer, every discounted shipment to Asia and every alternative transit route developed across Eurasia reduces the political influence that the Kremlin’s energy once generated. In many respects, Russia is now converting long-term geopolitical leverage into short-term cash. That trade may sustain the war, but it simultaneously weakens Russia’s future. The sales of Moscow’s strategic assets today are the surrender of its sources of influence tomorrow. Russia is no longer investing in its future—it is liquidating it.

    None of this means Moscow is on the verge of defeat. Economic pressure alone will not force Russia to abandon its objectives. The Russian state remains exceptionally capable of imposing costs upon society by suppressing consumption, redirecting capital, controlling information and compelling painful economic choices. Moscow may continue fighting for years, but perseverance is not equivalent to strength. Western policymakers often mistake Russia’s resilience for evidence of enduring strength, but they are not the same. Strength measures the ability to regenerate power. While Russia may be able to absorb astonishing losses, it is also mortgaging the capacity to regenerate the traditional sources of its national power.

• After the War, What’s Left of Russia

    Hence, the more important question is what emerges afterward. War economies are difficult to refocus and turn around. Entire regions that now depend on military contracts will need to transition to new sources of growth while addressing millions of workers, both directly and indirectly, tied to defense spending. Russia’s banks have adapted to financing government borrowing. Political elites have reorganized around wartime priorities and profits. Peace would not automatically solve these problems, nor would it restore Russia’s geopolitical position to its pre-2022 level.

    Post-war Russia will also face a significantly changed external environment. European energy markets have diversified. Central Asian states and the South Caucasus have de-risked their economies and secured new partnerships, building increasingly integrated trade through routes that do not depend on Moscow. Much of this lost influence may prove difficult for Russia to recover regardless of how the war ends.

    This raises a final and uncomfortable possibility. The most dangerous outcome may not be a victorious Russia, nor a collapsing one. It may be a Russia that emerges from Ukraine as a diminished and unreconciled, nuclear-armed Weimar: poorer, less influential, resentful, revanchist and convinced that its defeat resulted not from strategic errors but from betrayal and insufficient resolve.

    History offers sobering examples of declining powers struggling to accept diminished status. Economic stagnation does not necessarily produce moderation. National disappointment does not automatically generate reform. States experiencing relative decline often become more nationalist, more resentful, revanchist and more prone to external confrontation.

    For policymakers in Washington, Brussels and elsewhere, this distinction is critical. Russia remains dangerous precisely because it remains resilient. Yet resilience should not obscure the deeper trajectory. The greatest consequence of Putin’s war may ultimately not be what it does to Ukraine, but what it is doing to Russia itself.

    The Kremlin launched the invasion to restore Russian greatness, reverse geopolitical decline and reassert Moscow’s primacy across Eurasia. Instead, the war appears to be exacerbating and accelerating many of the very trends it was intended to halt: economic dependence, demographic erosion, shrinking regional influence and mounting fiscal strain. The Kremlin is financing today’s battlefield by liquidating the foundations of tomorrow’s national power.

Wars do not merely reveal national strength; they devour it. Russia can continue to mobilize, borrow and fight. It can continue exporting instability. But each additional year of war converts more of the country’s future into present military capacity. Putin launched this war to remind the world of Russian greatness. History may instead remember it as the war which exhausted and eroded the foundations of Russian power. The question is no longer whether Russia can sustain the war. It is what kind of Russia remains when the war is finally over?