Russia is facing a persistent fiscal challenge, entering its fifth consecutive year with a budget deficit, a situation exacerbated by escalating war expenditures and declining revenue streams. The recently unveiled budget projections for 2026 highlight a shortfall of 4.6 trillion rubles ($54.8 billion), representing 1.6% of the nation’s Gross Domestic Product (GDP). While Prime Minister Mikhail Mishustin has characterized this deficit as “acceptable,” the underlying financial dynamics suggest a precarious stability.
The fiscal roadmap for 2026 outlines government spending at 44.9 trillion rubles, a slight increase from earlier forecasts. Conversely, revenue is anticipated to contract by 4% to 40.3 trillion rubles. This fiscal recalibration occurs against a backdrop of diminished oil and gas revenues and substantial costs associated with ongoing military operations. To mitigate these pressures, Russian authorities are reportedly exploring strategies such as increased taxation, broadening the tax base, curtailing non-military spending, and augmenting borrowing.
Fiscal Adjustments and Tax Hikes
In a significant policy shift, Russia’s Finance Minister, Anton Siluanov, confirmed an increase in the Value Added Tax (VAT) from 20% to 22%, effective next year. This move is intended to bolster the national budget’s resilience. Furthermore, the VAT threshold for businesses will be lowered, requiring companies with annual revenues as low as 10 million rubles to comply, a reduction from the previous 60 million ruble benchmark. These measures, alongside a new 5% tax on specific gambling enterprises and the elimination of insurance premium exemptions for most small and medium-sized businesses, are projected to generate approximately 1 trillion rubles annually. These fiscal adjustments appear to diverge from President Vladimir Putin’s earlier pledge not to raise taxes before 2030.
Increased Borrowing and Fund Depletion
In parallel with tax adjustments, the Russian government plans to increase borrowing by 2.2 trillion rubles by the end of 2025. The projected revenue from the VAT hike alone is estimated at 1.19 trillion rubles for the upcoming year. However, these additional funds may not entirely bridge the fiscal gap, especially as Russia’s National Wellbeing Fund, a crucial reserve, has a remaining balance of only 4 trillion rubles available for immediate use.
Economic Headwinds and Shifting Priorities
The nation’s financial outlook is further complicated by a downturn in global oil prices, which previously led to a threefold upward revision of the 2025 deficit forecast. Economic growth projections have also been tempered, with the expected GDP expansion for 2026 revised to 1.3%, and the forecast for 2025 slashed to 1% from an earlier 2.5%. Expenditures for 2025 have been adjusted upwards to 42.3 trillion rubles, representing 19% of GDP, following mid-year budget adjustments. Notably, war-related spending has surpassed allocations for social programs, signaling a significant shift in budgetary priorities. The Bank of Russia has cautioned that maintaining fiscal balance amidst renewed growth in social spending necessitates cuts in other sectors. However, the sustained demands of the conflict in Ukraine present a formidable obstacle to substantial expenditure reductions. The Ministry of Finance’s proposed three-year budget and tax code modifications are slated for review, but the volatility in spending since 2022 suggests that current fiscal projections may remain subject to considerable uncertainty.
David Thompson earned his MBA from the Wharton School and spent five years managing multi-million-dollar portfolios at a leading asset management firm. He now applies that hands-on investment expertise to his writing, offering practical strategies on portfolio diversification, risk management, and long-term wealth building.