Military Keynesianism 2.0: The collapse of civilian-sector investment will lead to a fall in incomes and private consumption

Investment turnaround

In its recently updated forecast, the Russian government has sharply lowered its investment projections for 2026 and subsequent years. In the first half of the year, investment fell by almost 10% compared with the first half of 2025, meaning that the government was only narrowly ahead of the curve in revising its current forecast, which had envisaged a decline of just 1.5% for the year as a whole. In May, when this forecast was drawn up, government officials were keen to argue that the current investment pause was a natural phenomenon following the investment boom of previous years.

The first-quarter decline of 14% was attributed to ‘volatility’ and the previous year’s high base. The first quarter does indeed normally account for only around 15% of annual investment, so even very poor results in the first quarter can be diluted by volumes in subsequent periods. On this logic, the government's May forecast for the current year, at –1.5%, was more favourable than the previous year's actual result, at –2.3%. The government believed, or pretended to believe, that this was a correction, a cooling of the investment fever of previous years, a view of the Russian economy that President Putin has also promoted. However, the half-year data, although somewhat better than the first-quarter figures, leave no doubt that the front of the investment downturn is broadening and that the decline is structural. A 10% fall over the first half of the year is not merely a cooling-off.

The 2021–2024 investment boom was indeed impressive in scale. More generally, Russia's investment history over the past three decades comprises three clearly defined periods. First came nine years of powerful investment growth, from 1999 to 2008, when average annual growth was 13.4% and investment in 2008 was 3.3 times higher in real terms than in 1998. This was followed by 12 years of near-total stagnation: from 2009 to 2020, average annual growth was less than 1%. A new investment boom began before the war, in 2021, as the economy emerged from the Covid pandemic, and continued for four years, with investment growing at an average annual rate of 8.4%.

Figure 1. Fixed investment dynamics, 1999–2026, %

The turning point came in the second quarter of 2025: investment began to decline and has remained on this trajectory for five consecutive quarters. The longest run of consecutive investment declines in the past 28 years, lasting nine quarters, occurred in 2014–2016. The second-longest episode, which followed the global financial crisis of 2008, lasted six quarters, from 2008 to 2010. The current investment pause will certainly surpass it in duration. In terms of scale, the current investment downturn is also striking. A decline in investment of more than 10% has occurred only five times since 1998: in the first three quarters of 2009 and in the second and third quarters of 2015. The first quarter of 2026 has now joined that list.

The 2021–2024 investment boom should therefore now be viewed as a concluded historical episode. For the 12 years preceding it, investment had been unable to break through an invisible ceiling of around 21.5 trillion roubles in 2021 prices, which was finally breached in 2021. Over the following four years, investment increased by 37.9% in real terms. Of the 85 non-overlapping industries and types of economic activity in the Russian classification of economic activities, real investment increased in 70, while in more than half of them, 36, average annual growth exceeded 10%. However, the notion that after such an investment surge the economy can now simply take a pause is not merely incorrect. It also obscures a crucial mechanism through which a wartime economy moves from a period of rapid growth to stagnation and decline.

Deconstructing the boom

Although the 2021–2024 investment boom was broad-based and, one might say, affected almost the entire economy, it was also highly uneven. Within the broad swathe of investment growth, a group of nine industries and types of activity stands out. Their economic weight and high growth rates meant that they made the largest contribution to the boom. They accounted for 11.3 trillion roubles of the 19.5 trillion roubles increase in investment in nominal terms, or almost 60% of the total.

Table 1. Leaders of the 2021–2024 investment boom

This group of leading sectors comprises several clearly distinguishable clusters. First and foremost is the chemicals cluster, namely the manufacture of chemicals and chemical products, where growth began before the war. In 2021, real investment in the chemical industry had already increased by 8.5%, while in 2023–2024 annual growth reached as much as 45%. This was driven to a significant extent by a group of major projects, including the Amur Gas Chemical Complex, the Ust-Luga complex and the Irkutsk Polymer Plant, followed later by DGP-2 in Tobolsk. These projects were launched as early as 2020–2021 and rely not only on corporate funding but also on substantial state support. For example, the maximum amount of National Wealth Fund financing available to the Ust-Luga complex was set at 900 billion roubles, while other projects benefited from investment incentives, including reverse excise tax mechanisms and refundable tax deductions.

Interestingly, during the pre-war phase of the boom, in 2021, investment in the top nine sectors grew more slowly than in the rest of the economy. By 2022, however, the top nine had increased investment by 13.2%, while the rest of the economy cut investment by 1.3%. This initial upswing did not yet reflect the needs of military production, but rather the response to the sanctions shock and the associated large-scale restructuring of trade flows. In 2022, investment rose rapidly in warehousing activities (+9.1%), land and pipeline transport (+17.1%), engineering design (+32.7%) and building construction (+23.8%). To a large extent, these were forced investments, driven not by growth in economic output but by the need to create parallel logistics infrastructure along new trade routes (→ Re:Russia: Forced Boom).

Another component of the investment boom, construction and real estate, was also not directly related to the war. It was driven both by infrastructure restructuring and by the large-scale preferential mortgage programme, launched in April 2020 as an anti-crisis measure and operating until 1 July 2024. Thanks to state subsidies, the programme made it possible to mobilise significant volumes of bank credit, totalling around 6.2 trillion roubles, as well as households’ current income, through down payments, and future income, directing these resources towards property developers. According to the Bank of Russia’s estimates, at their peak, the preferential mortgage programmes increased investment in residential real estate by around 10%, while simultaneously raising prices in the primary housing market by around 20%.

The 3.8-fold increase in investment in the software development sector was a consequence of the unsuccessful attempt to achieve import substitution in this area. Real investment grew by 37% annually, while the nominal volume of investment increased from 111 billion roubles in 2020 to 633 billion roubles in 2024. The military component of the investment boom emerged in 2023–2024. In the three industries most heavily oriented towards military production, namely ‘fabricated metal products’ (All-Russian Classifier of Economic Activities, known by the acronym OKVED, 25), ‘computer, electronic and optical products’ (26), and ‘other transport equipment’ (30), real output recorded anomalously high annual growth rates of 20–40%, averaging 23%. This increase in output was supported by a surge in investment over two years: 54% and 24.8% in fabricated metal products, and 33.6% and 58.3% in computers and optical products, respectively. In ‘other transport equipment’, which includes tanks, infantry fighting vehicles and, above all, drones, the investment surge began in 2024 (+19.9%).

Across the top nine sectors of the investment boom, cumulative investment growth was almost 45%, equivalent to around 10% annual growth. In the rest of the economy, it was almost half as high, at 26% overall, or 6% a year. The clustering is even more pronounced in manufacturing. In 2024, the nominal increase in investment compared with 2020 amounted to 3.37 trillion roubles across manufacturing industries. The three military industries accounted for 686 billion roubles, or 20% of total investment in manufacturing, while the chemical industry accounted for 1.3 trillion roubles, or 39% of the total increase in investment in the sector. This brings us to one of the key features of the investment boom: the high concentration of growth in the ‘major’ leading sectors means that, in a significant number of sectors and industries, there was no real boom at all. In 2021–2024, real investment across manufacturing as a whole increased by 46.5%. But if we exclude the industries listed above with a high share of military production, together with the chemical industry, all other industries accounted for only around 11.7% real growth over the four years, equivalent to 2.8% annual growth. Most manufacturing industries did not experience an investment boom in 2021–2024, and the economy-wide figure of 39.7% growth in investment bears little relation to their experience.

Table 2. Breakdown of investment growth rates in 2021–2024, %

Recovery from the downturn

From the second quarter of 2025, investment entered a downward cycle, falling by 2.3% in real terms over the year as a whole. The main downward pressure came from logistics. Investment in land and pipeline transport fell by 32.8%, while investment in warehousing and support activities for transportation declined by 31.4%. The intensive phase of the forced restructuring of trade routes is now largely over. This does not mean a complete halt, as the third stage of the development of the Eastern Polygon continues, but the scale of investment has fallen sharply. As a result, the previous top-nine group effectively split into three parts in 2025. The two logistics industries, OKVED 49 and 52, together accounted for a 1.47 trillion rouble decline in investment; three sectors continued to experience an investment boom, namely real estate, chemicals and electricity generation and supply, contributing 2.4 trillion roubles of additional investment; while the boom weakened in the remaining sectors.

This clustering is characteristic of the economy as a whole. In addition to real estate, chemicals and electricity generation and supply, the core of investment growth in 2025 included building construction, other transport equipment, where investment in drone technologies was booming, increasing by 60% in real terms over the year, metal ore mining, reflecting a number of major gold and copper mining projects, and food manufacturing, the only consumer-oriented industry in the core group. Together, these sectors contributed around 5 percentage points, or approximately 77%, of the total positive sectoral impulse, estimated at 6.5 percentage points.

In addition to the two logistics sectors, the core of the downturn includes telecommunications, construction of engineering structures, and education. The two logistics industries accounted for –5.2 percentage points, or more than 60% of the total negative sectoral impulse, while the other three contributed a further approximately –1 percentage point, or around 15% of the total negative impulse. The remaining 73 industries and types of activity account for around half of total investment. In 2024, this broad intermediate group was still growing by 6.8%, with growth recorded in 59 of the 73 industries. In 2025, the picture reversed: only 31 industries grew, while 42 contracted, and the group's aggregate performance turned slightly negative, at around –1.5%.

According to Rosstat data, investment in manufacturing increased by as much as 10% in 2025. However, as during the boom, this figure is extremely misleading. The chemical industry continued to make an enormous contribution to the sector's investment growth, reflecting the ongoing construction of major complexes, while predominantly military industries also made a substantial contribution. Excluding chemicals, investment growth in the rest of manufacturing immediately falls to 2.7%; excluding the predominantly military industries as well, it turns negative, at –2.3%.

Thus, logistics dealt a powerful blow to the investment boom in 2025, while across a broad range of industries the previous growth either faded or turned into contraction. At the same time, within a narrow core of growth, the investment boom not only continued but intensified. Although this segment was not large enough to keep overall investment out of negative territory, it substantially improved the aggregate result. Outside this core, the decline in investment in the Russian economy was already in the range of 5–6% in 2025.

Data for the first half of 2026 points to a new phase of the investment downturn. Rosstat reports investment in two formats: based on direct reporting by enterprises, where the decline amounted to 11.7%, and including estimates for small enterprises and investment not captured in reported data, where the decline in the first half of 2026 is estimated at 9.9%. The downturn is becoming broad-based: investment is declining in 14 of 18 major industry groups. Manufacturing is down 13.5%, mining 8.8%, transport 11%, wholesale and retail trade 30.6%, information and communications 22.8%, professional, scientific and technical activities 24%, and education and healthcare by around one-third.

In 2025, the growing major sectors still offset around two-thirds of the gross negative impulse. In the first half of 2026, the group of stabilising sectors narrowed sharply. Chemicals are still growing, but by only 3%: the long-running chemical investment cycle is not yet over, but its momentum has weakened substantially. Other transport equipment recorded investment growth of just 8.7%, even though output in the sector continues to grow at anomalously high rates. Investment in metal ore mining is still expanding (+19.6%), as is investment in electricity, steam and water distribution (+14.2%), as well as in public administration, military security and social security (+28%). If these five stabilising sectors are excluded, investment in the rest of the economy is already declining by around 17.3%, rather than 11.7%.

In the extractive sector, investment is falling by 8.8% despite continued growth in metal mining. This is primarily due to an 11.3% decline in investment in oil and gas extraction, together with a deepening downturn in coal mining (–38.2%). But the particularly sharp downturn is once again evident within manufacturing. According to Rosstat, investment is declining by 13.5% in real terms, but excluding the chemical industry and the ‘military group’ (OKVED 25, 26 and 30), the decline in the remaining industries is already more than 25% (Table 3). Among the major industries in this group, investment in electrical equipment is down 50.6%, machinery and equipment 31.9%, metallurgy 27.2%, non-metallic mineral products and rubber and plastics around 19%, and food products 13%.

Table 3. Structure of investment activity in the manufacturing sector, 2021–2026, %

Overall, the narrow consumer-oriented segment, comprising food, beverages, light industry, cars, furniture, retail, hotels and catering, grew substantially more slowly than the economy as a whole during the boom: by around 17% in real terms in 2021–2024, compared with 38% for the economy as a whole. In 2025, it still grew by around 7%, largely thanks to food. This measure does, however, exclude an important component: investment in the production of household appliances and consumer electronics, which is subsumed under electrical equipment and computer and optical products. Their share of manufacturing is nevertheless small, at around 0.3%, so the estimate given is unlikely to be significantly revised.

At the same time, the consumer sector is particularly vulnerable during the downturn, despite relatively strong demand, because it lacks state support and investment is highly sensitive to the profitability of production and the cost of credit. As a result, its sensitivity to rising tax burdens is also greater, alongside its sensitivity to interest rates. Following relatively modest growth during the broader boom and still-positive growth in 2025, its estimated decline in the first half of 2026 is around 20%. Investment is falling in food manufacturing (–13%), beverages (–13.9%), textiles (–33.5%), leather and footwear (–41.1%), car manufacturing (–8.9%), car retailing (–19.9%), retail trade (–35.2%), and hotels and catering (around –15.5%).

Military Keynesianism 2.0

Investment in the economy is an indicator of future growth, which is why it is so important to interpret the onset of a new phase of investment decline, which we are observing based on the results of the first two quarters of 2026. As this analysis shows, claims by Russian officials that the decline in investment activity is less concerning against the backdrop of the preceding investment boom obscure the real problem. The investment boom and the downturn now under way are not mirror images of one another. Some of the decline does indeed reflect the completion of earlier investment cycles, above all in logistics. But a much broader downturn is affecting industries that grew more slowly than average even during the boom. As a result, for a number of industries, particularly those in the consumer sector, the rates of decline observed in 2026 will mean a return to their pre-boom starting point, and in some cases investment will fall below it.

The term ‘military Keynesianism’ has become popular in relation to Russia's recent brief military-economic boom, from the second quarter of 2023 to the fourth quarter of 2024. In fact, the concept was originally developed as a framework for economic policy in relation not to wartime but to post-war periods. The idea is that, in conditions of weak private demand, employment and output can be sustained by expanding military production, which in turn sets a normal cycle of economic growth in motion. John Maynard Keynes himself, however, described two standard phases of a wartime economy in How to Pay for the War (1940). In the first phase, when spare capacity and labour are available, an increase in government spending raises output. Unlike in peacetime, the state cannot regulate demand from the military sector during wartime: it is dictated by the needs of the front. But as the economy approaches full employment and full capacity utilisation, further expansion of military demand no longer generates a corresponding increase in output. At this point, the state begins to compete with the private sector for labour, raw materials, equipment and, more broadly, investment, which is diverted from the private to the public sector.

Keynes argues that the civilian sector will ultimately pay for the war through lower consumption and investment. In particular, if investment flows from the private to the public sector, an inflationary gap emerges: the incomes of people working for the war effort rise, but civilian industries, drained of resources by the state, cannot respond by increasing output. The only question is how civilian consumption will be reduced: through inflation, taxation or the freezing of savings.

An analysis of the structure of Russia's 2021–2024 investment boom shows that investment was concentrated in a limited group of industries, not all of them military. Some absorbed household savings through preferential mortgages, but this proved too costly for the state. Overall, consumer-cycle industries received substantially less investment than the economy-wide average, creating a gap between rising household incomes and output. Russia's economy remains caught in this dynamic. Investment is still growing in a number of sectors, reinforcing the contraction elsewhere in the economy. Government spending continues to rise, as does the fiscal burden on the civilian economy, against a backdrop of high borrowing costs. The government has virtually no instruments available to halt the decline in investment in the civilian sector. The widening investment gap is a contribution to a future inflationary gap and, therefore, to a future reduction in household consumption, which will take one form or another.