Russia’s budget proposal for 2025-2027 confirms many analysts' bold predictions — it is, in essence, a budget for prolonged warfare.
Moscow’s budget planning now operates on a three-year cycle, with yearly adjustments. This approach allows for more detailed forecasts of short-term revenues and expenditures, while also offering a medium-term outlook that can be revised annually. However, the significance of this year’s budget extends beyond the typical planning process due to two crucial factors. Firstly, it provides a clearer view of how the Russian government envisions its economic and fiscal future amid ongoing geopolitical conflicts. Secondly, it reflects how the current vision reshapes last year’s projections.
Just a year ago, Russia's three-year budget foresaw a sharp increase in defense spending in 2024, primarily due to support for the military-industrial complex, followed by a cooling period in 2025, with both revenue and expenditure lines projected to stabilize. Analysts interpreted this in various ways. Some saw it as a pragmatic assessment of the limits of the Russian financial system's ability to sustain ballooning military expenses. Others interpreted it as a sign of weakness, suggesting that Russia could afford only one more year of heavy military spending before needing to tighten its belt significantly.
Yet, the new budget draft for the next three years shows that military-industrial expenditures have increased by another 25%, now rivaling the late Soviet Union's defense spending levels in the 1980s. No future reductions are planned. Whether this is due to the silencing of more rational voices within Russia's financial sector or a complete disconnect of the leadership from reality, the result is clear: Russia is attempting to normalize a highly abnormal economic and societal state.
There are two key questions surrounding the 2025-2027 budget. First, how much will be spent on defense while simultaneously maintaining social programs? Second, how will these increased expenditures be financed?
Expenditures: War as a Priority
According to the Russian Ministry of Finance, the key priorities for the new three-year budget include fulfilling social obligations, ensuring national defense and security, and achieving technological sovereignty. The Ministry forecasts that federal revenues will rise by 11.6% in 2025, from 36.11 trillion rubles to 40.30 trillion rubles, with expenditures growing by 5.2%, reaching 41.47 trillion rubles. Despite these increases, the percentage of GDP devoted to spending is expected to decrease slightly, from 20.1% in 2024 to 19.3% in 2025, while revenues are projected to rise from 18.4% to 18.8% of GDP.
For all three years, Russia's budget is expected to remain in deficit. In 2025, the deficit is forecast to be 1.2 trillion rubles (0.5% of GDP), a significant improvement from the 2024 estimate of 3.3 trillion rubles (1.7% of GDP). The deficit will be primarily financed through government borrowing.
Defense will once again dominate Russia's budget. In 2025, 32.4% of all federal spending will be allocated to national defense, equating to 13.49 trillion rubles. In last year’s forecast, this figure was 29.4%, or 10.77 trillion rubles. The new budget reverses previous plans to reduce military spending, instead continuing to increase it over the next three years. Additionally, expenditures on national security and law enforcement, which include the functioning of police forces and the wages of prosecutors and investigators, will also grow. Combined, these defense and security expenditures will account for 41% of Russia’s total federal spending.
Meanwhile, social policy remains the second-largest budgetary category in 2025, absorbing 15.7% of total spending, followed by national economic development at 10.5%.
Interestingly, while the official presentation of the 2025-2027 budget emphasized social obligations, the rapid rise in military-industrial expenditures was downplayed in Russian state media. Despite the near-total control over public opinion, the government seems cautious about drawing too much attention to the fact that the country’s economy will increasingly be geared toward war. The omission may indicate that even in a tightly controlled media environment, the authorities remain somewhat sensitive to public sentiment.
Revenue: The Heavy Burden on the Population and Business
The new budget is based on a baseline forecast for Russia’s socioeconomic development, which predicts moderate economic growth of 2.5-2.8% of GDP annually from 2025 to 2027. This optimistic outlook has shaped the revenue expectations for the coming years, with an increase in non-oil and gas revenues and a decline in oil and gas revenues. By 2025, non-oil revenues are expected to account for 73% of total revenue, with oil and gas contributing just 27%.
This increase in non-oil revenue will be largely driven by significant tax code changes enacted in 2024. The Russian government anticipates higher turnover taxes, particularly VAT, in line with broader macroeconomic trends. Excise duties on gasoline, alcohol, cigarettes, and sugary beverages will also rise in 2025, further boosting revenue. Additionally, tax hikes are planned for businesses and individuals. Corporate tax rates will increase from 20% to 25%, while personal income taxes will become more progressive, imposing a heavier burden on higher earners.
This fiscal strategy will push Russia’s national debt from 15% of GDP in 2023 to 18% by 2027. While external debt is expected to decline, domestic debt will rise. In short, the increased military spending will be funded by the Russian population, both through direct tax hikes and indirectly via rising prices for goods and services.
A New Economic Reality
The ease with which Russia’s three-year federal budget was revised to further increase military expenditures suggests that the influence of so-called market reformers or economic liberals within the Russian leadership has been significantly diminished. Security forces now wield decisive influence, even over budgetary matters.
Yet, this shift in influence is not the only reason the Russian government appears confident in its financial future. The experience of navigating sanctions over the past few years seems to have reinforced the belief that Russia can finance its military operations without triggering significant domestic unrest. Despite international restrictions, Russia continues to earn enough from energy exports to sustain high levels of defense spending. Moreover, sanctions targeting Russia’s export and import of dual-use goods have often been delayed or ineffective, providing the country with time to adapt and circumvent these barriers.
However, this seemingly smooth budget adjustment should not be mistaken for an assurance of success. Russia’s economy remains highly dependent on volatile oil prices, and the ruble is prone to instability. Labor resources are also strained, making the country’s workforce vulnerable. While Russia can currently maintain a military conflict while keeping its civilian economy afloat, such a balancing act is unlikely to be sustainable in the long term.
The military sector’s demands are virtually limitless, while the civilian economy’s capacity to compensate for inefficiencies and unproductive defense spending is finite. Over time, the market-driven segment of the Russian economy may be overwhelmed by the financial strain of supporting a growing military sector.
Moreover, Russia’s apparent economic strength may rest on fragile foundations. Its reliance on energy exports and tenuous social stability, bolstered by propaganda, could quickly unravel. The government may continue to buy public loyalty for now, but even this resource is not infinite.
