Russia's War-Driven Economy: Assessing the Resilience of State-Owned Enterprises Amid Resource Constraints

The Russian economy, once buoyed by a surge in wartime spending and resource exports, is now showing signs of strain as the war in Ukraine enters its fourth year. With oil revenues declining and Western sanctions tightening, Moscow faces a critical juncture in its fiscal strategy. This article examines how state-owned enterprises in the defense and energy sectors are adapting to a resource-constrained environment, and what this means for investors navigating the risks and opportunities in these markets.

Energy Sector: A Dwindling Lifeline Amid Strategic Adaptation

Russia's energy exports, the backbone of its wartime economy, have faced mounting headwinds. In May 2025, monthly fossil fuel revenues dropped 3% to €565 million per day—the lowest since the invasion began—despite a 4% increase in export volumes. The culprit? A global slump in oil prices and the enforcement of a G7+ price cap on Russian crude, which has eroded margins. The Urals benchmark traded at a 15% discount to Brent crude in May, while the Sokol blend saw a 6% price drop.

To mitigate these losses, Russia has accelerated its pivot to Asia, with India's Russian oil imports hitting a record 3.74 million tonnes in May. However, this shift is not without costs. The reliance on "shadow" tankers—uninsured vessels often registered under flags of convenience—has increased operational risks, including environmental liabilities and geopolitical scrutiny. Meanwhile, the EU's proposed price cap cut of $45 per barrel could slash revenues by 27% in 2025, further straining the state budget.

For energy state-owned enterprises like Rosneft and Gazprom, the challenges are twofold: navigating sanctions while maintaining export competitiveness. Rosneft's recent acquisition of Indian-linked tankers highlights its efforts to secure shipping capacity, but the collapse of a key partner in 2023 due to insurance and certification issues underscores the fragility of these workarounds. Gazprom, meanwhile, faces dwindling European demand as TurkStream gas exports fell 21% in Q2 2025. The company's pivot to LNG exports via the Northern Sea Route remains a critical but costly strategy.

Defense Sector: Military Keynesianism and the Cost of Resilience

The defense sector has become the anchor of Russia's wartime economy, with the 2025 federal budget allocating 13.2 trillion roubles ($132 billion) to national defense—a 22.2% increase from 2024. This spending, part of what analysts call "military Keynesianism," has been funded by oil revenues, state-backed loans, and fiscal stimulus. Key players like Rostec and Almaz-Antey are expanding production of drones, artillery, and air defense systems, supported by government contracts and import substitution programs.

However, this model is not without cracks. The defense budget's opacity—85% of funds are unallocated to specific projects—raises questions about efficiency. Additionally, the sector's reliance on state subsidies has exacerbated inflation, forcing the Central Bank to raise interest rates to 21%. For investors, the risk lies in over-reliance on government funding and the lack of diversification. While Rostec's drone production has surged, its exposure to sanctions on Western components (e.g., microchips, software) could limit long-term scalability.

Fiscal Strategy and Long-Term Viability: A Double-Edged Sword

The Russian government's fiscal approach—prioritizing defense and energy spending while cutting social programs—has stabilized the economy in the short term. Real wages have risen by 8.7% in 2024, and GDP growth of 3.6% in 2023 defied expectations. Yet, this growth is uneven. The defense and energy sectors are expanding, while manufacturing and services lag. The National Wealth Fund, now a key tool for financing the budget deficit, is projected to inject 7.3 trillion roubles in 2025, but its reserves are dwindling.

For investors, the key question is whether this model can endure. The war's human and economic toll, combined with demographic challenges (Russia's population is projected to decline by 10 million by 2050), suggests that long-term sustainability is in doubt. Energy companies like Gazprom and Rosneft remain vulnerable to price volatility and sanctions, while defense firms face the risk of technological stagnation.

Investment Risks and Opportunities: Navigating a Volatile Landscape

Despite the risks, opportunities exist for those willing to take a measured approach. In the energy sector, companies with strong ties to Asian markets—such as Rosneft—could benefit from long-term demand, though investors must weigh geopolitical risks. Defense-linked equities like Rostec may see short-term gains from government contracts, but their exposure to sanctions and inflation makes them high-risk, high-volatility assets.

For a more cautious strategy, consider indirect exposure through commodities or infrastructure funds. The energy transition also presents an edge: Russia's pivot to LNG and Arctic shipping could create niche opportunities in logistics and energy infrastructure, though these remain speculative.

Conclusion: A War Economy at a Crossroads

Russia's state-owned enterprises in defense and energy have demonstrated remarkable resilience, but their long-term viability hinges on Moscow's ability to adapt to a shrinking resource base and a shifting global order. For investors, the path forward requires a balance of caution and strategic insight. While the war-driven economy has proven durable, its future depends on factors beyond Russia's control—energy prices, sanctions enforcement, and the trajectory of the war itself. In this uncertain landscape, due diligence and flexibility will be paramount.