Crafting the Russian War Economy

Russia’s 2022 invasion of Ukraine came as a surprise to the world. What many analysts thought before the invasion was a grand bluff has two years on become a full-blown conflict with seemingly no end in sight. It is increasingly evident that Russia was not prepared for a protracted war. The Russian government was also caught off guard initially by the scale of the sanctions and export controls that the United States and its allies imposed on Russia. The Russian defense industry was cut off from supplies of a range of critical components required to produce various platforms and munitions, just as demand for these weapons increased to replenish stocks depleted by wartime use. Beginning in 2022, Russia’s defense industry went into overdrive to ramp up production, with requirements significantly exceeding initial expectations because of the scale of the Russian military’s losses on the battlefield in Ukraine.

This report examines one aspect of the military industry’s shift to a war footing—the extent to which it has been able to shift supply chains to maintain the production of weapons in the face of its most significant prewar foreign suppliers introducing export controls on critical components. The report focuses on three strategies that the Russian government and defense industry have used to alleviate the effects of export controls on Russian military production. These strategies include the following:

• Import substitution, which encompasses efforts by the Russian defense industry to replace sanctioned Western products with domestic counterparts
• Parallel import, which involves the import of sanctioned Western products through third countries that have not implemented sanctions against Russia
• Foreign cooperation, which entails imports of foreign military and dual-use technology produced in friendly countries and, in some cases, joint projects with those countries’ defense industries

How these three strategies have been implemented by Russian defense industry can be seen through an in‑depth examination of how Russia is compensating for export controls on two types of components that are critical for the continued functioning of Russia’s military industrial complex: microprocessors and machine tools. The report concludes with an examination of how the combination of constraints and compensation strategies has worked in two key sectors of Russian military production. In the case of precision-guided missiles, export controls have served to constrain production but not curtail it entirely. In the case of uncrewed aerial vehicles (UAVs), Russia has been able to use a combination of parallel import and foreign cooperation to increase the rate of production while setting up its domestic industry for potential import substitution in the future.