Russia plans to increase taxes and reduce spending to sustain high defense expenditure as its economy struggles under the financial burden of the over three-year conflict in Ukraine.
President Vladimir Putin denies the war is damaging Russia’s economy, yet the budget deficit widens due to rising expenditures while oil and gas incomes decline due to Western sanctions, according to officials and economists mentioned by Reuters.
Recent discussions in Alaska between Putin and US leader Donald Trump did not result in a ceasefire, offering Moscow, which favors moving towards a peace resolution, a strategic lift but also a financial challenge.
The extended conflict in Ukraine increasingly impacts Russia’s economy. In 2025, the budget shortfall hit 4.9 trillion rubles ($61 billion), one of the largest recently. The drop in oil and gas revenues due to Western sanctions and rapidly rising military expenses are the causes.
Reportedly, Russia’s total defense and national security expenditure in 2025 will be 17 trillion rubles, the highest since the Cold War, making up 41% of the total spending. This positions the defense sector as a key economic growth driver amid declining civilian production.
What expenditures will be cut?
In June, Putin stated that Russia aims to lower military spending, yet authorities still foresee an increase.
The 2025 budget, expected in September, allocates 8% of GDP for defense and security, though a government insider notes the actual figure is slightly higher.
There are no planned defense spending cuts in 2026, but reductions might occur in 2027 if the conflict ceases as other spending areas compete for funds.
“Even with a ceasefire, manufacturing missiles and drones will continue, though on a reduced scale,” the insider mentioned, adding there won’t be a return to pre-“special military operation” levels.
Anatoly Artamonov, chairman of the Federation Council Budget Committee, suggests slashing non-priority area spending by 2 trillion rubles annually by 2028. Social sectors like healthcare, education, and other civil programs will be first affected, as their spending share is already reducing.
A governmental source informed Reuters that tax hikes are unavoidable.
“Without them, we simply can’t balance the budget, even with reduced defense spending. Oil and gas income falls short, and the economy can’t fully make up for it,” the source stated.
Putin claims the financial system is “stable,” but analysts expect low economic growth and a wider revenue-expenditure gap. A government source predicts this year’s deficit at about 5 trillion rubles, or 2.5 percent of GDP. If trends persist, the deficit could reach 8 trillion rubles in the coming years.
Economic challenges in Russia – current situation
Successful Ukrainian drone strikes on Russian oil refineries have led to historical highs in Russian gasoline exchange prices. Meanwhile, gasoline shortages and kilometer-long queues at stations plague certain regions of the “country of gas stations.”
Despite surprising resilience amidst international sanctions, Russia’s economy shows serious issues three years into the war and under Western restrictions, Bloomberg noted.
Illustrative Photo by Maxim Titov: https://www.pexels.com/photo/historical-building-located-under-blue-sky-3848886/
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