Russia's Military Spending Surge: Implications for Global Defense Equities

Russia's 2025 defense budget, unveiled in late 2024, marks a seismic shift in the country's fiscal priorities. Allocating 13.5 trillion rubles ($142 billion) to “National Defense”—a 25% jump from 2024—this category now accounts for 32.5% of the federal budget Russia’s 2025 federal budget outlines record military and top-secret spending and tax hikes for ordinary citizens^[1]. When combined with the 3.5 trillion rubles ($36.7 billion) earmarked for “National Security and Law Enforcement,” defense and security spending collectively consume 41% of Russia's annual outlays Russia’s Year of Truth: The Runaway Military Budget^[2]. This represents the largest share of GDP dedicated to military purposes since the Soviet era, with defense spending projected to hit 6.3% of GDP in 2025 Russia hikes 2025 defence spending by 25% to a new high of 6.3% of GDP^[3].

A War Economy and Its Consequences

The surge in military spending reflects the escalating demands of Russia's war in Ukraine. According to a report by The Moscow Times, Russia's 2024 military budget already exceeded 13.1 trillion rubles ($145.9 billion) in purchasing power parity (PPP), surpassing the combined defense budgets of the EU and the UK by nearly $5 billion Russia’s 2024 Military Spending Surpassed EU, U.K. Combined in PPP Terms^[4]. This trend is expected to continue, with the International Institute for Strategic Studies (IISS) forecasting a 13.7% increase in 2025, pushing total spending to 15.6 trillion rubles Russia’s military spending soars, surpassing all of Europe’s defense budgets combined^[5].

However, this militarization comes at a steep economic cost. The Russian Central Bank raised interest rates to 21% in October 2024 to combat inflation, which hit 8% year-on-year in March 2024 Russia’s Record-Breaking Defense Budget And The Strains Of War^[6]. Meanwhile, the ruble's devaluation and rising M2 money supply have exacerbated domestic economic instability. As noted by the Center for European Policy Analysis (CEPA), the Russian economy is increasingly structured as a command system, with defense and war-related industries expanding by over 60% since autumn 2022, while other manufacturing sectors stagnate The Russian Economy On A War Footing: A New Reality Financed By Commodity Exports^[7].

Global Defense Spending Trends and Equity Opportunities

Russia's military spending surge is part of a broader global trend. According to SIPRI, global military expenditures reached $2.7 trillion in 2024, a 9.4% year-on-year increase—the steepest rise since 1988 Trends in World Military Expenditure, 2024^[8]. NATO allies, in particular, have ramped up budgets in response to the Ukraine conflict. The Center for Strategic and International Studies (CSIS) reports that several European nations have committed to spending over 2.5% of GDP on defense by 2027 Defense Budgets in an Uncertain Security Environment^[9].

For investors, this environment presents both risks and opportunities. Russian defense sector equities, while benefiting from state subsidies exceeding 700 billion rubles annually, face long-term headwinds due to inefficiencies in the military-industrial complex Russia’s Military Industry Forecast 2023-2025^[10]. Conversely, Western defense firms—particularly those supplying advanced systems to NATO members—stand to gain from sustained demand. The U.S. and European defense industries, for instance, are poised to capitalize on modernization programs and technological innovation, which contrast sharply with Russia's reliance on war financing and external support (e.g., North Korean ammunition) Preparing for a Fourth Year of War: Military Spending in Russia’s Budget 2025^[11].

Strategic Implications for Investors

The key takeaway for equity investors lies in the divergence between Russia's conflict-driven spending and the more sustainable, innovation-focused strategies of its adversaries. While Russia's military budget may appear robust, its economic model is inherently fragile. As FPRI analysts note, the Kremlin is unlikely to reduce defense spending, as the military-industrial complex has become a political and economic linchpin Russia’s Military Industry Forecast 2023-2025^[12]. This creates a paradox: high short-term demand for Russian defense goods coexists with long-term economic instability and reduced growth potential.

In contrast, global defense equities—particularly those in Western markets—are benefiting from a more diversified and technologically driven spending environment. Companies involved in next-generation systems (e.g., AI, cyber, and hypersonic defense) are likely to outperform, given the strategic emphasis on asymmetric warfare and deterrence.

Conclusion

Russia's 2025 defense budget underscores the country's deepening entanglement in a war economy, with profound implications for global security and equity markets. While Russian defense firms may see near-term gains, the structural weaknesses of its military-industrial complex and the broader economic strain pose significant risks. Conversely, the global defense sector—driven by NATO's rearmament and technological innovation—offers a more resilient investment landscape. For investors, the path forward lies in hedging against Russia's volatility while capitalizing on the growth of Western defense industries.