Borrowing from the future How Russia can keep financing its war without running out of money

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Russia’s 2026 budget projected 12.93 trillion rubles ($152 billion) in national defense spending — on paper, less than the 13.5 trillion ($158.8 billion) budgeted for 2025. But the budget as a whole is already off track. The government now expects this year’s deficit to reach 3.2% of GDP, double the planned 1.6%. For 2027, the government intends to spend 17.1 trillion rubles ($201 billion) on defense, according to documents reviewed by Reuters — about 27% more than it had previously budgeted. In total, it plans to spend 50 trillion rubles ($587 billion) on defense over the next three years — more than Russia’s total projected federal spending this year. Judging by the government’s track record, it’s safe to assume the reality will be even higher.

If Russia keeps spending more on the war than it budgets for, why isn’t the money running out?

Alexander Kolyandr, Eurasia Group’s Europe director, discussed that question on a recent episode of Meduza’s daily podcast. Russia can keep paying for the war “for a very long time,” he said, because it “prints its own money.” The question is who will bear the cost.

Fudging the numbers

Kolyandr doesn’t put much stock in the official defense budget figures. He estimates that military spending this year has already increased by about the same 1.6% of GDP by which the deficit overshot the plan.

And much of the war’s cost falls outside the “national defense” line. Kolyandr would include the entire security section, along with defense-related spending scattered through other parts of the budget. Funding allocated to the Emergency Situations Ministry, for example, includes reimbursements to companies for interest paid on loans used to fulfill defense contracts. Last year, Kolyandr also found an allocation for drone development in the agriculture budget. “Are those drones then used for spraying corn, or are they used at the front? Hard to say,” he said.

Then there’s spending that doesn’t appear as a budget line at all. PSB, a Russian state-owned bank that finances the defense industry, is less a conventional commercial bank than a channel for state money, Kolyandr said. Last year, the government repeatedly injected capital into PSB, enabling it to extend loans to companies carrying out defense contracts.

All told, Kolyandr estimates that Russia is spending around 9% of GDP on defense. He expects the figure to reach double digits next year, in part because he considers the government’s forecast of 1.4% economic growth too optimistic.

Manufacturing money

By Western standards, Russia’s public debt is low, at less than 30% of GDP. The problem is where the government can borrow. Russian banks are effectively the buyers of the government’s ruble-denominated debt, Kolyandr said, and those purchases create new money.

That wouldn’t necessarily be a problem if the economy were becoming more productive at the same pace. But productivity isn’t keeping up. Wages are rising amid a labor shortage, while sanctions constrain investment in technology. “When the amount of money grows and the amount of goods doesn’t, it all ends in inflation,” Kolyandr said.

The Soviet Union could also keep issuing money for defense, even as living standards declined, Kolyandr said. Economically, he said, it makes little difference whether toilet paper doubles in price or disappears from store shelves, as it did in many Soviet cities. Both are manifestations of the same imbalance between supply and demand.

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Robbing Pyotr to pay Pavel

Russia covered much of the cost of its full-scale invasion of Ukraine during the first few years with government savings, Kolyandr said. Judging by the budget, the government is now turning increasingly to the savings and incomes of ordinary Russians.

Taxes are one way to do that. In late September, right after the State Duma elections, Russian officials proposed another round of tax and fee increases. Kolyandr said the government is trying to “scrape” out as much revenue as possible without provoking mass tax evasion.

There’s also the inflationary pressure created by borrowing. Kolyandr said inflation acts as another tax, eroding middle-class savings and hitting poorer Russians especially hard because they spend more of their income and save less.

And there’s another way to free up money for the war: spend less on everything else. Kolyandr expects growing pressure on investment in education, infrastructure, culture, and other areas not directly connected to the war or essential government and economic functions.

‘Slow rot’

None of this means Kolyandr expects Russia’s economy to collapse overnight. “I don’t see why it should fall apart tomorrow,” he said. Instead, he expects “slow rotting”: the kind of steady deterioration his parents’ generation experienced in the Soviet Union. Back then, prices were fixed, but one thing or another was always missing from stores, and people spent more and more time waiting in line. “Here, with inflation, you’ll have to work longer and longer to buy food,” he said.

The economic turmoil of the 1990s “didn’t fall from the sky,” Kolyandr said. The Soviet Union “borrowed from the future to pursue its geopolitical and ideological goals,” and eventually the bill came due. “Life has taught me that the bill always has to be paid,” he said. “The 2027 budget is one of those loans from the future.”

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