Russia’s budget crunch explained: The impact of weaker oil prices, high military spending and a strong rouble

Russian President Vladimir Putin (Courtesy: Reuters photo)

Russia’s wartime economy, long buoyed by oil and gas revenues and relentless military outlays, is showing signs of fatigue. President Vladimir Putin, fresh from celebrating foreign policy wins in China and India, now faces tough decisions at home as falling energy income and ballooning costs open a large hole in the state budget. Economists warn that the Kremlin’s strategy of “everything for the front” is colliding with the limits of Russia’s financial resilience, the Financial Times reported.

Oil income slump and widening deficit

Energy earnings, the backbone of Russia’s budget, have fallen by about 20 percent compared with last year. A temporary spike in July from quarterly tax payments masked deeper weakness, leaving Moscow on track to post a far wider deficit than the 0.5 percent of GDP it originally forecast. The shortfall already hit 2.2 percent in the first half of 2025, equal to $61 billion, and is expected to widen further by year-end.

Growth slows amid high rates and strong rouble

After expanding 4.3 percent in 2024, Russia’s economy is forecast to grow just 1.4 percent this year, with analysts doubting growth will exceed 2 percent in the next three years. A strong rouble, which has gained about 20 percent against the dollar since January, has squeezed budget revenues while complicating exports. Meanwhile, the central bank’s insistence on keeping rates high to contain inflation has angered businesses struggling with borrowing costs and depressed investment.

Spending priorities shift to the military

Military expenditure has nearly doubled in nominal terms since 2022, with factories running at full tilt to replace losses in Ukraine. This emphasis leaves little room for social or infrastructure spending. Officials are considering cuts in subsidies for sports clubs, state-run sanatoriums and non-core projects, potentially freeing up $2.5 billion. But economists say such measures will not close the gap, meaning Moscow must rely on borrowing or dipping further into its reserve fund — half of which has already been depleted.

Structural strains and industry challenges

Beyond the budget, Russia faces broader structural issues. Labour shortages have worsened as hundreds of thousands of workers are mobilized or emigrate. Sanctions have complicated cross-border payments and disrupted industries reliant on western technology. The coal sector is suffering its worst downturn in decades due to strained rail infrastructure and lost markets. Banks, too, are feeling the pressure, with state lender VTB setting aside provisions on a quarter of its corporate loan book.

Balancing strength with vulnerability

Despite these pressures, Putin insists the economy is undergoing a “soft landing” and maintains that Russia’s debt burden remains manageable. Borrowing is likely to plug much of the deficit, especially as interest rates are gradually lowered from last year’s emergency highs. Yet former officials and independent economists caution that trade-offs are now unavoidable. As one observer put it, Russia must “rebalance some investment programmes,” even if the Kremlin’s rhetoric of strength suggests otherwise.

Three years into the war in Ukraine, Russia’s economy is caught between resilience and strain. While the state can still borrow and redirect resources, its ability to sustain current levels of military spending without sacrificing civilian needs is narrowing. Whether Moscow can manage these trade-offs without triggering recession will define not only the stability of Putin’s government but also the durability of Russia’s war economy in the years ahead.