Since Russia invaded Ukraine in February 2022 it has caused enormous damage. Thousands of people have died and billions of dollars’ worth of infrastructure has been destroyed in Ukraine. Yet all this damage has come at a relatively mild cost to Russia. As we have reported, its economy is holding up much better than almost anyone expected. And the direct fiscal cost of the war—what it is spending on men and machines—is surprisingly low.
Russia’s budget is murky—especially its military one. So our estimate of what Russia is spending on invading Ukraine is imprecise. However, in consultation with various experts, and using our own analysis, we have come up with a figure. In essence this involved taking the Russian government’s pre-invasion forecast of what it would spend on defence and security, and comparing that with what it is actually spending. That would put the cost of its invasion at 5trn roubles ($67bn) a year, or 3% of GDP.
That is, by historical standards, a puny amount. We compiled estimates of spending on other wars—some involving Russia, some not (see chart). At the peak of the second world war the USSR spent 61% of GDP on the war effort. Around the same time America spent about 50% of GDP on its military forces.
Three reasons explain why Russia is spending so little. The first is political. Many within the Russian government would like to continue to portray the war on Ukraine as a “special military operation”. It would hardly make sense for such an operation to cost a double-digit percentage of GDP.
The second is economic. Russia would struggle to expand the war effort without costing its citizens dearly: printing money would spur inflation, eroding living standards; loading up banks with public debt might have a similar effect; tax rises or a big shift in public expenditure towards defence would also eat into personal incomes. This is a problem for Vladimir Putin, who has presidential elections in 2024. Mr Putin’s victory seems certain, but he does not want the potential embarrassment of large demonstrations, as happened for example in legislative elections in 2011. “Of course, national defence is the top priority,” he said recently, “but in resolving strategic tasks in this area, we should not repeat the mistakes of the past and should not destroy our own economy.”
The third reason relates to defence economics more broadly. Today’s armed forces are far more efficient than the ones of the past. They need ever fewer people and their machines are ever more accurate. The economic theory of “cost disease” suggests that high-productivity sectors tend to command a smaller share of GDP over time (unlike something like health care, which tends to take up a bigger share). Spending a lot less than you did in 1945 can still buy you a powerful army.
