Military Post-Keynesianism: Sustaining high growth rates in the military sector is now only possible at the expense of the civilian sector

The surge in industrial output observed in October, when year-on-year growth reached 3.1%, is unlikely to be repeated in November, according to high-frequency data from the Central Bank and business sentiment surveys. In particular, industry failed to take advantage of the opportunities created by the lifting of restrictions on oil production. Marketing difficulties led to a decline in output in November following growth in October.

As a result, at the end of the year industry is likely to remain on the trajectory observed for most of the year, characterised by a split of the industrial sector into two segments. One is a rapidly growing segment of industries linked to military and military-adjacent production, while the other is a civilian segment that has entered a recession.

Despite the October spike, in October 2025 as many as 70% of industrial industries and sub-industries showed year-on-year declines, while only 20% recorded growth. Although the aggregated industrial result points to modest growth of around 1% compared with last year, in reality this reflects two opposing trajectories. While industries in the first segment are posting abnormally high growth rates, conditions across the rest of industry are better described as crisis-like. The 20% fall in automotive output is a vivid indicator of this crisis profile.

Some economists argue that lowering the key policy rate is necessary to correct the situation. However, the picture is more complex. Generous budgetary funding for the expanding military sector makes a substantial contribution to the budget deficit and acts as an inflationary factor in the economy. To limit this impact, the Central Bank keeps the key rate at a high level. The flow of budgetary resources that drives extreme growth in military and military-adjacent production, and the shortage of funds that contributes to the contraction of the civilian sector, are communicating vessels.

In other words, the period of growth associated with budgetary expansion and the impulse from the military sector in the second half of 2023 and in 2024 has been replaced by a period in which maintaining high growth rates in the military sector is possible only by suppressing growth in the civilian one.

The October surge and 2025 trend

In October, Russian industry unexpectedly recorded growth of 3.1% compared with October 2024, although over the previous nine months annual output growth had failed to reach even 1%, according to Rosstat. Such spikes, however, have become something of a new normal (see Figure 1). Unlike the previous surge in May to June, this time growth was seen not only in manufacturing, up 4.5% year on year, but also in the extractive sector, which had been contracting steadily throughout the year, more sharply in the first quarter and less so in the third. The October increase in extraction is explained in part by higher oil output following the lifting of restrictions under the OPEC+ agreement. The cartel's latest review notes that Russia increased production by 46,000 barrels per day.

As for the jump in manufacturing, according to CMASF calculations, two-thirds of the growth was generated by sectors dominated by defence-industrial output. An additional factor was the recovery of oil refining, which had fallen by 5% in August and September compared with 2024 levels and has now returned to normal output volumes. Finally, one-off factors include a sharp jump in pesticide production, up 20% year on year, which was most likely the result of the opening of a new production facility by the EuroChem holding company. Nevertheless, the main substance of growth continued to come from traditionally strong military industries, notably the production of 'other transport equipment', up 41%, and 'fabricated metal products', up 19%.

The October acceleration did not, however, mark a turning point. High-frequency data for November show a more restrained picture for output and demand, according to the latest issue of the Central Bank’s review ‘What the trends are saying’. Industry also failed to fully exploit the potential for further increases in oil production. Although Russia has not yet fully utilised its quota, new sanctions against Rosneft and Lukoil and the resulting marketing problems (→ Re:Russia: Oil Prices Have Fallen)have led to a decline in oil output in November. According to the latest report by the International Energy Agency. Finally, the industrial optimism index of the Institute of Economic Forecasting of the Russian Academy of Sciences, which recorded its strongest rise since the start of the year in October, also returned to September levels in November.

In short, preliminary November data suggest that by the end of the year the industrial sector is likely to remain within the trajectory it has followed for most of the year. As shown in Figure 1, Rosstat’s overall industrial indicators in 2025 displayed a volatile pattern but no clear upward trend in output. At the same time, the dynamics of indices for civilian industries, that is industrial output excluding sectors dominated by military production, calculated by CMASF and the HSE Centre for Development, fall into three distinct phases. These are a recovery phase from early 2023 to March 2024, a period of stagnation slightly above pre-war levels for most of 2024, and a contraction throughout 2025, as a result of which output dynamics revert to 2023 levels.

Figure 1. Dynamics of industrial production overall and of 'civilian' industries, 2021–2025, seasonally adjusted, 100 = average monthly value in 2021

Two industries

The division of Russian industry into two segments has become the defining trend of 2025. One segment is growing, predominantly military in nature and financed directly from the budget. The other is contracting, civilian, and suffering from an acute shortage of credit.

At the level of individual industries and sub-industries, this split is extremely clear. For example, the 33% growth recorded in the 'other transport equipment' sub-industry over the first ten months conceals two opposing dynamics. On the one hand, there has been a sharp increase in the production of aircraft, that is drones, which rose by 64% in January to October. On the other hand, there has been a deep decline in railway engineering, down 21%. While drone production is advance-funded from the budget, investment programmes in railway transport are being scaled back. According to a CMASF review, fixed capital investment in rail transport fell in the first half of 2025 by 27% in the freight segment and by 48% in passenger transport.

Output in the production of 'fabricated metal products' rose by 16% year on year over ten months. However, this result reflects a 30% increase in the production of 'fabricated metal products not elsewhere classified', which is military output, alongside a deep decline in other parts of the sub-industry. Output fell in 'metal structures for construction' by 6.8%, in 'metal tanks and reservoirs' by 19%, and in metal processing by 13%.

Figure 2 shows the gradual spread of the downturn across industrial sub-industries over the past year. Of the 123 industries and sub-industries for which Rosstat regularly publishes data, in October 2024 contraction was observed in 24 segments, eight were stagnating, and 91 were growing. The ratio of contracting to expanding sectors was 20 to 74%. By March 2025, almost 60% of segments were contracting compared with the previous year, while only 30% were growing. By October 2025, growth persisted in seven industries and 18 sub-industries, or 20%, while 86 industries and sub-industries, or 70%, were in decline.

Figure 2. Distribution of industrial sub-industries by categories 'growth', 'stagnation' and 'decline', 2024–2025, %

At the same time, within the narrow zone of growth, which in addition to military production also includes medical and pharmaceutical manufacturing, apparently reflecting the need to provide care for a vast influx of wounded, output growth rates are extremely high. These gains are offset by a broad-based contraction across the civilian sector, allowing industry as a whole to post near-stagnant but still positive growth rates.

Sub-sectors with annual growth rates of over 110% in January-October 2025

Growth due to decline

Russian industry is on the borderline between stagnation and decline, according to analysts at CMASF in their November review. However, such a characterisation seems inadequate in the current circumstances. An 'average temperature in the hospital' is unlikely to be informative when different factors are affecting the 'patients' in opposite ways, widening the gap between their outcomes.

If the military part of the industrial sector is experiencing a zone of abnormal growth, the remainder is largely in a crisis-like condition. For example, motor vehicle production, which last year showed output growth of almost 20%, is now contracting by more than 20%. Such a reversal in a key consumer-sector industry would normally point to a large-scale economic crisis. It is precisely during periods of crisis that interest rates have previously reached the levels at which they have stood over the past year. More broadly, during the 2015 crisis, when the economy contracted by 2% following the fall in oil prices, around 40% of industrial industries and sub-industries were in decline, while roughly the same number continued to expand. Today, as we can see, the zone of contraction is significantly wider, reflecting the degree of macroeconomic imbalance in the Russian economy.

Business climate indicators for industry, calculated by the Central Bank on the basis of enterprise surveys, also display a crisis profile. For the economy as a whole, the actual value of the index, excluding expectations, stood at -5.48 in August to October, well above the crisis low of -9.60 recorded in August to October 2015. However, for the industrial sector itself, the value over the past three months, at -7.16, is almost identical to the -7.26 points seen in August to October 2015.

In a review of systemic and macroeconomic risks, CMASF analysts warn that leading indicators point to a high probability of recession over the coming year. The main factor increasing recession risks, they argue, is the prolonged maintenance of high interest rates, implying that a reduction in the policy rate would be needed to mitigate these risks.

The situation, however, is more complex. Generous budgetary funding for the expanding military sector makes a substantial contribution to the federal budget deficit (→ Re:Russia: Where does the road paved with tax manoeuvres lead?), which in turn acts as an inflationary factor in the economy. To offset this impact, the Central Bank keeps interest rates at an exceptionally high level. As a result, the flow of budgetary resources that ensures extreme growth in military and military-adjacent production, and the shortage of funds that drives contraction in the civilian sector, are communicating vessels. In other words, the period of growth associated with budgetary expansion and the military impulse in the Russian economy, so-called military Keynesianism, in the second half of 2023 and in 2024, has given way to a period in which sustaining high growth rates in the military sector is possible only by suppressing growth in the non-military economy and extracting resources from it in favour of the military sector.