Russia is grappling with intensifying economic pressures as its budget deficit widens, prompting the government to propose tax increases and reductions in nonmilitary expenditures. The draft budget for 2026, expected to reach parliament on September 29, reflects a shift in fiscal policy, with minimal revisions anticipated after President Vladimir Putin finalizes key decisions. n nIn a reversal of earlier commitments, authorities announced plans on September 25 to raise the value-added tax from 20% to 22% in an effort to address the growing shortfall. This move breaks a prior promise not to increase taxes before 2030. Additionally, officials are preparing to slash spending in areas such as social programs and public services, driven largely by declining oil revenues. n nThe country’s budget deficit has reached approximately 4.2 trillion rubles ($50 billion, €42.7 billion), equivalent to 1.9% of gross domestic product (GDP)—nearly four times the initial 2025 target of 0.5%. The finance ministry projects this gap could expand to 5.7 trillion rubles by year-end. n nElina Ribakova, an economist at the Kyiv School of Economics, noted that Moscow has consistently prioritized military expenditure over other sectors since 2014. “The pattern remains unchanged,” she said in an interview with DW. “Funding for education, healthcare, and environmental initiatives faces severe reductions while defense budgets continue to grow.” n nChris Weafer, a financial analyst at Macro-Advisory, explained that the slowdown in government outlays outside critical sectors has been underway since Putin signaled fiscal restraint last December. “There’s been a deliberate reduction in spending on nonessential programs—particularly those unrelated to defense or core social functions,” he stated. n nEconomic warning signs have become increasingly evident. Former U.S. President Donald Trump highlighted Russia’s financial struggles in a September 24 social media post, urging Ukraine to take advantage of the situation. He referenced ongoing fuel shortages linked to Ukrainian drone strikes on energy infrastructure, which have disrupted supply chains and led to long lines at gas stations. n nA major factor behind the economic downturn is the decline in oil and gas income. While high global prices and strong demand from China and India boosted revenues in 2022 and 2023, recent developments—including lower crude prices, a stronger ruble, attacks on refineries, and persistent sanctions—have eroded this income stream. State earnings from hydrocarbons are projected to drop about 23% year-on-year in September, signaling a deteriorating outlook. n nEconomic growth slowed to just 0.4% year-on-year in July, a sharp deceleration from previous forecasts of 2.5% annual expansion. Current official estimates project 1% growth for the year. Inflation, once surging due to massive defense-related spending, has been reined in through higher interest rates, which were implemented to curb consumer demand. n nWeafer cautioned that maintaining such elevated budget levels—especially in defense—is unsustainable without significant adjustments. “If military outlays aren’t scaled back in the coming years, it risks undermining the narrative of economic stability,” he warned. “This could trigger broader domestic instability.” n nHe suggested that mounting fiscal strain may push the Kremlin toward seeking a diplomatic resolution sooner rather than later. “Internal financial pressure, combined with the imperative to maintain social calm, adds weight to the argument that the conflict cannot continue indefinitely,” he added. n nRibakova, however, remains skeptical. She pointed out that Russian leadership entered the 2022 invasion with full awareness of the economic consequences and deemed them politically acceptable. n nAmid these challenges, calls are growing in the U.S. and EU to tighten sanctions further. Trump recently urged European nations to halt all purchases of Russian liquefied natural gas (LNG), while the U.S. is considering secondary sanctions on countries like India and China that import substantial volumes of Russian oil. Such measures could significantly worsen Moscow’s fiscal position. n nRibakova supports strengthening sanctions but cautions against overestimating their impact. “They can help address certain aspects of the crisis, but they won’t single-handedly end the war,” she said, citing examples like Iran, North Korea, and Venezuela, where regimes have endured despite severe economic hardship. n nStill, Weafer believes secondary sanctions could have a decisive effect. “A 20% to 30% reduction in oil export revenue would push the budget into unmanageable territory,” he argued, potentially forcing major shifts in domestic policy and strategic calculations. n
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How Russia’s mounting economic woes could force Putin’s hand – DW – 09
The pressures of the war in Ukraine are starting to bite for Russian President Vladimir Putin and his policymakers in the Kremlin, with Moscow planning tax hikes and spending cuts to deal with its growing budget deficit. n nThe draft budget for 2026 is expected to be submitted to parliament on September 29. Only minor changes are likely from that point, with Putin having agreed to the main details by then. n nOn Wednesday (September 25), the government announced plans to raise value added tax to 22% from 20% in a bid to curb the deficit, reneging on a pledge Putin previously made not to raise taxes before 2030. n nThere is also growing expectation that nondefense spending, including some social spending, will be cut to deal with the mounting pressures caused, largely, by plunging oil revenues. n nRussia ‘s budget deficit has grown to around 4.2 trillion rubles ($50 billion, €42.7 billion). That ‘s around 1.9% of the country ‘s gross domestic product (GDP) — almost four times the original target of 0.5% for 2025. The finance ministry expects the deficit to reach 5.7 trillion rubles by the end of the year. n nHowever, Elina Ribakova, an expert on the Russian economy with the Kyiv School of Economics, expects Moscow to continue what she says is an established pattern of maintaining high military spending by making cuts elsewhere. n n”The consequences are the same as we have seen since 2014,” she told DW. “That is: everything else gets cut, the military spending expands. So, education, health care, social spending, environmental protection, all of that gets cut severely.” n nChris Weafer, a Moscow-based financial analyst with the consulting firm Macro-Advisory, told DW that budget cuts have been in the offing since Putin signaled them last December. n n”We ‘ve had a deliberate slowdown in government spending in nonessential areas, which essentially means nonessential military and maybe nonessential social areas,” he said. n nFlashing red n nRussia ‘s economy has been flashing red for a while, a fact seized upon by US President Donald Trump in his social media post of September 24, which expressed strong support for Ukraine. n n”Putin and Russia are in big economic trouble and this is the time for Ukraine to act,” he wrote on Truth Social. n nHe also referenced Russia ‘s ongoing fuel crisis. Ukraine ‘s successful drone attacks on Russian energy infrastructure such as refineries and export terminals have led to shortages of multiple fuel grades, rising prices, and long queues. n nA major cause of the overall economic difficulty is the ongoing fall in oil and gas revenues. Soaring oil prices and enthusiastic new buyers in China and India meant Russian energy revenues soared in 2022 and stayed strong in 2023, despite Western sanctions and the EU reducing its dependence. n nHowever, a falling oil price, a stronger ruble, the attacks on refineries and the continued impact of sanctions have all chipped away at the Kremlin ‘s key revenue source. State oil and gas revenues are set to fall by around 23% year-on-year in September, pointing to a darkened economic outlook. n nIn July, GDP grew by 0.4% year-on-year, indicating a significant cooling. Official forecasts predict growth of 1% this year, well down from 2.5% forecast. This time last year, soaring inflation pointed to an overheating economy, pumped up by massive budget increases on defense spending. n nDefense spending has more than quadrupled since 2021, and totalled around 16 trillion roubles in the year to June 2025. n nChris Weafer says the official narrative is that what is happening is a “managed cooling,” with the central bank having raised interest rates to curb inflation and reduce soaring consumer spending — a move which has largely worked. n nBudget cuts n nHowever, he says the budget is “unsustainably high” and that if it is not significantly pulled back in the next few years — including military spending — it threatens to “destroy this whole narrative of how stable Russia is, and how the economy is fine, and people ‘s lives are unaffected, and everything is grand.” n n”You would destroy the economy,” said Weafer, who believes Putin and the Kremlin are increasingly open to the idea of a peace deal being struck soon because of the growing economic pressure. n nRibakova is not as optimistic. “When they went into the 2022 invasion, they were conscious of the economic costs. They calculated them, and at the political level, they decided it ‘s acceptable,” she said. n nSecondary sanctions n nGiven the strains faced by the Russian economy, pressure is growing on the EU and US to significantly strengthen existing sanctions in pursuit of a successful peace negotiation. n nTrump has recently called on Europe to do more to completely end its purchases of Russian gas, mostly via liquefied natural gas (LNG). The bloc still purchases Russian oil too, via refined products. n nThe US has also mulled placing secondary sanctions on countries like India and China, which buy large quantities of Russian oil. Such a move could seriously add to Moscow ‘s economic challenges. n nRibakova thinks now is the time to ramp up pressure on Moscow with more sanctions, as it is clear the economy is as vulnerable as it has been for quite a while. n nHowever, she points to the fact that the heavily sanctioned regimes in Venezuela, North Korea, and Iran remain in power despite economic calamity as evidence that sanctions alone will not save Ukraine. n n”Sanctions can fix part of the problems, but they cannot solve all,” Ribakova said. n nHowever, Chris Weafer thinks secondary sanctions in particular could force Moscow quickly to the table. n nIf the US were to put secondary sanctions on the buyers of Russian oil, then that would be very important, he argues. n n”If you were to take, say, another 20-30% hit to oil export revenues, then that would tip the budget into unsustainable territory and could force massive changes to the domestic dynamics.” n nEdited by: Uwe Hessler