Russia's Wartime Economic Resilience and Long-Term Strategic Vulnerabilities: Assessing the Durability of a Resource-Driven Economy Under Prolonged Geopolitical Conflict

Russia's invasion of Ukraine has tested the limits of its resource-driven economy, revealing both the resilience of its energy sector and the fragility of its long-term fiscal and demographic foundations. As of October 2025, Russia's fossil fuel export revenues have declined by 4% month-on-month to EUR 524 million per day, the lowest since the invasion began. This decline, driven by Western sanctions and a weaker global oil price, underscores the vulnerability of an economy reliant on hydrocarbon exports. Yet, Moscow has adapted through a combination of shadow fleets, discounted sales to China, and aggressive military Keynesianism. For investors, the interplay of these factors demands a nuanced approach: cautious exposure to energy and defense sectors, while avoiding long-term bets on Russian assets.

Energy Revenues: A Double-Edged Sword

Russia's energy exports remain the cornerstone of its wartime economy. In October 2025, China accounted for 44% of Russia's fossil fuel export revenues, with crude oil making up 63% of its purchases. This shift to the East has offset some of the losses from Western markets, but at a cost. The imposition of a USD 30/barrel price cap would have slashed Russia's oil revenues by 40% since the start of EU sanctions in late 2022. Meanwhile, seaborne refined product exports have plummeted to five-year lows, dropping 500,000 barrels per day in September 2025.

The "shadow fleet" of sanctioned and non-sanctioned tankers has enabled Russia to circumvent Western restrictions, but this workaround is not sustainable. As of October 2025, 44% of Russian crude oil exports were carried by sanctioned tankers, while 18% relied on shadow vessels. The added insurance and financing costs under recent US sanctions on Rosneft and Lukoil have further eroded Moscow's net revenue, widening the discount on Russian crude relative to international benchmarks.

War Financing: Military Keynesianism and Fiscal Strain

Russia's wartime economy has increasingly relied on military Keynesianism, where defense spending drives growth at the expense of social and industrial sectors. The 2025 federal budget allocated 8% of GDP to defense, with nearly all additional state revenues directed to arms production and military salaries. This strategy has kept unemployment low (just above 2%) but has exacerbated labor shortages in key industries, with 1.6 million jobs unfilled.

The Central Bank of Russia (CBR) has cut interest rates from 21% to 16.5% to manage inflation, which remains stubbornly high at over 8%-double the CBR's target. However, real inflation in households often exceeds 20%, creating a growing disconnect between official metrics and lived experiences. To attract soldiers, the government has offered enlistment bonuses of up to 3 million rubles in border regions like Belgorod. These measures, while effective in the short term, highlight the fragility of a system dependent on coercion and incentives.

Social Stability and Demographic Collapse

Social stability is increasingly precarious. Public sector workers, including teachers and doctors, face real-terms wage cuts as their compensation is tied to official inflation rates, while actual inflation far outpaces these figures. Regions reliant on defense manufacturing experience uneven wage growth, deepening regional inequality. Meanwhile, demographic pressures loom large. By 2024, deaths outnumbered births by 600,000, the steepest natural decline since the pandemic. The war has accelerated this crisis, with military casualties exceeding 790,000 and 800,000 young, educated individuals fleeing the country.

Labor shortages are most acute in poorer, non-Slavic regions like Siberia and the North Caucasus, which bear the brunt of conscription. Immigration from Central Asia, once a buffer, has declined due to xenophobic policies and a lack of skilled workers. These trends suggest a demographic collapse that will strain Russia's economy well beyond the war's duration.

Fiscal and Strategic Vulnerabilities

Despite short-term resilience, Russia's fiscal position is deteriorating. Industrial factories operate at just 81% of expected capacity, and the defense sector's dominance has created an overheated economy with demand outpacing supply. The pivot to China, while critical, has entrenched Russia as the junior partner in an asymmetric relationship. China's discounted energy purchases provide a lifeline but do not address Russia's structural weaknesses.

Looking ahead, the combination of fiscal strain, demographic decline, and Western sanctions will likely force a crisis by 2026–2027. The government's refusal to acknowledge demographic data and its reliance on mythologized notions of power further complicate policy responses.

Investment Implications

For investors, the key takeaway is to adopt a cautious, sector-specific approach. Energy and defense sectors offer short-term opportunities as Russia adapts to sanctions and maintains its war effort. However, long-term exposure to Russian assets remains fraught with risk. The country's demographic and fiscal vulnerabilities, coupled with its geopolitical isolation, suggest a trajectory of decline.

Cautious positioning in energy and defense sectors is warranted, given their critical role in sustaining the war effort. However, avoiding long-term exposure to Russian assets is prudent, as the economy's reliance on resource exports and military spending is unsustainable. Investors should also monitor China's role in Russia's economy, as its influence may shift in response to global market dynamics.

In conclusion, Russia's wartime economy demonstrates remarkable adaptability but is ultimately a house of cards. The interplay of energy revenues, military Keynesianism, and demographic collapse will determine whether this resilience endures-or collapses under its own weight.