Oil slump and weak GDP growth deepen Russia’s fiscal troubles

Russia is heading into its fifth straight year of running a budget deficit, as war spending and weak revenue continue to slam its finances.

The latest 2026 budget, presented on Wednesday by the Finance Ministry, shows a gap of 4.6 trillion rubles ($54.8 billion), which amounts to 1.6% of GDP. Prime Minister Mikhail Mishustin called the shortfall “acceptable” during a televised statement, but nothing about it looks stable.

The government’s plan includes spending 44.9 trillion rubles in 2026, which is about 2% higher than its previous forecast. Meanwhile, revenue is expected to drop to 40.3 trillion rubles, a 4% fall from earlier numbers.

The Kremlin is pushing ahead anyway, forced to deal with the fallout of declining oil and gas revenue and an expensive war. According to Bloomberg, officials now want to collect more taxes, widen the tax net, cut spending on civilian programs, and increase borrowing just to keep the budget from falling apart.

Finance Ministry hikes taxes and cuts incentives

Anton Siluanov, Russia’s Finance Minister, confirmed the value-added tax will rise from 20% to 22% starting next year. “We need to make the budget more muscular,” Anton said last week at a forum in Moscow. “We have to respond to any constraints we face.”

The ministry will also lower the VAT threshold so that companies earning as little as 10 million rubles will have to pay, down from the previous bar of 60 million rubles.

The ministry says this tax increase, along with a broader base, could bring in 1 trillion rubles a year. On top of that, there’s a new 5% tax on some gambling companies, and exemptions on insurance premiums for most small and medium-sized businesses are being completely removed.

These businesses must now pay a flat 30%, and fewer industries will qualify for special treatment going forward. This all directly contradicts Vladimir Putin’s public pledge last year, when he promised not to raise any taxes until 2030. He even gave a written order to lawmakers and the government to follow through. That promise is now meaningless.

The Kremlin is also increasing borrowing by 2.2 trillion rubles by the end of 2025. According to the Finance Ministry, next year’s VAT hike alone is expected to bring in 1.19 trillion rubles. Still, that doesn’t cover everything. Russia only has 4 trillion rubles left in its National Wellbeing Fund that can be used quickly to patch the gap.

Oil crash, falling GDP, and rising war costs fuel the red ink

The drop in global oil prices already forced Moscow to triple its 2025 deficit forecast in May. What was supposed to be 1.2 trillion rubles is now 3.8 trillion rubles, or 1.7% of GDP. That figure has been revised again and is now pegged at 2.6% of GDP, Interfax reported.

Economic growth is also taking a hit. Russia expects its economy to grow just 1.3% in 2026, and the Economy Ministry slashed its 2025 GDP growth forecast to 1%, down from 2.5% earlier this year.

Meanwhile, expenditures in 2025 are being pushed to 42.3 trillion rubles, or 19% of GDP, after officials tacked on another 829 billion rubles in the middle of the year.

Spending on the war has already overtaken social programs, a complete reversal from earlier priorities. The Bank of Russia warned this month that with social spending now climbing again, the only way to keep the budget in check is to cut other areas.

But cutting isn’t going to be easy with the Ukraine war still draining cash fast. The Finance Ministry has also submitted a three-year budget plan and tax code changes, which will be reviewed by the cabinet this week and sent to the State Duma on September 29.

Though judging by how quickly spending has blown past targets since 2022, any numbers now are just rough guesses.

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