news

High oil prices and tax hikes aren’t enough to offset war spending and keep Russia’s budget on track

Source: Meduza

This year’s St. Petersburg Economic Forum turned from a showcase of Russian achievements into a mirror reflecting the problems the full-scale war has created for the country. Officials showed no signs of panic — aside from the usual controlled outbursts. On the contrary, Putin assured investors that the economy was in fine shape and that the slowdown in growth was a deliberate, controlled process. Meanwhile, the budget has begun to feel the effects of the oil price spike and the VAT increase. But the gap in the treasury will still end up larger than the government planned by year’s end. And as the war continues, the economy’s structural problems will only deepen.

Budget update: the only good news is for the war machine

Russia’s federal budget deficit for January through May reached 6.01 trillion rubles — 2.6% of GDP and one and a half times the full-year target of 3.8 trillion rubles (1.6%). Even so, the pace at which the deficit expanded in May slowed sharply — the first positive trend the budget has shown since the start of the year.

The positive trend is unlikely to last: Russian authorities plan to increase spending this year. Finance Minister Anton Siluanov explained in an interview with the Russian business daily Kommersant that the increase reflects the need to concentrate additional resources on important priority areas.

In recent years, that has meant financing the war and its costs. Spending under the “National Defense” and “National Security” line items already accounts for nearly 40% of all expenditures approved in this year’s budget — 16.8 trillion out of 44.1 trillion rubles — just below the post-Soviet record of 41% set in the 2025 budget.

The spending increase will push the final 2026 deficit above the planned 1.6% of GDP. The government does not intend to cover the shortfall by expanding domestic borrowing — which Siluanov said will stay at 5.5 trillion rubles — or by drawing on the National Wealth Fund, which has shrunk by more than half from its level before the full-scale war. “Reserves are not infinite,” Siluanov acknowledged. The money will come from “budget carry-overs” and from “asset sales and so on,” the Finance Minister said.

“Spending in 2026 will be increased, but only modestly, and the draft budget for 2027–2029 will show a schedule of planned expenditures that does not fall in nominal terms but does fall in real terms over three years,” a leading economist at a Russian analytical center told Meduza. “The goal [facing the Finance Ministry] is probably to produce a [budget] plan that is workable both with the continuation of the war and with its end. With an [escalation of the war], I don’t think there are any scenarios.”

The Finance Ministry plans to lower the cutoff price in the budget rule starting in 2027, which will automatically reduce budget spending. Given the continuation of the war, civilian spending — unrelated to combat operations — will be cut first.

According to sources cited by the Russian business news outlet RBC, the government is discussing lowering the cutoff from the current $59 to $50 per barrel for Russian Urals crude — a move that would leave less oil revenue in the budget and channel more into National Wealth Fund reserves. Specific figures will not be available until the fall, when the draft budget package for 2027–2029 is submitted to the State Duma, the lower house of Russia’s parliament.

Economic update: authorities sacrifice growth to hold down prices — which the war keeps pushing up

The Economic Development Ministry cut its GDP growth forecast for Russia threefold — to 0.4% from the 1.3% projected as recently as September 2025. Growth came in at 0.2% year-on-year for January through April, according to the ministry’s estimate.

Speaking at the St. Petersburg forum, Vladimir Putin called the slowdown “deliberate,” saying the authorities were prioritizing the fight against rising prices: “We don’t want inflation, hyperinflation, to be at 60–70%, like in some countries. We are fighting for the health of the Russian economy as a whole.”

He did not mention that inflation is being driven by massive military spending, which has forced Russia’s central bank to keep its benchmark rate in double digits — currently 14.5%, with the regulator’s next rate-setting meeting scheduled for June 19. Credit remains expensive, and civilian sectors are the first to suffer. If the authorities’ real priority were the “health” of the economy, the obvious first step would be to end the war.

Annual inflation as of June 1 stands at 5.4%. The Economic Development Ministry expects the figure to come in at 5.2% for the full year — the same number Putin cited in St. Petersburg. Russia’s Central Bank, for its part, kept its 2026 inflation forecast in the range of 4.5–5.5% at its April meeting.

The latest industrial data show that growth is being sustained almost exclusively in war-related sectors, while civilian industries contract.

The planned increase in military spending will only widen the gap between the war economy and the civilian economy. The defense industry — producing shells, drones, semiconductors, radar equipment, and the like — is growing rapidly on the back of state defense orders. It is draining resources, including labor, from sectors not directly connected to the war by offering above-market pay, which pushes up wage figures across the country without any corresponding increase in labor productivity. Subsidized loans for defense enterprises are covered preferentially from the budget. Russian Railways prioritizes their freight.

And the demands on resources will only grow. The war machine will keep burning money taken from productive sectors of the economy. Where this dangerous experiment ultimately leads remains impossible to predict.