Russian President Vladimir Putin is preparing the country’s economy for a long war in Ukraine.
Military spending and war-related expenditures have already fueled much of Russia’s economic growth this year, helping the country weather the impact of Western sanctions.
Next year, the government plans to increase military spending even more. Outlays will rise by more than two-thirds to a post-Soviet record of over $100 billion, according to data from Russia’s Ministry of Finance. Military spending will hover at more than twice prewar levels until at least 2026, the current budget-planning horizon.
Putin has placed a long-term bet that focusing the economy more squarely on the war will allow Russia to withstand a protracted conflict better than Kyiv and its Western backers.
Wars through history, though fought on the battlefield, have often been won or lost based on which side can muster the money and materials over the long haul. Doubts about financial support for Ukraine grew this week after a congressional budget deal didn’t include a fresh slug of money.
On Thursday, Putin prepared the nation for the shift in production with remarks on the economy. Speaking of military output, he said, “We are increasing production many times over, not by some percent, but by several times.”
The militarization of the economy has propped up industrial production, provided jobs and helped raise wages. The growth it generates, coupled with ample revenues from high global oil prices, means that Moscow can continue to fund the war for now, economists say.
At the same time, the ramped-up defense outlays have fueled imbalances. The country has grappled with surging inflation and a labor shortage. The military spending will do little to raise long-term productivity, economists say.
The government will also need to borrow more to cover the growing war bill. High military spending is diverting resources away from fields such as education and healthcare, which are essential for long-term growth.
“The longer the war lasts, the more addicted the economy will become to military spending, raising the risk of stagnation or even outright crisis once the conflict is over,” said Vasily Astrov, an economist at the Vienna Institute for International Economic Studies.
A Kremlin spokesperson didn’t immediately respond to a request for comment.
The war’s growing footprint in the Russian economy is a sign that the Kremlin expects that it won’t end soon. Both Kyiv and Moscow have shown little willingness to negotiate and Ukraine’s counteroffensive this year has yielded only halting progress.
The Russian budget figures suggest that “Russia is preparing for multiple further years of fighting in Ukraine,” the U.K. Ministry of Defense said earlier this month. “It is highly likely that Russia can support this level of defense spending through 2024, but only at the expense of the wider economy.”
Putin on Thursday defended the military spending spree, saying that all social obligations are being fulfilled.
“To say that we spend too much money on guns and forget about the butter is not true,” he said.
Russian military expenditures next year will be triple what the state plans to spend on healthcare, education and environmental protection combined, according to the finance ministry data.
As the war becomes one of the main organizing principles of the economy, Russia’s top finance officials, who last year took pains not to mention the conflict as a factor in economic planning, are now openly highlighting its centrality.
“We need this money to solve the most important task: to ensure victory,” Finance Minister Anton Siluanov said about the budget this week.
As a share of gross domestic product, spending on a budget category described by the ministry as national defense will grow to 6% next year, from around 3.9% this year, according to the ministry’s data. That would be the highest level since the demise of the Soviet Union, economists who track the data said.
The budget foresees the government’s debt servicing costs rising to 3.3 trillion rubles, equivalent to $33 billion, by 2026, from 1.5 trillion rubles now.
Booming military spending, meanwhile, is fueling already high inflation in Russia, economists said.
“As military production crowds out the civilian one, the supply of civilian goods and services declines which drives the prices up,” said Sergei Guriev, a professor at Sciences Po in Paris and a former Russian government adviser.
Putin has said that factories are working in several shifts to fulfill military orders. Industrial sectors associated with military production are growing at double-digit rates while output of some civilian goods is stagnating or falling, data shows.
Economic growth has been particularly brisk in traditional military-industrial hubs such as the Sverdlovsk, Chelyabinsk and Kurgan regions and the Udmurt Republic, according to an analysis by the Bank of Finland Institute for Emerging Economies. Construction-sector activity is particularly strong in Russian regions bordering Ukraine, it said, as the army builds fortifications and repairs are carried out after Ukrainian strikes on railways and other infrastructure.
In Tambov, a city south of Moscow, a bread-baking factory is now making drones for the military.
Employees at the Tambovsky Bakery are assembling carbon frames, antennas and camera holders, using 3-D printers to make some of the parts. They then package the quadcopters in camouflage backpacks to be sent to the front, according to the firm’s posts on VK, a Russian social network. The company didn’t respond to a request for comment.
Last month, the bakery tested a new batch of its Bekas drones. Alexander Rudik, the project coordinator at the company, said in an earlier video posted on VK that bread production isn’t affected.
Siberia-based quad-bike maker Ykt-Sokol, whose vehicles are usually used for hunting, carrying logs or crossing lakes, is now supplying them to the Russian army in Ukraine. It is currently working on a government contract for 70 vehicles, the company told state newswire TASS in August. It didn’t respond to a request for comment.
The militarization of the economy has sparked controversy in some quarters.
Several shopping centers in the city of Izhevsk, west of the Ural mountains, have been converted into drone-making enterprises. Local residents signed petitions to protest weapons manufacturing in their neighborhood and a tenant of one of the shopping centers filed a lawsuit for breach of contract, according to the petitions, the tenant’s website and a court document. Aeroscan, the company that has taken over one of the malls, didn’t respond to a request for comment.
In September, Putin visited one of the shopping centers to inspect the drone production.
Write to Georgi Kantchev at georgi.kantchev@wsj.com