Inside Russia’s Wartime Budget Crisis

The war is the engine of the deficit

Military expenditure is the dominant force behind the ballooning deficit. Russia’s federal budget allocates roughly one-third of all spending, or 6.3% of GDP, to national defense, a level unseen since the Cold War . This spending has increasingly crowded out investment in other areas, but the official budget documents do not capture the full picture. A significant volume of war-related expenditure occurs off-budget, meaning the true fiscal cost of the conflict is substantially higher than the published statistics indicate . German intelligence has publicly challenged the Kremlin’s figures, claiming the real federal deficit is closer to 8.01 trillion rubles, not the official 5.65 trillion, and that Western sanctions are having a “clear impact” .

Collapsing corporate profits are devastating regional budgets

The regional fiscal crisis is not merely an echo of federal overspending; it has a distinct and alarming mechanism of its own. Regional governments in Russia are heavily dependent on the corporate profit tax for revenue. As the economy has slowed under the weight of sanctions, labor shortages, and high interest rates, corporate earnings have slumped, directly starving regional coffers of their primary source of income . Finance Minister Siluanov has identified these declining corporate profits as the central cause of the widening regional deficits . The effect has been particularly pronounced in regions that traditionally ran surpluses, a sign that the revenue shock is spreading to the economy’s former strongholds . In 2025, corporate profit tax collections reportedly fell by 8.5% , even as regional spending continued to rise to support war-related activities and social obligations.

The oil and gas cushion is deflating

The erosion of Russia’s energy revenues has compounded the crisis. Fossil fuel taxes, which once accounted for roughly 40% of the federal budget, have seen their share fall dramatically. By the first three quarters of 2025, they represented only around 25% of federal revenue, squeezed by lower global prices and the tightening grip of Western sanctions . This structural shift forces the budget to rely on non-oil tax sources at a time when the broader economy is cooling. With over 75% of federal revenues now coming from sources other than oil and gas, any slowdown in domestic economic activity directly and immediately depresses tax collection . The government’s 2026-2028 fiscal framework now officially projects seven consecutive years of high budget deficits, a sequence of shortfalls the country has not endured since 1999 .

The Kremlin’s scramble for solvency

The response from Moscow has been a multi-pronged attempt to stabilize the public finances without cutting defense outlays, an effort that has forced the government into a series of politically painful measures.

Debt write-offs. President Vladimir Putin ordered that two-thirds of the federal debt owed by the regions be written off, a mammoth operation affecting loans worth over one trillion rubles across 79 federal subjects . The condition attached to this relief is that the freed-up funds be directed toward investment and infrastructure projects, though a substantial portion effectively compensates for the resources regions have already spent on the “special military operation” . Prime Minister Mikhail Mishustin has been implementing the write-offs in tranches, with the most recent in June 2026 canceling 37.5 billion rubles for six regions , and further orders for an additional 114 billion rubles for 21 more regions earlier in the year . The remaining third of the debt has had its repayment postponed .

Tax increases. The government has already deployed the most powerful fiscal lever available by increasing the value-added tax (VAT). Discussions, reported by Reuters, have explored raising the rate from 20% to 22% to contain the deficit . The VAT increase is projected to generate an additional 1.7 trillion rubles in revenue, though this covers less than half of the planned annual deficit . In a more coercive move, the Federal Tax Service has passed a menu of revenue-raising options to regional governors, despite Putin’s earlier promise of no new taxes until 2030 . Regions have been advised to tax more real estate at market value, maximize vehicle taxes, and reclassify land to charge several times the current rates in order to plug their budget holes .

Austerity on the horizon. The federal government is preparing a formal austerity plan that targets non-defense and non-social spending, an acknowledgment that the era of open-ended fiscal stimulus is ending . The clearest symbol of the new reality emerged from Moscow itself. The capital, Russia’s wealthiest region, is cutting its large-scale investment program for the first time since the outbreak of the COVID-19 pandemic, a direct reflection of the deepening fiscal strain . Meanwhile, the 2026 federal budget has already faced a reality check; front-loaded spending pushed the country’s January deficit to nearly half of the entire annual target, raising serious doubts about the feasibility of planned deficit reduction .

The Kremlin is not out of options. It can still tap a national reserves pool of around 11 trillion rubles and borrow under favorable conditions from a banking system primed to absorb government debt . But the fiscal architecture that sustained Russia through the first three years of the war is visibly eroding. The measures now being undertaken — mass debt cancellation, aggressive tax hikes, and mandated austerity — are no longer merely adjustments. They represent the permanent re-plumbing of the Russian state’s finances to serve a single, all-consuming priority.