Putin Needs War To Keep His Economy Going — Just Like Hitler In The 1930s

-Analysis-

WARSAW — Putin, like Hitler in his time, has two options: Convert the economy to civilian activity, which is likely to create great tensions, or expand the war, hoping that the spoils will alleviate shortages.

Experts disagree on the assessment of the Russian economy. This also applies to Russian experts living outside Russia. Some believe that Russia is coping surprisingly well with Western sanctions, the loss of revenue from oil and gas exports, and the increase in war spending, which accounts for over 40% of the country’s budget. The Russian budget shows a deficit, but it is not excessively large. According to official data, it amounted to 1.7% of GDP last year.

Despite the fact that many European countries have stopped buying Russian gas, Russia still has a surplus in foreign trade, and therefore significant foreign reserves. The ruble to dollar exchange rate, which some experts consider a measure of economic stability, was 70:1 at the end of 2021, and since the invasion of Ukraine began, it has fluctuated from 50:1 in June 2022 to 113:1 in December 2024. It is currently around 80:1.

The International Monetary Fund (IMF) predicts that Russia’s GDP will grow by 1.4% this year, which is not an impressive result. But this does not mean that the global superpower will enter a recession. The most visible symptom of tensions in the economy is inflation, which in 2024 officially amounted to 9.5%, and independent measurements indicate 15-18%.

Yet for an obvious reason, the current state of Russia’s economy should not be compared with other countries. The Russian economy is a war economy, meaning that it operates according to principles other than market ones. And the macroeconomic indicators it achieves result from specific mechanisms that are difficult to maintain in the long term.

Outside market laws

A study of the war economy’s functioning was presented by British historian Adam Tooze in his 2006 book The Wages of Destruction: The Making And Breaking Of The Nazi Economy. Of course, the situation of Russian President Vladimir Putin’s state is in many respects different from German dictator Adolf Hitler’s state. The shift of the economy to war, which began in Germany in 1936, went further there than it did in Russia after 2022.

Russia, unlike Germany, is a country rich in raw materials, which allowed it — and is still allowing it — to achieve surpluses in foreign trade and to acquire foreign currencies. It also receives help from bordering China, while Germany was isolated and had to reckon with an economic blockade and shortages of many basic raw materials and products.

What is common is that in both Hitler’s and Putin’s economies, the allocation of resources is largely carried out not through market mechanisms but through political decisions. Less efficient solutions are chosen, but which are necessary for the war effort. Germany developed the production of motor fuels from coal on a gigantic scale in order to become independent from foreign supplies. The gasoline produced in this way was five times more expensive than that produced from crude oil.

From an economic point of view, this was absurd. But thanks to this technology, Germany’s supplies not only became independent from countries that could potentially be on the side of an unfriendly coalition, but it also saved foreign currencies, which scarcity was a constant problem for the Nazi economy.

Hitler had two options: either switch the economy to peaceful purposes or start a war.

Both Hitler and Putin questioned the geopolitical order they found at the beginning of their rule. They believed that they could only revise it by military means: Putin by occupying the territories of the former USSR and perhaps subordinating the former Warsaw Pact countries; Hitler by conquering neighboring countries and reaching to the east at least the borders set by the Brest Treaty of March 1918. This required a huge rearmament, which Germany started immediately after the Nazis seized power, and which took on a particularly intensive form in the 4-year plan launched in 1936.

The implications of the extraordinary expansion program were explained in detail by Major General Friedrich Fromm, head of the central administrative office of the German army, in a 1936 memorandum. Fromm also described with brutal simplicity the consequences of such a rearmament program for the German economy.

He did not hide the fact that enormous tensions would arise in the economy and that this state could not be maintained in the long term. “Shortly after the end of the rearmament phase, the Wehrmacht must be used, otherwise there will be a decrease in demand or the level of readiness for war. The political leadership must answer the question of whether there is a determined intention to use the Wehrmacht on a precisely determined date,” Fromm wrote in the memorandum.

Hitler’s need for war

At the time the general uttered these words, the German economy, after several years of an intensive armament program financed partly outside the budget by special debt securities issued by the fictitious company Metallurgische Forschungsgesellschaft mbH (MEFO), was severely overheated, deprived of foreign currencies, plagued by shortages of many raw materials and qualified labor, and threatened by an outbreak of inflation.

The Nazis came up with various “creative” methods of financing. As part of the so-called New Financial Plan (Neuer Finanzplan) of March 1939, suppliers of goods and services to the state were required to accept payment for at least 40% of the contract value not in cash, but in the form of a tax deduction. In this way, private companies were crediting the state interest-free, and military spending absorbed almost 20% of GDP.

Hitler had two options in this situation: either switch the economy to peaceful purposes or, as Fromm wrote, start a war, counting on the spoils that would alleviate the shortages. The first option, even if Hitler had been more rational, was extremely difficult. Tank factories are not easy to switch to producing bicycles or pots. Demilitarizing the economy would entail enormous unemployment.

Putin’s same dilemma

Let us now look at the economy of Putin’s Russia. Its growth, albeit rickety, is also fueled by armaments, which consumes about 10% of GDP. Industrial production capacities are strained, unemployment has fallen to a historically low level of 2 to 3%, and it is estimated that between 1.6 and 3.5 million jobs remain unfilled. The influx of workers from Central Asia is limited by xenophobic visa regulations, which increases shortages in professions requiring low qualifications.

Factories in Russia operate on old machines and devices, some of them dating back to the Soviet era. Semiconductor production is about 15 years behind global standards. Even factories producing for military purposes are outdated, forcing the Kremlin to import or illegally smuggle key components. Pre-war import routes for high-tech components such as chips, precision parts, electronics have been disrupted by sanctions. Russia has to rely on “parallel imports,” buying dual-use goods through China, Turkey, the United Arab Emirates, etc. But this is expensive.

Putin, like Hitler in the late 1930s, has two options before him.

Putin’s Russia, like Nazi Germany, is reaching for unconventional ways of financing its military spending, which means that the officially reported small budget deficit is a fiction. The methods of this financing are described by Craig Kennedy, former vice president of Bank of America Merrill Lynch, a specialist in the Russian economy, on his website Navigating Russia.

A secret decree by the Russian government on Feb. 25, 2022, allows the state to demand that banks provide preferential loans to companies supplying military equipment on terms set by the state. The authors of this decree may have been inspired by Hitler’s Neuer Finanzplan.

Two options

As a result, since mid-2022, corporate debt in Russia has increased by 71%, or by the equivalent of $415 billion, which is 19.4% of Russian GDP. This increase in corporate loans is 1.8 times greater than the official defense budget, 1.4 times greater than budget revenues from oil and gas, and as much as 6.5 times greater than the increase in government loans. These debts will be difficult to repay, which could mean a gigantic banking crisis.

In order to prevent uncontrolled inflation, the Bank of Russia raised the key interest rate to 21%. This is a lethal level for companies that do not have access to preferential loans. Even Gazprom is among the companies at risk, taking out large loans on domestic markets, with interest rates of 22% and more, to cover losses caused by the collapse of European exports.

Putin, like Hitler in the late 1930s, has two options before him. He can convert the economy to civilian activity, which will be a very difficult task and will result in a sharp increase in unemployment. Or he can continue to expand the war, counting on the fact that the spoils — Ukrainian nuclear power plants, millions of hectares of fertile arable land, and above all Ukrainian workers, voluntarily or forcibly incorporated into the Russian economy — will alleviate shortages and eliminate some bottlenecks.

As Kennedy says, Putin knows that he is sitting on a ticking bomb of unpaid bank debts, which will explode sooner or later. He has a limited time to end the war but the prospect of demilitarizing the economy is also worrying.