Vyacheslav Butko, economist, economic advisor to the Kyiv Security Forum
An analysis of the Russian authorities’ response to the deterioration in the broader economic and fiscal environment suggests that they are acting like a player confident in its strategy. The accumulation of economic imbalances alone is unlikely to force a change of course, as the Russian Ministry of Economic Development’s updated forecast through 2029 also indicates.
At first glance, the growing set of crisis signals in the Russian economy appears to create the conditions for an inevitable reassessment of the economic policy underpinning the financing of the war. A widening budget deficit—RUB 5.8 trillion in the first half of the year—tariff increases running at almost twice the official inflation rate, the effective halt in economic growth, an officially acknowledged risk of recession, and declining corporate profits would normally indicate that the system is approaching a point at which change becomes unavoidable. That is what economic logic suggests. When several load-bearing elements of a structure begin to fail at once, they are repaired before the structure starts to collapse. But this logic applies only to a system that is concerned with its own economic efficiency. Given the current priorities of Russia’s leadership, an increasing number of signs point in a different direction. The crisis indicators listed above do not look like a temporary departure from the norm. On the contrary, they increasingly resemble components of a model prepared to sacrifice economic momentum for other priorities. The accumulation of problems does not, in itself, mean that the Russian authorities are ready to change course on the war in Ukraine.
Russia’s Budget Deficit as a Reflection of the Economic Slowdown
One of the most serious risks facing the Russian economy is the fiscal imbalance. Despite the rise in oil prices amid escalating tensions in the Middle East, the problem of funding the budget has not disappeared. In the first half of the year, oil and gas revenues fell RUB 165 billion short of the plan. This comes against the backdrop of rapidly rising expenditure and overall budget revenues lagging behind. During the first six months, 55% of the annual expenditure plan was used, while the revenue plan was fulfilled by only 46%. This reflects a structural weakness in Russia’s public finances: the growth in budget commitments is becoming increasingly disconnected from the capacity of the revenue base. Whereas the approved 2026 budget projected a deficit of RUB 3.8 trillion, or 1.6% of GDP, the outcome for the first half of the year now points to a deficit of RUB 4.8 trillion, or 2.2% of GDP. Given the United States’ apparent course toward de-escalating the conflict with Iran, the resulting stabilisation of the global oil market, and a corresponding decline in prices, Russia’s fiscal position could deteriorate further.
The Russian budget deficit is gradually becoming a reflection of the economic slowdown. Russia’s military-industrial complex requires enormous resources, yet it creates extremely short production chains and provides little stimulus to market-oriented sectors or to small and medium-sized businesses. Even substantial injections of public money into the defence industry do not translate into sustainable economic growth. Instead, they tend to fuel cost inflation, as wages rise without corresponding productivity gains. This has effectively been acknowledged: last week, Russia’s Sberbank revised its growth forecast to 0.5% for this year. The Russian Ministry of Economic Development has the same baseline forecast.
Such trends would seemingly push the Russian authorities to seek a balance between supporting economic activity and maintaining fiscal stability. Formally, options for financing the deficit remain available: the government can continue increasing public debt, draw on reserves such as the National Wealth Fund, or raise the tax burden. Cutting expenditure, however, appears to be the most difficult option. The Russian economy is becoming increasingly dependent on state demand. As a result, the federal budget is no longer merely a mechanism for redistributing resources; it has become one of the principal means of sustaining economic activity, concentrated primarily in the military-industrial complex and related sectors. Under these conditions, reducing government expenditure could itself trigger a recession.
In similar circumstances, governments usually look for compromise solutions. They may restrain tariff increases, ease regulatory restrictions, or try to create conditions for expanding the tax base. In Russia’s case, however, there are no signs that such a search is taking place.
The Russian authorities are demonstrating their readiness to maintain a high level of war-related budget expenditure. The room to do so is gradually narrowing, but there are no indications that a change of course is being prepared. Neither budget priorities are being revised nor attempts are being made to reduce the burden on the economy through tariff or regulatory policy.
This is an important observation because it reveals the Russian authorities’ actual intentions. If even a widening budget deficit and increasingly frequent warnings about recession risk do not lead to a policy adjustment, it means that the authorities do not yet regard the economic slowdown as a threat capable of outweighing the priority given to financing the war. This is the behaviour of a player confident in its strategy. The Kremlin appears to believe that it has sufficient financial resilience to continue the war.
The ‘Tariff Component’ of the Economic Development Ministry’s Forecast as an Indicator of the Authorities’ Priorities
Another important signal comes from tariff policy. The Russian Ministry of Economic Development’s new forecast assumes that inflation will return to 4% as early as 2027. At the same time, the same document provides for regulated tariffs to rise faster than inflation: next year, wholesale gas prices in Russia are expected to increase by 9.1%, household electricity tariffs by 8.6%, and housing and utility charges by 8.7%. Throughout the remainder of the forecast period, up to 2029, these tariffs are also projected to grow at rates noticeably above the inflation target. At first glance, this appears contradictory. If returning inflation to target were genuinely the priority, one would logically expect more restrained tariff growth. Yet tariff indexation is set well above the inflation target.
This reflects the hierarchy of priorities. The Russian authorities are prepared to preserve financial flows to infrastructure and quasi-state monopolies at the cost of imposing additional inflationary pressure on the economy and the population. This is a deliberate resource-redistribution mechanism in which inflation functions as a hidden tax, redirecting consumers’ money to infrastructure monopolies and, from there, toward the financing of military expenditure.
The Russian authorities are making it clear that their priority is not economic growth or public welfare, but the financing of sectors that support the war. Within this system of priorities, a temporary recession is an acceptable price rather than a major problem.
The Russian Authorities’ Hierarchy of Priorities
The conservative scenario prepared by Russia’s Ministry of Economic Development envisages GDP contracting by 0.5% in 2026. What is most revealing is not the forecast itself, but the response to it. For the first time in a long period, an official document treats recession as one of the baseline scenarios for the Russian economy. Yet this has not been accompanied by the introduction of anti-crisis economic policy instruments or by attempts to mitigate the consequences. In such circumstances, governments usually consider a broad range of support measures, from stimulating household demand to loan-restructuring programmes or special mechanisms for assisting individual civilian industries. Russia’s approach looks different. The authorities are maintaining funding for the military-industrial complex and continuing to provide advance budget financing for state defence orders. Civilian businesses are effectively left to survive on their own. This is the hierarchy of priorities pursued by the Russian authorities.
The budget deficit is growing, and the Russian government is increasing expenditure on the war. Tariffs are outpacing inflation, and this pattern is being locked in for years ahead. The economy is sliding into stagnation, yet budget priorities remain unchanged. Corporate profits are falling and debt is rising, but there are no measures to support the civilian sector. Moreover, the Ministry of Economic Development’s new forecast for 2026–2029 contains no hint of a change of course. On the contrary, it establishes the current model as the baseline for the entire planning period through 2029.
This is the clearest indication that no reversal is planned in Russia’s economic policy—and therefore in its plans for financing the war. What we are seeing is the consistent implementation of a long-term course, and that consistency is not being disrupted by economic pressures alone.
