The Russian economy has come under massive pressure, directly linked to the huge costs of waging war against Ukraine, as well as the subsequent Western sanctions. The government is forced to face an unprecedented budget deficit. The shortfall is staggering, with the government projecting it will reach 5.736 trillion rubles, or about €64.4 billion, in 2025, and fall to just 3.786 trillion rubles, or about €42.5 billion, in 2026. The key problem is the significant drop in income from oil and gas; they fell in the first ten months of 2025 by 2 trillion rubles compared to the previous year, and only in October the Ministry of Finance there recorded a 27% year-on-year decrease.
Martin Vlachynský, an analyst at the INESS institute, also comments on the overall picture, describing the dimension of the conflict in detail. Vlachynský states that waging war brings with it not only direct but also indirect costs, with direct spending on soldiers and weapons cumulatively reaching around 500 billion euros as of February 2022. Even more serious are the indirect costs, which consist in the loss of markets for the export of key commodities, especially oil and gas. Russia has failed to replace Europe, which was the biggest buyer, with fossil export earnings in October 2025 at their lowest in three years.
Printing money
Vlachynsky also explains how Moscow is financing the growing budget hole. Due to financial sanctions, Russia cannot finance this deficit on the international market like other countries. Initially, the government covered the deficit from the National Welfare Fund, which already had to sell 57% of its gold reserves to cover budget deficits. In addition, for the first time in history, the Russian Central Bank started selling physical gold from its own reserves to finance the state budget. Currently, however, financing primarily relies on the issuance of domestic ruble bonds, which are subsequently purchased by semi-state banks. The central bank provides loans for these purchases, which is the main cause of long-term high inflation despite practically zero economic growth.
To prevent further depletion of reserves, the government presented a draft budget for 2026 with sweeping tax changes that are expected to generate 2.4 to 2.9 trillion rubles, or about 27 to 32.6 billion euros, in additional revenue. The most fundamental measure is the increase of value added tax (VAT) from 20% to 22%. The government is also drastically reducing the threshold for the obligation to pay VAT, from 60 million rubles (673,440 euros) to 10 million rubles (112,240 euros) of annual income. According to estimates, these changes could affect around 450,000 small businesses and entrepreneurs, which will probably accelerate the consolidation of the market and the absorption of smaller players by stronger ones.
The regions are out of money
Fiscal pressure also falls hard on the regions, with Vlachynský pointing out that up to half of them are in deficit this year, which will ultimately require funding from the central government. Regional budgets showed a deficit of 724.8 billion rubles by the end of September, which is approximately 8.27 billion euros. As a result of these financial problems, 12 regions have already cut teacher pay and elsewhere are considering raising taxes on small businesses. In a worrying sign that reflects the region’s deepening fiscal crunch, some federal republics have already moved to cut bonuses for recruiting new soldiers, as well as lower compensation for injury or death in Ukraine.
In addition to regional problems, the crisis has also taken deep root in the civil sector. Martin Vlachynský states that the civil sector is falling deeper and deeper into problems. He points out, for example, the debt of the railways exceeding 46 billion euros, with which the state will have to help, or the automobile industry in “free fall”, where AvtoVAZ (Lada) has reduced the production target from 500,000 to 300,000 cars. While defense and propaganda spending remain protected, the government is cutting funding for key development programs, such as in regional primary health care, where the government is reducing funding from 123.3 billion rubles (1.38 billion euros) to 53.2 billion rubles (597.1 million euros) in 2026.
However, this does not mean the end of the Russian economy
In conclusion, Vlachynský puts the economic misery in a wider context when he reminds that the bad economic situation “only means that Russia will be able to produce significantly less modern weapons than it could with a well-functioning economy.” Therefore, smaller countries lying on a potential main axis of Russian attack, such as the Baltics or Poland, will have better chances to defend themselves, even if economic difficulties do not mean automatic military irrelevance, as the examples of Iran or North Korea show. The Russian economy thus balances between fiscal stability and the priority of unlimited war financing.
