The new three-year Russian federal budget, recently submitted to the State Duma, offers one of the clearest insights yet into how deeply the war in Ukraine has reshaped the country’s economy. Far from signaling stabilization, the document confirms a decisive turn toward a permanent wartime footing: defense and security now consume nearly 40 percent of all federal spending, while oil and gas revenues no longer cover the cost of war. The Kremlin’s message is unmistakable – Russia is preparing to live, and fight, as a besieged fortress for years to come, even if doing so slowly drains the vitality of its economy and society. Yet this ambition may collide brutally with reality – the real limits of Russia’s economic capacity.
Budgets Reveal the War’s Mounting Economic Stakes
Russia’s annual federal budget has become a key indicator of the economic dimension of the Kremlin’s war in Ukraine. Beyond the geopolitical and military aspects, the conflict imposes an ever-growing burden on Russia’s economy. Each budget released since the invasion serves as a window into the true cost of the war and a message about the Kremlin’s intentions. In the fog of war, hard data are scarce – which makes the budget figures, however sanitized, invaluable for understanding Russia’s capacity to sustain its war effort.
Notably, Russia’s federal budget is formulated by the Finance Ministry, not the defense establishment, meaning it reflects what the financial technocracy believes the economy can actually afford. The choices in spending and revenue thus offer a candid, if implicit, assessment of Russia’s wartime economic limits. The budget also serves as a communication to domestic elites and the public: a signal of how long and at what intensity the leadership plans to prosecute the war.
Last year’s budget projections, for instance, carried a note of cautious optimism that the war’s costs might ebb in the mid-term. The three-year budget approved in late 2024 (for 2025–2027) assumed that after a wartime spending peak in 2024, expenditures would decline – suggesting an expectation that the conflict might not drag on indefinitely. It penciled in total federal spending dropping from ₽36.7 trillion in 2024 to just ₽34.4 trillion in 2025 and ₽35.6 trillion in 2026. Those assumptions have since been overtaken by reality. The new budget numbers tell a very different story: instead of shrinking, spending has surged to record levels, with ₽41.5 trillion now planned for 2025 and ₽44 trillion for 2026. In short, any earlier hopes of reining in war expenditures have been abandoned. The Kremlin is telegraphing that a “siege economy” posture is the new reality – Russia is settling in for a protracted confrontation, and the budget is built for a long war.
Oil Windfalls Can No Longer Cover War Costs
One of the starkest revelations from the budget is how Russia’s oil and gas revenues no longer suffice to finance its military outlays. Russia’s economy is a classic petrostate, heavily reliant on exporting hydrocarbons (oil and natural gas) to cover government spending. In the past, lucrative energy exports essentially bankrolled the state – and by extension, could bankroll war. Early in the Ukraine conflict, high oil prices and continued gas sales meant that energy windfalls still kept pace with the ballooning cost of the military. 2024 marked a critical threshold: that year, Russia’s oil and gas revenues (around ₽11.1 trillion) roughly matched its defense spending (about ₽10.8 trillion) – meaning the “war budget” was essentially covered by resource rents. But going forward, that is no longer the case. In 2025, the government expects only ₽8.65 trillion in oil and gas income, while planned military expenditure (“national defense”) is a staggering ₽13.5 trillion. In other words, the war now costs far more than the oil and gas sector can pay for.
This crossover has huge implications. It signals that the Kremlin can no longer sustain the war effort on petro-revenues alone, and must either divert funds from other parts of the budget, raise new revenues, or run larger deficits (in practice, all three). Indeed, Russia is turning to new fiscal measures and debt to fill the gap. For the first time in years, the 2026–2028 budget does not count on a major spending increase – instead the government is hiking taxes and borrowing more to meet existing commitments. The Finance Ministry has explicitly prioritized boosting non-oil revenues to mitigate volatile commodity markets.
Officials have acknowledged this shift. Military outlays would keep rising despite falling oil and gas takings and a weaker economic outlook. That prediction proved accurate. Through the first 9 months of 2025, oil and gas taxes were down over 20% year-on-year, comprising only about a quarter of budget revenues. Russia’s Urals crude has been selling at a discount under sanctions, and gas export volumes are sharply reduced – a dangerous combination for a petrostate at war. The war’s cost is outpacing the petro-dollar firehose, forcing the Kremlin to squeeze the broader economy for funds.
Defense and Security: Record Shares of the Budget
Where is all this money going? The short answer: the military and the security apparatus, which now dominate Russia’s expenditures at levels not seen since the Cold War. In the 2025 budget, national defense spending alone accounts for roughly 30% of all federal outlays – an extraordinary figure in modern Russian history, the highest share since the Soviet era. In absolute terms, Russia will spend about ₽13.5 trillion on defense in 2025 (approximately $165–170 billion), more than double the pre-war level. And that’s just the direct military budget. When you add “national security and law enforcement” – the policing, domestic security, and spy agencies – the combined siloviki (force structures) absorb around 40% of the entire federal budget. Such a degree of guns-over-butter allocation has truly not been seen since the late Soviet military buildup.
This trend toward militarization of the budget accelerated rapidly with the war. Defense outlays have surged 68% year-on-year in 2024 alone and are set to rise further into 2025. The share of spending going to the military climbed from about 15% before the invasion to over a quarter in 2024, then one-third in 2025. In 2025, Moscow will be spending roughly 6% of GDP on the military, several times higher (proportionally) than countries like the US or China. This is a burden reminiscent of the Soviet Union’s guns-versus-butter dilemma – with the crucial difference that today’s Russian economy is much smaller and less autarkic than the USSR’s was. Piling such a defense burden on a less formidable economy is potentially an even more perilous strategy.
Crucially, the 2026–2028 budget plan indicates no significant demobilization ahead. Military spending is slated to remain around ₽13 trillion each year through 2028, tapering only slightly if at all. Any notional decline in 2026 (a 4% dip) would still leave war spending at roughly double the 2021 level and the budget has it rising again in 2027. In short, the Kremlin is planning for high defense expenditures to be a permanent feature. The message to Russia’s economy and elites is unmistakable: the guns aren’t going silent, and resources will continue to be marshaled for war for the foreseeable future.
There is also a notable bump in internal security spending, which speaks volumes about the regime’s concerns. Spending on the “national security and law enforcement” category – which funds the likes of the Interior Ministry, National Guard, FSB, police and prisons – is set to grow in coming years even after a wartime surge in 2022–2023. After a modest pause in 2024–25, the new budget boosts internal security outlays by about 13% in 2026 (to roughly ₽3.9 trillion) and continues increasing them through 2028. The Kremlin clearly anticipates potential domestic unrest or instability and is preemptively fortifying its repressive apparatus. Pouring money into the security services is a tacit admission that a longer war – and the socio-economic strains it brings – could provoke dissent that needs containing. Essentially, the regime is investing not just in fighting the external war, but also in shoring up the home front against any cracks.
A “Fortress” Strategy – at a Steep Price
The overarching picture is that Russia’s budget priorities have decisively shifted to a wartime footing, albeit without official wartime mobilization of the economy. President Putin’s government is embracing what some call a “fortress Russia” strategy – redirecting huge resources to defense and internal security, while telling the public to adapt to a new normal of confrontation. The Kremlin’s message now is that Russia is in a long-term siege-like standoff with the West, and this is the new reality. The latest budget explicitly names defense and security needs as the strategic priority, even above economic development. According to the Finance Ministry’s own documentation, the budget is designed to ensure the needs of the armed forces and security are met, including re-equipping the army and modernizing the defense-industrial complex. Social support for soldiers’ families is also highlighted, underscoring how the war effort permeates fiscal policy.
To fund this warfare state, the government is making ordinary Russians and businesses pick up more of the tab. New tax hikes are on the way. For example, the draft budget includes an increase in the value-added tax (VAT) from 20% to 22% starting in 2026, a move that will hit consumers and enterprises across the board. It also drastically lowers the income threshold for small businesses to qualify for simplified taxation, dragging many into the full tax system. These measures show that Moscow is willing to squeeze the wider economy to finance its military ambitions – even at the risk of damping small business activity and consumer demand. Essentially, Russians will pay more in taxes so that the state can continue paying for tanks, drones and missiles.
On top of taxation, Russia is expanding its borrowing. The budget deficits for the next few years are projected in the trillions of rubles. In fact, the expected 2025 deficit may exceed 5 trillion (over $60 billion), a sign of how war strains are outrunning revenues. Much of this gap will be financed by domestic bond issuances – effectively debt that future Russians must service. The rest will likely be covered by drawing down reserves or additional, less transparent means (such as profits from state companies). While Russia still has relatively low sovereign debt by international standards, the sudden need to borrow so much more reflects the fiscal pressure of sustaining the war. It is a far cry from the pre-war years of oil-fueled budget surpluses.
All these adjustments – higher taxes, more debt, reallocating spending – amount to a slow reconfiguration of the Russian economy. It is not a total war mobilization, at least not yet; many consumer markets still function, and not all industry is on a war footing. But the trend is unmistakable: each passing month, the war drains more state resources and demands a heavier tribute from the economy. Like a frog being slowly brought to boil, the Russian public and businesses are being gradually acclimated to a harsher, costlier economic environment, one dominated by guns-and-butter tradeoffs. The Kremlin seems to bet that by turning up the heat gradually – cutting some civilian programs here, nudging taxes up there – the populace will remain quiescent and not “jump out of the pot,” so to speak. Gradual or not, the pot is getting hotter.
Endurance with Erosion: How Long Can This Last?
Despite the immense burdens, it must be noted that Russia’s economy has not collapsed – and is unlikely to in the near term. The country still has substantial resources, a diversified (if often inefficient) industrial base, and experience of weathering sanctions. After the initial shock in 2022, the economy adjusted faster than many expected. As the new budget itself forecasts, Russia even anticipates modest growth (around 1–2% a year) in the medium term. The ruble may be weak, and inflation elevated, but domestic production has ramped up in sectors like armaments, and unemployment remains very low. All this underscores that Russia can continue to fund and fight this war for years if needed, barring some external economic catastrophe.
However, “not collapsing” is a low bar. Under the surface, the war is steadily eroding Russia’s economic vitality. The massive diversion of funds to military uses is crowding out investment in infrastructure, education, healthcare, and other areas that directly affect long-term growth and living standards. Much of the surge in manufacturing is happening in the defense sector, which produces little consumer or export value. Technological isolation due to sanctions is worsening over time, making many industries less efficient and innovative. The budget’s heavy skew toward defense and security means fewer resources to address demographic challenges or stimulate civilian industries (even as some initiatives are funded, like schools or roads, those are overshadowed by defense needs).
In essence, Russia is trading away future development for present military power. This path is strikingly similar to the late Soviet trajectory, when excessive military spending strangled the civilian economy. Dedicating roughly 40% of the budget to the military and security agencies is something not seen since the Cold War and is ultimately unsustainable without painful consequences. Each year of war economy accelerates Russia’s slide into a less efficient, less dynamic state. It’s a slow bleed rather than a sudden crash. The Russian economy of 2025 is still standing – even relatively stable on the surface – but it is undeniably weaker, more rigid, and more isolated than it was before the war. That is a process unlikely to reverse while the conflict continues.
Ironically, the Kremlin touts the economy’s resilience as proof that Russia can afford this war indefinitely. The presidential spokesman Dmitry Peskov recently insisted the economy had largely “restructured for the needs” of the military campaign such that all front-line requirements are being met “with abundance”. This upbeat rhetoric, however, glosses over the long-term costs. Yes, Russia can pour out shells and build drones today – but at the cost of robbing other sectors and future generations. Economic pain is being deferred and diffused, not eliminated. The true bill for this war will come due in years of lost growth, technological lag, and diminished public well-being.
In conclusion, the latest Russian budget starkly illustrates the country’s predicament: Moscow can still muster the funds to fight on, but only by marring its economic future and tightening the screws on its people. The war has transformed Russia’s budget into an instrument for a militarized economy, one that prioritizes guns and internal control above all else. This is the Kremlin’s bet – that a “fortress Russia” can outlast Ukraine and the West by sheer endurance. Yet history suggests that such militarization, if sustained, becomes a self-defeating trap. The new budget shows Russia digging itself deeper into that trap: a wartime economy that can limp along for quite some time, but at an ever-growing cost to its efficiency, prosperity, and ultimately its power. The trajectory is set – and it leads toward a poorer, more militarized Russia as long as the conflict rages on.
