High oil prices and tax hikes aren’t enough to offset war spending and keep Russia’s budget on track Russia’s federal budget deficit has significantly exceeded its annual target due to increased war-related spending, even with higher oil prices and a VAT increase. Economic growth has slowed dramatically, with the government prioritizing inflation control over expansion, a move that primarily impacts civilian sectors. The defense industry is booming at the expense of other economic areas, draining resources and labor, which is expected to worsen the structural problems within the Russian economy as the war continues.

• Russia’s federal budget deficit for January-May reached 6.01 trillion rubles, 2.6% of GDP, exceeding the full-year target.
• Revenue increased due to higher oil prices and a VAT hike, while spending slowed in May but overall expenditures rose 17% year-on-year.
• Spending on “National Defense” and “National Security” accounts for nearly 40% of the current budget, indicating a focus on war financing.
• The government plans to increase spending, pushing the final 2026 deficit above the planned 1.6% of GDP, to be covered by “budget carry-overs” and asset sales, not borrowing or the National Wealth Fund.
• Russia’s GDP growth forecast was cut to 0.4% for the year, with growth at 0.2% in the first four months, as authorities prioritize fighting inflation.
• Inflation stands at 5.4% as of June 1, with forecasts around 5.2% for the full year.
• Industrial data shows growth is concentrated in war-related sectors, while civilian industries like construction materials and automobile production are contracting.
• Increased military spending is widening the gap between the war economy and the civilian economy, draining resources and labor from non-war sectors.
• The Finance Ministry plans to lower the budget rule’s cutoff price for Russian Urals crude from $59 to $50 per barrel starting in 2027 to reduce budget spending.