Russia is preparing to raise taxes and cut spending in an attempt to maintain high defense spending as its economy buckles under the weight of financing the more than three-year war in Ukraine.
President Vladimir Putin rejects the idea that the war is destroying the Russian economy, but the budget deficit is growing due to increased spending while oil and gas revenues are shrinking under the pressure of Western sanctions, officials and economists quoted by Reuters said.
Long-awaited talks between Putin and his US counterpart Donald Trump in Alaska last week failed to produce a ceasefire, giving Moscow, which would prefer to move straight to a peace settlement, a strategic boost but also a spending headache.
The Russian economy is increasingly feeling the effects of the prolonged war in Ukraine. In 2025, the budget deficit reached 4.9 trillion rubles ($61 billion), one of the largest in recent years. The reasons are the decline in oil and gas revenues due to Western sanctions and the rapid growth of military spending.
It is noted that the total spending of the Russian Federation on defense and national security in 2025 will amount to 17 trillion rubles, which is the highest figure since the Cold War and represents 41% of total spending. This makes the defense sector a major engine of economic growth against the background of a decline in civilian production.
What spending will be cut?
In June, Putin said that Russia plans to reduce military spending, but the authorities still expect it to increase.
The 2025 budget, which is due to be presented in September, provides for defense and security spending of 8% of GDP, but a source in the Russian government said that the actual figure is slightly higher.
He said there would be no cuts in defense spending in 2026, but cuts are possible in 2027 if the fighting stops as other spending areas compete for resources.
“Even if there is a ceasefire, it will still be necessary to produce missiles and drones, but on a slightly smaller scale,” the source told the publication, adding that there would be no return to the level that existed before the “special military operation.”
The chairman of the Federation Council Budget Committee, Anatoly Artamonov, is proposing to cut spending on non-priority areas by 2 trillion rubles a year by 2028. The first to be affected will be social sectors: healthcare, education and other civil programs. Their share of spending is already decreasing.
A government source told Reuters that tax increases were inevitable.
“Otherwise, we simply won’t be able to make ends meet, even if defense spending is cut. Oil and gas revenues are falling, and the economy cannot fully compensate for this,” the publication quoted the source as saying.
Putin says the financial system is “stable,” but analysts predict low economic growth and a further gap between revenues and expenditures. A government source estimates this year’s deficit at about 5 trillion rubles, or 2.5 percent of GDP. If current trends continue, the deficit could grow to 8 trillion rubles in the coming years.
Economic problems of the Russian Federation – what is known
A series of successful strikes by Ukrainian drones on Russian oil refineries has led to the fact that exchange prices for gasoline in Russia are breaking historical records. At the same time, in a number of regions of the “country of gas stations,” gasoline is running out, and queues at gas stations have become kilometers long.
The Russian economy surprised many by remaining resilient despite international sanctions, but after three years of war and Western restrictions, it is showing a host of problems, all of which appear very serious, Bloomberg reported.
Illustrative Photo by Maxim Titov: https://www.pexels.com/photo/historical-building-located-under-blue-sky-3848886/
