How strong is Russia really? Russia's military-industrial complex is faltering: production is declining

Economic collapse looms: Why Russia's arms industry cannot find employees despite record wages or even has to lay them off

At first glance, Russia's arms industry seems unstoppable: millions of artillery shells, thousands of tanks, and an economy fully geared towards war. But anyone who looks behind the propaganda facade sees a system that is consuming itself.

We receive daily reports about the sheer volume of Russian equipment at the front. With an alleged production of 3 million artillery shells per year and 1,500 battle tanks, the Kremlin appears to be logistically crushing the West in a war of attrition. However, a more in-depth analysis of production data, labor market figures, and stockpiles paints a completely different picture. What looks like an endless industrial might is, in reality, a race against time, driven by the "cannibalization" of Soviet legacies and an extreme dependence on external actors like North Korea.

The reality behind the glossy figures is sobering: when the country's largest tank manufacturer has to lay off employees in the midst of war, when state-of-the-art fighter jets can barely be produced, and when 70-year-old tanks are rolling onto the front lines, the fragility of the system is laid bare. Moreover, the overheated economy, fueled by a dramatic labor shortage and skyrocketing wages, threatens to undermine the very foundations of Russian society.

This report analyzes the structural weaknesses of Putin's war machine. It reveals why current production rates are unsustainable, how dependent Moscow is on Chinese electronics and North Korean munitions, and why 2026 could mark an economic turning point for the Kremlin. Read here why Russia's military strength is based less on innovation and more on the reckless depletion of its last reserves.

Russia's military-industrial complex is under enormous pressure. What superficially appears to be a production miracle, on closer inspection reveals itself to be a fragile system based on the cannibalization of Soviet stockpiles, massive external dependence, and economic overheating. The question of Russia's actual military strength cannot be answered with simple production figures, but requires a nuanced analysis of the structural weaknesses hidden behind the glossy facades of Kremlin propaganda.

When the limits of the war economy become visible

Russia's largest tank manufacturer, Uralvagonzavod, a flagship of the defense industry and part of the state-owned Rostec corporation, announced a comprehensive restructuring program in November 2025. By February 2026, approximately ten percent of the workforce is to be reduced, which, with an estimated 30,000 employees, translates to roughly 3,000 layoffs. Internal sources even report that some departments could lose up to 50 percent of their staff. At the same time, all new hiring has been halted.

This development is remarkable because it fundamentally contradicts the official narrative of a booming war economy. Uralvagonzavod is not just any small supplier, but the heart of Russian tank production. The plant in Nizhny Tagil produces the most modern Russian main battle tanks, the T-90M, as well as the modernized T-72B3M models. If even this company has to reduce its workforce, it points to serious structural problems that go far beyond temporary difficulties.

The company's official explanation cites the optimization of administrative and management expenses. However, military analysts interpret these measures as an indication of a severe funding crisis or a reduction in government military contracts. Russia apparently can no longer afford to operate its arms factories at full capacity. The wave of layoffs affects not only Uralvagonzavod, but also other key plants such as the Ashinsky Metallurgical Plant in the Chelyabinsk region, which has also announced production cuts and staff reductions.

In parallel, official statistics from the Russian agency Rosstat show a dramatic decline in growth rates in war-related industrial sectors. Production of finished metal products, including ammunition and missiles, rose by 31.6 percent in 2024, but from January to October 2025, growth was only 15.9 percent. The situation is even more dramatic for other vehicles, including tanks and armored personnel carriers. After growth of 316 percent in 2024, the increase was a mere six percent in September 2025. Production of computer electronics and optical goods used for military purposes grew by only 13.6 percent, compared to 27.9 percent the previous year.

These figures paint a clear picture: the Russian arms industry has passed its peak. After three years of explosive growth, the momentum is collapsing. This is not a temporary dip, but the result of structural limitations that cannot be easily overcome.

The illusion of mass production

When we talk about the battle for production capacities

At first glance, Russia's arms industry boasts impressive figures. According to NATO, the country produces approximately 250,000 artillery shells per month, which equates to an annual production of around three million rounds. This is roughly seven times more than the combined production of the United States and Europe. Regarding tanks, the Kremlin also proudly announces the production of approximately 1,500 main battle tanks annually. These figures are largely confirmed by Western analysts and create the impression of a functioning war machine.

But behind these figures lies a fundamental weakness that calls into question the entire narrative of Russian production strength. Of the supposedly 1,500 tanks produced annually, only about 100 to 250 are actually new builds. The vast majority, between 1,250 and 1,400 units, come from the modernization and repair of Soviet-era tanks stored in depots. Russia is massively utilizing material that has been stockpiled, in some cases, since the 1970s. This strategy worked remarkably well initially, but now the usable reserves are largely exhausted.

An analysis by the Kyiv School of Economics shows that shipments from Russian military depots have fallen from a peak of 242,000 tons in 2022 to approximately 119,000 tons in 2025. This represents a decline of more than half. High-quality and easily repairable Soviet tanks were mobilized at the beginning of the war. Now, Russia has to rely on T-54 tanks from the late 1940s, a clear indication of the worsening resource shortage. Russian stockpiles are being depleted faster than new ones can be built up.

The central problem is obvious: Russia is losing approximately 258 tanks per month on the Ukrainian front, which equates to roughly 3,100 tanks per year. Even if the official production figure of 1,500 units is accurate, this results in an annual deficit of 1,600 tanks. This structural imbalance is unsustainable. Deliveries of T-90M and T-72B3 tanks have already declined by about 33 percent compared to the winter of 2024, a clear indication that production capacity is under pressure.

In the midst of war: Russia's most important tank factory suddenly plans mass layoffs

Several independent sources report that Uralvagonzavod has initiated a restructuring program with significant staff reductions.

• Internal documents, which are referenced by both the Russian portal E1 and international media, mention a reduction of around 10 percent of the workforce by about February 2026 as well as a hiring freeze.
• With an estimated workforce of around 30,000 employees, this would correspond to approximately 3,000 redundancies.
• Employees also report that cuts of up to 50 percent of jobs are possible in certain areas, which goes far beyond mere administrative optimization.

The company management officially speaks of a "restructuring" and an "optimization of administrative and management costs", but does not deny either the direction or the basic nature of the staff reduction.

Classification of the report

The headline “Mass layoffs” is pointed, but not far-fetched:

• A reduction in staff of approximately 10 percent in a strategically central arms factory in the midst of an intensive war is highly relevant both economically and politically.
• The fact that a hiring freeze is in place at the same time and that cuts of up to 50 percent are being discussed in parts of the workforce reinforces the impression of a deeper structural problem, not just a cosmetic restructuring.
• Uralvagonzavod had already reduced working hours for parts of the civilian sector (four-day week) – a further indication of declining demand or shortages.

Analyses by Western and Ukrainian observers interpret these steps as a sign that

• either government contracts or payments do not flow in the originally expected amount,
• or bottlenecks in components, sanctions and financing slow down the previous high-load production.

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When the pool of available workers dries up

Russia's economy at its limit: Why the country is now running out of workers

The acute labor shortage has become a major bottleneck for Russia's war economy. The unemployment rate, at 2.4 percent, is at a historic low. While this may sound positive, it reflects a dramatic overheating of the labor market. According to estimates by the auditing firm FinExpertiza, there are five job openings for every unemployed Russian, the largest gap in 19 years. Overall, the Russian economy is currently short approximately two million workers.

The defense industry has hired around 520,000 new workers since 2023, yet 160,000 positions remain unfilled. At the same time, several hundred thousand people have fled Russia since the outbreak of war, and hundreds of thousands more are fighting or have been killed. In addition, there was the exodus of approximately one million migrant workers who left Russia in 2024 after the country tightened immigration regulations following a terrorist attack. Furthermore, the weak ruble makes Russia less attractive to migrant workers from Central Asia.

Competition for scarce labor has driven wages up dramatically. Average salaries rose by 19 percent in 2024 compared to the previous year. In the defense industry, the increases were even more drastic. Uralvagonzavod raised salaries by 12 percent in May 2024 and again by 28 percent in August. In the Sakhalin region, recruitment bonuses of up to three million rubles were offered to soldiers, which is equivalent to about 27,000 euros at purchasing power parity and is several times the average annual salary.

This wage spiral is further fueling inflation, which already stood at 10.1 percent in January 2025. Companies in the civilian sector cannot compete with the salaries in the defense industry and are losing staff. The owner of a Moscow restaurant chain reported a 30 percent shortage of workers, a situation he had never experienced in 15 years of business. The consequence is a gradual erosion of the civilian economy, while war production absorbs all available resources.

The dependence on external suppliers reveals weaknesses

Chips from washing machines: The dramatic fall of Russia's high-tech arms industry

Russia's arms production is increasingly dependent on external support, particularly from North Korea, China, and Iran. This dependence is not only economically problematic but also strategically risky.

North Korea has become Russia's most important supplier of munitions since 2023. According to Ukrainian military intelligence, Pyongyang delivered a total of 6.5 million artillery shells to Russia. In 2024, approximately 52 percent of the explosive materials received by Russia originated from North Korea, totaling 250,000 tons. Some Western sources estimate that between 40 and 70 percent of Russian munitions are of North Korean origin.
However, these deliveries are now declining dramatically. Major General Vadym Skybitsky, deputy head of Ukrainian military intelligence, told Reuters that deliveries in 2025 had fallen by more than 50 percent compared to the previous year. In September 2025, not a single shipment of Soviet-era artillery shells from North Korea was recorded. The reasons are obvious: North Korea's own stockpiles are dwindling, and the country cannot increase production indefinitely. Furthermore, Pyongyang is increasingly supplying outdated and low-quality grenades, as its high-quality stocks are depleted.

Russia's dependence on China is also considerable. Approximately 90 percent of the electronics for the Russian defense industry come from China. Over 20 percent of Russian foreign trade is now conducted in yuan. Chinese companies have demonstrably supplied assault rifles, protective equipment, and drone components to Russia, sometimes via intermediaries such as the United Arab Emirates or Turkey. Western sanctions on semiconductors and high-tech components have severely impacted the Russian defense industry. As has been reported on several occasions, Moscow is forced to extract microchips from washing machines to build missiles.

Russia primarily sources Shahed drones from Iran, which are produced in Russia under the name Geran. However, the production line in Tatarstan now operates largely without Iranian involvement, and the latest models are equipped with Chinese rather than Iranian engines. Iran itself is facing increasing difficulties in supplying Russia, as Tehran needs its resources for its own conflicts and financial constraints are making payments for arms purchases more difficult.

When exports collapse and innovation stagnates

From export champion to supplicant: The dramatic decline of the Russian arms industry

Russia's arms industry was once a global export giant. But those days are over. According to data from the Stockholm International Peace Research Institute (SIPRI), Russian arms exports plummeted by 64 percent between 2015–19 and 2020–24. Russia's share of global arms exports fell to 7.8 percent. In 2023, Russia slipped to third place among the world's largest arms exporters for the first time, behind the US and France. The number of recipient countries dropped from 31 in 2019 to just 12 in 2023.

The reasons for this collapse are manifold. Russia has prioritized the production of arms for export to support its own armed forces. International sanctions severely hamper trade, and political pressure from the US and its allies on potential buyers is having an effect. Furthermore, Russian weapons have revealed significant weaknesses in the Ukraine war, undermining the confidence of international customers.

Particularly problematic is Russia's inability to produce technologically advanced systems. The much-lauded Su-57 fighter jet, Russia's answer to the American F-35, is a prime example of this stagnation. By the beginning of 2024, only about 20 production aircraft had been delivered to the Russian Air Force, although a total of 76 aircraft were planned by 2027. Production is sluggish due to a lack of avionics and modern engines. Western sanctions have blocked access to critical components.

Even in the Ukraine war, Su-57 jets are rarely used, presumably for fear of reputational damage should they be shot down. Ukrainian forces damaged at least one or two Su-57 aircraft at Akhtubinsk airbase in June 2024. India, once a potential major customer, has since lost interest in the Su-57 and abandoned the joint development project.

A recent report by the British think tank Chatham House delivers a damning verdict: Russia is currently struggling to build genuinely new and technologically advanced systems. Instead, the country is relying on Soviet legacy systems and research. Despite record-high military spending, the Russian arms industry is in a state of regression. Production will have to be simplified and slowed down in the coming years, while Russia is forced to accept reduced quality and suffers from innovation stagnation.

The priceless model of a war economy

Stagflation instead of superpower

Russia's defense budget for 2025 amounts to approximately 13.5 trillion rubles, which is nominally equivalent to around 130 billion euros. However, due to the significantly higher purchasing power in Russia, this equates to roughly 350 billion euros by Western European standards. This represents about seven to eight percent of Russia's gross domestic product (GDP), more than double what NATO countries aim for. Before the outbreak of war, military spending in 2021 was still at 3.6 percent of GDP.
These expenditures already consume 32.5 percent of the total state budget. This is an enormous burden for an economy that is barely generating any growth. While the Russian economy grew by 3.9 to 4.3 percent in 2024, experts expect growth of only 0.5 to 2.5 percent for 2025, depending on the forecast. Some institutes even anticipate a recession in 2026. The Munich-based ifo Institute forecasts a decline in GDP of 0.8 percent.

The growth of recent years was not the result of productivity gains or innovation, but simply the consequence of massive government war spending. Once this spending can no longer be increased, the model will collapse. The National Wealth Fund, intended to finance budget shortfalls, will be depleted within a few years. The Russian central bank is battling inflation with a key interest rate of 16.5 percent; inflation had already reached 10.1 percent in January 2025. In its risk scenario, the central bank anticipates inflation of 10 to 12 percent in 2026 and negative growth rates in 2026 and 2027.

Economists like Anders Åslund of the Atlantic Council see Russia already on the verge of stagflation: the combination of high inflation and stagnant growth is already a reality. Companies' interest costs are rising sharply, and a wave of corporate bankruptcies is looming. Indebted households could face serious financial difficulties in 2026. The Russian Finance Ministry has repeatedly revised its forecast for the 2025 budget deficit upwards. Putin increased the value-added tax from 20 to 22 percent on January 1, 2026, further reducing real purchasing power.

The Russian war economy rests on three interconnected cycles: a fiscal system that channels roughly 40 percent of the budget into defense, a financial cycle that transforms private deposits into war loans via government bonds with interest rates of up to 18 percent, and an industrial network that binds entire regions to arms production. This development leads to a system of institutionalized hopelessness: growth is based not on productivity, but on government spending and debt. Interest payments already consume eight percent of the budget.

The question of actual strength remains complex

The question of how strong Russia truly is cannot be answered simply. In the short term, the country possesses considerable capabilities, particularly in ammunition production, where it significantly surpasses NATO. The sheer volume of artillery shells produced and the ability to deploy 1,500 tanks annually should not be underestimated. These figures give Russia a certain operational depth that allows it to continue the war in Ukraine.

In the medium term, however, clear cracks in the system are becoming apparent. The depletion of Soviet stockpiles, the drastic decline in production growth rates since the second half of 2024, and the layoffs at key companies like Uralvagonzavod are warning signs. The drastically decreasing dependence on North Korean munitions and the structural labor shortages further exacerbate the situation.

In the long term, Russia's military-industrial complex faces fundamental structural weaknesses. The country is unable to produce modern, technologically advanced weapons systems in sufficient quantities. Innovation is stagnating, dependence on Chinese and North Korean supplies is growing, and the economic costs of the war economy are becoming increasingly unsustainable. A system that spends seven to eight percent of its GDP on military expenditures, while relying on outdated Soviet technology and systematically eroding the civilian economy, is not sustainable.

Russia's military-industrial complex is not faltering in the sense of immediate collapse. However, production momentum is slowing, structural problems are mounting, and the economic limitations of the model are becoming increasingly apparent. Russia's true strength lies not in its capacity for innovation or sustainable production, but in its willingness to mobilize immense resources in the short term, sacrificing long-term economic stability in the process. This is a self-destructive strength.

Markus Becker

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Chairman SME Connect Defense Working Group

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Konrad Wolfenstein

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