The strait will not save you from failure: why even a sharp rise in oil prices cannot compensate for the decline of the Russian economy

The Russian budget deficit in the January-April period almost doubled compared to the same period last year, reaching almost 6 trillion rubles, which was already well above the annual plan - all this against the backdrop of a decline in production of more than 10% in key sectors of the civil industry. The authorities admit this, but are not going to change course: the rate remains high and, together with increased taxes, puts pressure on business. The rise in oil prices to $95 per barrel - a consequence of the escalation of the conflict in the Persian Gulf - will partially improve budget arithmetic, but the difference between the optimistic and pessimistic oil scenarios is only 3 trillion rubles. This is not enough to close the budget hole or stop the decline in civilian sectors. Meanwhile, public debt is growing faster than GDP, and Russia is gradually losing what for the last 20 years was considered its main macroeconomic advantage - the minimum debt burden among large economies.

• 1. Economy: from recession to partial recovery
• 2. Record budget deficit
• 3. Expensive oil will not save you
• 4. Structurally trapped

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Economy: from recession to partial recovery

At the beginning of 2026, the Russian economy moved from a slowdown to a net contraction. In January, GDP decreased by 1.8% in annual terms, in February - by 1.1%. Even Russian leader Vladimir Putin, at meetings on economic issues, consistently noted the deterioration of macroeconomic indicators. He noted that “for two months in a row, economic dynamics, unfortunately, have been declining.”

But already in March, the trajectory changed: according to the Ministry of Economic Development, GDP grew by 1.8% year-on-year, thus recouping almost the entire previous fall. The result of the first quarter is that GDP decreased by only 0.3%.

The drop is partly explained by the calendar factor: in January 2026 there were two fewer working days than in January 2025, and in February there were one less day. But the reasons are not limited to the calendar alone. Of course, their list should begin with large military expenditures and, as a consequence, increased taxes, especially VAT, for which since the beginning of the year they have not only raised the rate, but also expanded the circle of payers. However, these versions are not heard in Putin’s official statements.

If you look at the data for individual industries, you can see that most non-military sectors are still under pressure. Industrial production was slightly up - by 0.3%. However, the manufacturing industry contracted by 0.7%. The production of metals, cars, building materials, paper, printing products, and clothing fell by more than 10%. In these industries, both demand and production capabilities are falling. Moreover, they are falling due to long-term factors - companies suffer from taxes, the flow of resources into the military sphere, Internet bans, anxious expectations, and loss of access to foreign technologies.

Companies suffer from taxes, the flow of resources into the military sphere, Internet bans, anxious expectations, and loss of access to foreign technologies.

Among the relatively stable indicators are the unemployment rate, which remains low, consumer spending, which is growing along with inflation, and the real incomes of citizens (that is, they are ahead of inflation).

Forecasts for the year remain subdued. The September forecast of the Ministry of Economic Development assumed GDP growth of 1.3%, but Minister Maxim Reshetnikov indicated that in May the estimate would be revised downwards. The Bank of Russia insists that the economy will return to growth in the range of 0.5–1.5%.

“In the first quarter, economic activity slowed down. This was partly due to the economy adapting to tax changes. The calendar factor also made a contribution,” said Central Bank Chairman Elvira Nabiullina. — In the second quarter, this factor will work in the opposite direction. In May–June this year there will be 3 more working days than a year earlier. All this means that a more accurate assessment of output dynamics can only be made on the basis of statistics for the first half of the year.”

Record budget deficit

There is also something new in the way the government spends money. Based on the results of the first four months of the year, the federal deficit amounted to 5.9 trillion rubles, already exceeding the annual target of 3.8 trillion rubles. For comparison: at the end of the first quarter of 2025, the deficit was also significant, but then the Ministry of Finance additionally indicated that March ended with a surplus and that the annual parameters of the structural balance would be maintained. In the commentary to the results of the first quarter of 2026, there is no clarification - it only says about advanced financing of expenses.

In January–April, expenses increased by 16% year-on-year. The intra-quarter dynamics are also noteworthy: in 2026, March expenses were higher than February for the first time, while in 2023-2025 March was a month of relative budgetary moderation. In the previous three years, March expenses were 79–90% of February; in 2026 - 110%.

Actual expenses for the quarter amounted to 29.2% of the annual plan, although for uniform expenses they should have been 25%. Direct extrapolation of this proportion for the whole year gives expenses of 50 trillion rubles - 13–14% higher than the planned 44.1 trillion rubles. However, historical data shows that initial overruns tend to be made up in subsequent quarters: in 2025, the resulting overrun was only 3.5%.

If a similar picture emerges in 2026, annual expenses will be in the range of 45.6–45.8 trillion rubles. This, firstly, is still higher than planned, and secondly, it means that in the remaining nine months, monthly expenses should not exceed 3.65 trillion rubles.

The dynamics of the monthly balance are also characteristic. In the last three years, March has been a surplus: revenues in this month are traditionally high due to the schedule for paying taxes on additional income from hydrocarbon production, and expenses are lower. In 2026, even March ended with a deficit. Moreover, in 2025, only three months were surplus: March, August and September. The loss of the March surplus means it will be even more difficult to reduce the accumulated deficit in 2026.

Russia even ended March with a budget deficit, which means that reducing the accumulated deficit in 2026 will be even more difficult

If we assume that the 8.3 trillion received in the first quarter is exactly a quarter of what will come in the year, then the final income will amount to 33.2 trillion rubles. And with a rather optimistic estimate of expenses at 45.7 trillion, a huge federal deficit is drawn at 12.5 trillion rubles. This would be 2.2 times more than last year's deficit, almost 3.3 times more than the project for the current year, and overall would amount to more than 5% of GDP.

If financed through loans, this would mean that the state domestic debt increases one and a half times over the year - from 30.7 to 43.5 trillion rubles (in 2025 it increased by almost 30% - from 23.7 trillion to 30.7 trillion). And this is only at the federal level, without taking into account deficits and debts in the regions.

The Ministry of Finance has not yet disclosed from what sources the federal deficit was financed in January–March, but this can be judged by the dynamics of domestic debt ( increased by 0.8 trillion to 31.5 trillion rubles) and liquid funds of the National Welfare Fund ( decreased from 4.08 trillion to 3.89 trillion on April 1 and to 3.6 trillion on May 1).

“The deficit says that the source of financing expenses was not taxes, but something else,” recalls economist and NEST Center expert Sergei Aleksashenko. — In the first quarter, the Federal Ministry of Finance very actively used both internal borrowing and money from the National Welfare Fund. But most importantly, he greatly reduced the balances in the Treasury accounts - this is a slightly less well-known “little box” than the National Welfare Fund. But no less large. At the beginning of the year, there were more than 9 trillion rubles in these accounts; by the end of the first quarter, this amount decreased by 2 trillion. Reducing account balances is the source of financing the deficit.”

The government was even preparing to reduce unprotected budget items by 10%. Later, Finance Minister Anton Siluanov explained that this is not a reduction, but a redistribution. “We never talked about sequestration at all. The word “sequestration” is not the right word, we are talking about budget consolidation,” he said in April. - We are now working with the budget, for example, prioritization - increasing money for the most important things, and, on the contrary, moving money to the secondary, less important ones, or, perhaps, reducing them. This is a routine effort to prioritize spending.”

Aleksashenko explains this change this way: “Even if we carry out sequestration, we can reduce it by about a trillion, that is, this will not cover the deficit. It's like shearing a pig - a lot of squealing, not enough wool. And this is a blow to Putin’s image. Therefore, according to my sources, when Siluanov came to Putin with a sequestration proposal, he said: “Listen, let’s do without sequestration for now, things aren’t that bad with us.”

The fact is that the budget was greatly undermined by oil at the beginning of the year. Oil and gas revenues for January–March were 45.4% less than a year earlier. Here the Ministry of Finance has a consolation - other income is growing. “There is a positive trend in the receipt of key non-oil and gas revenues from both the federal budget (+7.1% y/y) and the budget system as a whole (+6.7% y/y),” officials report. But what does the increase in tax collections from the non-resource sector with a reduction in taxable added value indicate? About increasing the actual level of the tax burden, which further slows down the economy.

Expensive oil won't help

After the escalation of the situation in the Persian Gulf, oil prices soared to four-year highs, Urals overtook Brent in March for the first time in a long time. The average monthly price of Russian oil, which is set by the Ministry of Economic Development for calculating taxes, rose to $77 per barrel in March, which was reflected in April budget revenues (calculated based on March data). However, oil and gas revenues from expensive oil did not grow as much as expected.

In April, oil workers received 207.5 billion rubles from the budget in fuel damper subsidies (before that, when prices were very low, for two months in a row they themselves paid into the budget using the same mechanism, but much less: 15 billion rubles in March, 19 billion in February).

In May, revenues will be higher, because they are calculated from the April price of $94.87 per barrel. For Russia, this obviously means a slight increase in oil and gas revenues. The budget will receive 200 billion rubles of additional revenue due to increased oil prices, Siluanov said . But it is unknown whether he took into account payments to oil workers, or whether they will again receive the bulk of the bonus from the Iranian war, and not the budget. Even if all the additional 200 billion rubles go to the treasury, this will only cover the shortfall, which amounted to 234.3 billion rubles in March.

The budget will receive 200 billion rubles of additional revenue due to increased oil prices

In general, for the Russian oil sector, March fell into two completely different periods. Until March 23, both export volumes and prices were growing rapidly. Then Ukrainian attacks on the ports of Primorsk and Ust-Luga reduced hydrocarbon shipments, although prices remained high. As a result, exports by sea increased compared to February in physical terms by 29%, and in monetary terms by 115%. It is already clear that high prices in April will affect budget revenues in May. And this situation may continue for quite a long time.

And yet, this success looks pale in comparison with the “normal” situation in March-April last year, when, at $55-60 per barrel of Urals, the budget received more than a trillion rubles in oil and gas revenues every month. High prices are not enough; it is also necessary to ensure supply volumes, and with this problems arose, and on two levels at once.

Firstly, it is unknown for how long the ports were out of order. If successful Ukrainian attacks continue, Russia will not be able to export oil. This will lead to a decrease in production and, as a consequence, to a reduction in budget revenues that are calculated from it.

Secondly, even oil loaded into tankers may not reach foreign consumers - arrests of ships, physical attacks on them, and accidents are increasingly occurring. All this increases insurance costs and freight costs.

An optimistic scenario for the Russian treasury could look like receiving just under a trillion in oil and gas revenues per month until the end of 2026. Then it will be possible to collect a little less than 9 trillion rubles in the remaining time, and for the year as a whole - even exceed the budgeted 8.9 trillion, but still not reach the record levels of 2022 (11.6 trillion).

In a pessimistic or, rather, trivial scenario, oil and gas revenues will remain approximately at the March level - 600–700 billion rubles per month. This is possible if the Strait of Hormuz is opened under normal conditions. Then, by the end of the year, oil and gas revenues will amount to about 7.4 trillion rubles.

But the entire difference between the successful and unsuccessful scenarios is about 3 trillion rubles - less than 1.3% of GDP. This is not enough either to compensate for the downward trend in industry, or to completely close the “hole” in the budget. In the structure of its income, the share of the oil and gas component decreased from 41.6% at the end of 2022 to 17.4% in the first quarter of 2026. This means that rising oil prices alone will not be a sufficient condition to compensate for budget losses.

Trapped structurally

The first quarter exposed a contradiction that is not resolved by the favorable oil market. The civilian economy is shrinking for reasons that lie deeper: the tax burden is growing, credit is expensive, investment activity is suppressed, access to technology is limited.

High oil prices can temporarily improve budget arithmetic, but do not change this logic. Even under an optimistic scenario—about a trillion rubles in oil and gas revenues per month—the budget deficit will remain a record high, and spending will require either a reduction or an increase in borrowing. In any case, public debt is growing faster than GDP, and Russia is gradually losing what for the last 20 years was considered its main macroeconomic advantage - the minimum debt burden among large economies.

At the same time, monetary and budget policies work against growth at the same time: a high key rate constrains lending, and tax increases eat into business margins. It is difficult to get out of this combination without structural changes - in the tax system, in the distribution of resources between the military and civilian sectors, in access to foreign markets.

Monetary and fiscal policies work against growth at the same time

Nabiullina is right that the calendar factor will work in the opposite direction in the second quarter. But if there is no recovery even with oil at $90 and three additional working days, this will mean that the economy is not facing a temporary slowdown, but a structural growth ceiling.

And this will be a completely natural course of events, even quite favorable for wartime. An economic decline of 1–2% per year is a very benign, mild scenario; Wars are usually much more devastating. Annual inflation of 5–6% seems unusually low for Russia, even in peaceful conditions. One can imagine that after five years of such a life, Russia’s public debt will reach 60% of GDP, and this will be less than each of Ukraine’s key sponsors. In purely financial terms, the margin of sustainability has not yet been exhausted.

However, no positive prospects for Russia are visible. The country will become poorer for a long time and slowly, lag behind in development, and again go into debt. The hopelessness of the new stagnation will gradually become obvious to everyone. How this will affect society and politics is no longer a question for economists.

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