Russia Grapples with Mounting Financial Pressures Amidst Sustained War Effort

Budget Deficit Projections and War Financing

The Russian Federation is navigating a complex financial landscape in 2026, marked by the ongoing costs of its military campaign in Ukraine. Official government plans project a federal budget deficit of 1.6% of GDP for the year, a reduction from an estimated 2.6% in 2025. However, some analysts suggest that the actual deficit could be closer to 3% of GDP, similar to the previous year, citing optimistic revenue growth expectations and the unlikelihood of a nominal reduction in defense spending. Trading Economics models forecast the government budget to reach -2.80% of GDP by the end of 2026. To cover this deficit, the government is expected to rely primarily on increased borrowing.

The 2026 federal budget underscores Russia's commitment to its military objectives, with nearly 40% of all federal spending allocated to defense and security. This translates to approximately 38% of total expenditure, or about 7% of GDP, dedicated to defense and 'national security'. While the budget nominally calls for a decrease in defense spending, experts view this as improbable unless the conflict concludes soon. In 2025, actual military spending surpassed budget allocations, reaching 7.3% of GDP. Supporting the war effort remains a central tenet of Russian economic policy, with authorities prepared to reallocate resources to war-supporting sectors as needed.

Revenue Challenges and Economic Stagnation

Russia's revenue streams have faced significant challenges, particularly from its crucial oil and gas sector. In 2025, federal revenues from oil and gas dropped to a five-year low, declining by 24% from the previous year, a factor contributing to the budget deficit. Sanctions, fluctuating oil prices, and an appreciating ruble have collectively exerted pressure on budget revenues. In response, Russia's Finance Ministry has proposed raising the Value Added Tax (VAT) to 22% in 2026, specifically to fund military requirements and manage the budget deficit. Achieving the projected 1.6% deficit will necessitate exceptionally strong tax collection and the absence of unforeseen emergency expenditures.

The broader Russian economy is experiencing a period of stagnation, with growth anticipated to be no more than 1% in 2026. Some analyses suggest a high probability of a recession in 2026, with only modest growth expected to resume in 2027. The economy is increasingly oriented towards military production, diverting resources to the war effort, which, while delaying an immediate crisis, is making it more costly in the long run. This shift has led to a deterioration in the civilian sector and difficulties for small businesses. The country also faces significant labor shortages, partly due to military conscription.

Reserves and Official Stance

Despite these financial pressures, Russia maintains substantial reserves. These include RUB11.4 trillion ($124 billion) in the National Welfare Fund and access to RUB20 trillion in banking sector liquidity. Hard currency reserves have also surged, exceeding $700 billion. Furthermore, Russia's debt-to-GDP ratio remains relatively low, just under 20%. President Vladimir Putin has asserted that the government has successfully balanced the federal budget, with the forecasted 2026 deficit of 1.6% of GDP being a 'good result' and an indicator of the economy's sustainability.