Russia Has Been Diagnosed With The Military Version Of "Dutch Disease"

• 6.08.2026, 20:10

The Russian military and defense-industrial complex are draining resources from the civilian economy, leading to its decline.

The shift of the Russian economy toward a war footing has led to a surge in earnings but has not improved its efficiency. The current situation is somewhat similar to the oil boom of the 2000s, which generated rapid income growth without a corresponding increase in labor productivity, notes Bloomberg, describing the current situation as a military version of “Dutch disease.” Just as oil revenues 20 years ago drew labor and capital into the energy sector, depriving other manufacturing sectors of them, so now the military sector—the army fighting in Ukraine and the military-industrial complex — is siphoning resources from the civilian economy, leading to its decline.

Since the start of the war in 2022, wage growth in Russia has outpaced labor productivity growth by about 5 percentage points, according to Bloomberg Economics. This is close to the figure recorded during the oil boom in the first decade of the 21st century and significantly exceeds the average of 1 percentage point observed between 2009 and 2021.

“The private sector cannot function this way indefinitely,” notes Dmitry Polevoy, head of investment strategy at Astra Asset Management. “When wages grow faster than labor productivity, it inevitably affects profits—and that is exactly what we are seeing now.” Less efficient companies that cannot compete with the public sector on wages are losing workers, Polevoy notes. This is especially true given that, with unemployment at 2%, people leaving the country, and others enlisting in the military, there is nowhere to find additional workers.

Even though it has slowed, nominal wage growth stands at 10–15%; real wages have been rising by about 5% over the past year and a half, and retail spending is even showing an upward trend. At the same time, the economy is stagnating, production is contracting in many sectors, and investment is falling, according to Rosstat data.

The civilian sectors are forced to raise wages to keep up with the military. According to Bloomberg Economics, in 2022, the monthly salary of a contract soldier was roughly four times the average salary in Russia, whereas now it is only twice as high. Ekaterina Vlasova, an economist at Bloomberg Economics covering Russia and Eastern Europe, notes:

The wage boom that helped Vladimir Putin wage the war is becoming one of the main obstacles to its continuation. More generous contract pay may force civilian employers to raise wages, which would once again narrow the pay gap between workers in the military and civilian sectors. This strengthens the economic case for another mobilization.

In Russia, about 30,000 people enlist for the war every month to replace the tens of thousands who have been killed or wounded. And employment in the defense industry has increased by approximately 510,000 people since the end of 2021, reaching 2.8 million, according to estimates by Oxford Economics.

Thanks to payments for military contracts, “death benefits,” high salaries in the military-industrial complex, and wages in the civilian sector that are “trailing” behind them, households have more money to spend, but the supply of goods and services is not increasing accordingly. The excess money fuels inflation and high interest rates.

This creates a vicious cycle, says Tatyana Orlova, an economist at Oxford Economics: labor shortages require an increase in labor productivity through capital investment, but such investment is not growing due to high interest rates, especially outside the military sectors prioritized by the Kremlin, which receive subsidized loans.

The war-induced imbalances leave little room for reallocating the labor force to where it would be most productive, Orlova adds.

The term “Dutch disease” came to describe the situation that arose in the Netherlands after the discovery in 1959 of a massive natural gas field in the province of Groningen. Gas exports led to a strengthening of the national currency, raised the standard of living, and generated increased demand for services. However, non-resource-based industrial sectors suffered and even declined, as the energy sector deprived them of resources—both capital and labor. An additional factor was the loss of competitiveness in these sectors due to the strong currency.