Putin's war economy has reached its limits

The budget is perhaps the main document for the economy, and indeed for the life of the entire country. Its spending amounts to approximately 20% of GDP, and “following the money” can tell a lot.

Wartime budgets were formed according to a simple principle, which was formulated by Finance Minister Anton Siluanov at the end of 2023: “victory budget.” Every year an increase in spending, primarily defense, was planned, but the war demanded more and more money, refusals were not accepted, spending exceeded the plan, and the Ministry of Finance climbed into the “little box” and also borrowed the missing amount from state banks.

The first call rang a year ago. The government, instead of reducing military spending as it had intended, increased it again. To achieve this, taxes had to be increased (on company profits and a progressive personal income tax scale was introduced). In addition, the economy was beginning to slow down, and this year it slowed down sharply.

It became clear that this would no longer work: the “victory budgets” would no longer converge. It is necessary either to stop the growth of expenses - not in words, but in deeds, or to raise taxes again, although Siluanov and Vladimir Putin promised not to do this until 2030. “This is not some pass-through budget. This is a choice [of politics],” said Oleg Buklemishev, director of the Center for Economic Policy Research at the Faculty of Economics of Moscow State University.

Military spending at maximum

The main news: military spending has not increased. In June, Putin argued that they were too big and allowed them to be reduced, but there was no certainty about this.

In 2019–2021, Russia spent 3–3.6 trillion rubles on the army, or about 15% of budget expenditures. During the war, spending on “national defense” quadrupled, and its share of the budget more than doubled. This year the government was going to spend 13.5 trillion on war—that’s 32% of all expenses. In 2026, spending on the army and military-industrial complex is planned to be 0.6 trillion lower - 12.9 trillion rubles. This is 4.4% less than this year, and taking into account rising prices, the real reduction will be about 10% (depending on what the average inflation will be).

However, the implementation of budgets may differ from government projects, but for now we will proceed from them. It is expected that spending on the army and military-industrial complex will remain at approximately the same level (13–13.6 trillion rubles) in 2027–2028.

Cutting spending on “national defense” does not indicate the defeat of the “hawks” in Putin’s circle. At the same time, spending on other security forces - “national security” and “law enforcement” - increased: from 3.5 to 3.9 trillion rubles. Total spending on the army, law enforcement agencies and special services will remain at almost the same ultra-high level as in 2025 - 16.8 trillion rubles, and their share in budget expenditures will decrease only from 40 to 38%.

The government has stopped the growth of war spending not because it does not want to increase it, but because it can no longer do so. Economist Vladislav Inozemtsev was willing to bet in May that military spending had reached a ceiling and would not rise any further. The country will be able to afford such expenses [for the war] for a long time, but “if Putin wants to spend 20 trillion rubles next year, then everything will go wrong.” Yes, in fact, it has already started to go.

Revenues have collapsed

Trouble came from unexpected places. In 2024, the government managed to increase spending by almost a quarter (from 32.4 to 40.2 trillion rubles), and in 2025 it was barely able to increase spending by 2 trillion, to 42.3 trillion rubles. What happened?

First, oil prices fell and the ruble strengthened. This brought down oil and gas revenues: in April, the Ministry of Finance revised the budget, reducing them by almost a quarter (by 2.6 trillion rubles).

However, budget expenses were not reduced. On the contrary, they grew by 0.8 trillion rubles. The government believed that non-oil and gas revenues would be higher than last year's plan. Perhaps it was due to excessive optimism, perhaps the understanding that talk about ending the war will remain talk and that allocations need to be increased. One way or another, with dwindling revenues, planned spending was increased and the budget deficit tripled.

Then the economic slowdown began to take its toll (Important Stories told about it). The government remained optimistic to the last: when everyone was talking about the beginning of stagnation, it predicted growth of 2.5% this year. Now it has been lowered to 1%, and the slower the growth, the lower the GDP and the less taxes the budget receives. It had to be changed again.

Now the government has slightly increased the estimate of oil and gas revenues, but reduced the estimate of other income by almost 2 trillion.

But it is impossible to reduce costs. They are all very important, Putin explained : except for the military, these are social ones - and they are classified as “protected” and cannot be reduced; infrastructural ones - but where to go, we need to build roads and ports for the delivery of goods from the Far East, etc. It is impossible to reduce expenses for servicing the national debt - and this is 3.9 trillion rubles next year, or almost 9% of budget expenditures.

This led to a new increase in the budget deficit this year to 5.7 trillion rubles. And a return to pre-war principles of fiscal policy.

The party is over

The authorities realized that such uncertainty is very dangerous. It has become difficult to predict not only revenues, but also budget expenses (how much will be needed for the war), but there are fewer reserves to close the “hole” in the budget. The “pot”, the National Welfare Fund (NWF), remains a third of what it was before the war, and low debt is not a panacea. You can only borrow from state banks, but their capabilities are limited and the interest rates are high.

But for two decades before the war, all Putin’s governments pursued an extremely cautious budget policy. They quickly paid off their foreign loans and tried to avoid budget deficits so as not to be dependent on creditors. But, being careful in other expenses, Putin spends “like crazy” on the war, not counting money. Against this background, the 2026 budget shows that the “war frenzy” is ending: the government can no longer throw money away, as in 2022–2025.

Budget expenditures will amount to 44.1 trillion rubles - only 3% more than this year, growth is even less than inflation. The Ministry of Finance, as if pointedly, did not change the amount of expenses compared to earlier plans: a year ago, in the draft budget for 2025–2027, it was supposed to be 44 trillion.

At the same time, income expectations increased from 37.1 to 40.3 trillion rubles, or by 8.6% compared to the budget schedule for 2025. To collect so much, taxes were raised again (but more on that later).

In reality, there may be more income: now the budget is drawn up on the basis of a very cautious forecast. This old but reliable government trick translates to this: if there is more income, we will know what to spend it on. And in general, increasing expenses throughout the year is much more pleasant than cutting. Moreover, cutting turns out badly.

This was almost always the case under Putin: budget revenues usually exceeded the plan. The exceptions are the crisis year of 2009 (then GDP fell by 7.9%, unprecedented since the 1990s), the post-Crimean years of 2015–2016 (then oil prices dropped significantly) and the pandemic year of 2020.

Accepting reality

It's not just about accounting tricks. The basis for the conservative budget for 2026 was the cautious forecast of the Ministry of Economic Development, which is very close to most expert estimates (for example, the consensus forecast of the HSE Development Center and the macroeconomic survey of the Central Bank of 33 analysts). The ministry had long refused to notice the stagnation of the economy, but now it has admitted the obvious.

The forecast for economic growth and inflation has been lowered (the lower the growth, the worse consumer sentiment and the less opportunity producers have to raise prices). This is what allowed the government to show that despite the increase in taxes, the growth of budget revenues will not be too fast.

Budget message from Nabiullina

Perhaps even such estimates are optimistic. The growth of the military economy is slowing down, and the civilian economy is already falling. As calculations by the TsMAKP analytical center close to the authoritiesshow , this year output in most civilian industries has been declining, and since the beginning of the year the decline has reached 5.4%, and over the past 12 months - 6.3%. The Ministry of Economic Development forecasts a 0.5% reduction in investment next year, which is a deduction from future growth.

This is largely the result of a high key rate. Its reduction is demanded by the heads of enterprises and state banks, who, in the words of the head of Sberbank German Gref, “at the next stage will receive all the problems that arise in the economy.” According to other calculations by TsMAKP, the shock from high rates for industry is comparable to the shocks of a pandemic and the outbreak of war.

The Central Bank keeps the rate so high to reduce inflation, which has been driven up by huge budget expenditures. Central Bank Chairman Elvira Nabiullina said directly: the more conservative the budget, the lower the key rate. She compared the budget and lending to communicating vessels: the larger the deficit, the more money the budget throws into the economy and the less money should be created through lending. The Central Bank regulates this through the key rate.

The government, by the way, is itself interested in reducing it. The head of the State Duma budget committee, Andrei Makarov, estimated that each point of the key rate costs the budget 280 billion rubles a year, which it spends on servicing the public debt and subsidizing rates on preferential loans.

In general, the government had to demonstrate to the Central Bank that it had not completely “lost its shores.” Nabiullina appreciated this sign of attention, calling the draft 2026 budget “disinflationary.”

Taxes for war

They had to pay for this by increasing taxes. Minister of Economic Development Maxim Reshetnikov said so: the alternative is an increase in the budget deficit, a high key rate and much slower economic growth for all three years.

The choice made by the government shows how big the problems are in the economy. When it is teetering on the brink of recession, it is recommended not to increase taxes, but to reduce them in order to reduce the burden on business. Even at the end of June, Siluanov said at SPIEF that there are no plans to change taxes. But the war squeezes everything it can out of both the budget and the economy.

In total, tax innovations, according to the Ministry of Finance, will give the budget about 1.8 trillion rubles in 2026, which, according to the explanatory note to the budget, will be used “to finance defense and security.” According to economist Dmitry Polevoy, the budget will receive even more - 2.4–2.9 trillion.

The main measure, which will give the budget at least 1.2 trillion, is an increase in VAT from 20 to 22%. This tax brings the budget almost 40% of revenues. Russians will have to chip in for the war, paying the state an increased share of each purchase.

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In addition, taxes on the gambling business and recycling fees on transport are increasing. It is also proposed to quickly increase excise taxes on “harmful” consumption and introduce a new tax on trade in imported goods (to combat smuggling).

In addition to tax increases, many benefits are being cancelled. The income threshold for small businesses, above which they are required to pay VAT, will be reduced sixfold, to 10 million. This threshold was introduced a year earlier - previously small businesses did not have to pay VAT at all. The tax benefit introduced during the pandemic for IT companies will be reduced , which will now have to pay insurance premiums at a rate of 15%, rather than 7.6%, on salaries up to 230 thousand rubles per month.

Patriotism and stuff

Reducing military spending, however, may turn out to be an accounting trick. As in the previous two years, the government can finance part of next year’s expenses in December of this year, suggests Sergei Aleksashenko. And since the government has classified structural data on budget execution, we will not know how much will actually be spent on the war in 2025. This year’s budget is still hopelessly spoiled by a record deficit, but in the future it can be “done beautifully,” argues Aleksashenko.

The “beauty” is that the suspension of the increase in military spending made it possible to increase literally all “peaceful” budget items. This is in stark contrast to previous years. The biggest increase in 2026 (except for servicing the national debt and national security) is the increase in spending on transfers to extra-budgetary funds (13.2%), education (10.1%), government administration (10%), housing and communal services (9.9%), economy, social policy (9.4% each). Spending on healthcare is almost not growing (+1.1%), as are transfers to regional budgets (+3.3%). It is planned to increase salaries for public sector employees by 7.6%, approximately on par with inflation.

Due to high interest rates, spending on servicing the national debt has increased. In 2026 they will reach 8.8% of budget expenditures (in 2021 - half as much, 4.4%). Starting this year, the Ministry of Finance has almost stopped spending the National Welfare Fund and is financing the entire budget deficit only through borrowing. During 2024–2028, the national debt, according to the plan of the financial department, will double.

Still, some expenses have to be cut. In 2026, the outsiders will be the aviation industry (cost reduction by a third), agriculture and rural development (by 24–30%), the national project “Long and Active Life” (by 27%), modernization of clinics (by half) and ambulances (by a quarter), rehabilitation of patients (by almost three times), regional and local road networks (by 10%), state support exports (doubled). Funding for the federal project “Domestic Solutions” (IT support) has been reduced by more than three times, and funding for the state energy development program has been reduced by 22%. The funding for the national project “Personnel” is falling by the same amount, and the closely related federal project “Active Measures to Promote Employment” is falling by 20%. Indeed, what is there to promote when unemployment is already at a minimum.

Most of the expenses in the budget are allocated to various government programs. Of the 51 state programs in 2026, expenses will decrease by 18, and total spending on state programs will fall by 13%, from 38 to 33.1 trillion rubles.

But allocations for the electronic and radio-electronic industry will increase 4.3 times, to 186.5 billion. But due to secrecy, little is known about them. Expenditures on tourism development will increase by more than a third.

As always, the budget contains a lot of ideological expenses and spending on propaganda and “education of youth.”

Operators of the patriotic project

The “Movement of the First” will receive, among other things, 7.4 billion rubles for patriotic education, another 9.6 billion for educating the younger generation and 1 billion for popularizing the movement. “Youth Army” will receive 1.1 billion for military-patriotic events. The Russian Cultural Foundation is allocated 1 billion for the “preservation and popularization of traditional values,” and the Russian Military Historical Society will receive 524 million rubles to create memorial sites related to military history, to conduct military history camps and educational patriotic programs.

The Presidential Fund for Cultural Initiatives is allocated 1.2 billion to support “demanded cultural, educational, and historical projects.” 460 million will be spent on “national films” that strengthen spiritual and moral values. The Internet Development Institute will receive 26 billion to create state content that strengthens civic identity and spiritual and moral values. ANO "Russia - the Land of Opportunities" is allocated 2.6 billion rubles for the project "It's in Our Family", the "Time of Heroes" program and the "Leaders of Russia" competition.

Spending on the “Russia in the World” project has been more than doubled, from 5.5 to 11.9 billion rubles, including 5.1 billion for sending Russian language teachers abroad and encouraging foreigners to study Russian.

There is no longer any possibility of continuing to increase military spending without serious consequences. To do this, we will either have to raise taxes again, or abandon the indexation of other expenses, much like what was done recently in Turkmenistan. There, the chief member of the council of elders, on behalf of the people,asked the supreme leader to refuse to increase salaries, pensions, state benefits and scholarships, since “the social and living conditions of the people have reached a high level,” and they live a “peaceful, prosperous and happy life,” and the saved funds should be used “for the further development of the country and other important areas.”

Russia has not yet reached this point.