The pressures of the war in Ukraine are starting to bite for Russian President Vladimir Putin and his policymakers in the Kremlin, with Moscow planning tax hikes and spending cuts to deal with its growing budget deficit.
The draft budget for 2026 is expected to be submitted to parliament on September 29. Only minor changes are likely from that point, with Putin having agreed to the main details by then.
On Wednesday (September 25), the government announced plans to raise value added tax to 22% from 20% in a bid to curb the deficit, reneging on a pledge Putin previously made not to raise taxes before 2030.
There is also growing expectation that nondefense spending, including some social spending, will be cut to deal with the mounting pressures caused, largely, by plunging oil revenues.
Russia’s budget deficit has grown to around 4.2 trillion rubles ($50 billion, €42.7 billion). That’s around 1.9% of the country’s gross domestic product (GDP) — almost four times the original target of 0.5% for 2025. The finance ministry expects the deficit to reach 5.7 trillion rubles by the end of the year.
However, Elina Ribakova, an expert on the Russian economy with the Kyiv School of Economics, expects Moscow to continue what she says is an established pattern of maintaining high military spending by making cuts elsewhere.
“The consequences are the same as we have seen since 2014,” she told DW. “That is: everything else gets cut, the military spending expands. So, education, health care, social spending, environmental protection, all of that gets cut severely.”
Chris Weafer, a Moscow-based financial analyst with the consulting firm Macro-Advisory, told DW that budget cuts have been in the offing since Putin signaled them last December.
“We’ve had a deliberate slowdown in government spending in nonessential areas, which essentially means nonessential military and maybe nonessential social areas,” he said.
Flashing red
Russia’s economy has been flashing red for a while, a fact seized upon by US President Donald Trump in his social media post of September 24, which expressed strong support for Ukraine.
“Putin and Russia are in big economic trouble and this is the time for Ukraine to act,” he wrote on Truth Social.
He also referenced Russia’s ongoing fuel crisis. Ukraine’s successful drone attacks on Russian energy infrastructure such as refineries and export terminals have led to shortages of multiple fuel grades, rising prices, and long queues.
A major cause of the overall economic difficulty is the ongoing fall in oil and gas revenues. Soaring oil prices and enthusiastic new buyers in China and India meant Russian energy revenues soared in 2022 and stayed strong in 2023, despite Western sanctions and the EU reducing its dependence.
However, a falling oil price, a stronger ruble, the attacks on refineries and the continued impact of sanctions have all chipped away at the Kremlin’s key revenue source. State oil and gas revenues are set to fall by around 23% year-on-year in September, pointing to a darkened economic outlook.
In July, GDP grew by 0.4% year-on-year, indicating a significant cooling. Official forecasts predict growth of 1% this year, well down from 2.5% forecast. This time last year, soaring inflation pointed to an overheating economy, pumped up by massive budget increases on defense spending.
Defense spending has more than quadrupled since 2021, and totalled around 16 trillion roubles in the year to June 2025.
Chris Weafer says the official narrative is that what is happening is a “managed cooling,” with the central bank having raised interest rates to curb inflation and reduce soaring consumer spending — a move which has largely worked.
Budget cuts
However, he says the budget is “unsustainably high” and that if it is not significantly pulled back in the next few years — including military spending — it threatens to “destroy this whole narrative of how stable Russia is, and how the economy is fine, and people’s lives are unaffected, and everything is grand.”
“You would destroy the economy,” said Weafer, who believes Putin and the Kremlin are increasingly open to the idea of a peace deal being struck soon because of the growing economic pressure.
“Domestic budget pressure relative to the need to maintain stability is a significant factor, and one that adds to the weight of feeling this has got to end sooner than later,” he said.
Ribakova is not as optimistic. “When they went into the 2022 invasion, they were conscious of the economic costs. They calculated them, and at the political level, they decided it’s acceptable,” she said.
Secondary sanctions
Given the strains faced by the Russian economy, pressure is growing on the EU and US to significantly strengthen existing sanctions in pursuit of a successful peace negotiation.
Trump has recently called on Europe to do more to completely end its purchases of Russian gas, mostly via liquefied natural gas (LNG). The bloc still purchases Russian oil too, via refined products.
The US has also mulled placing secondary sanctions on countries like India and China, which buy large quantities of Russian oil. Such a move could seriously add to Moscow’s economic challenges.
Ribakova thinks now is the time to ramp up pressure on Moscow with more sanctions, as it is clear the economy is as vulnerable as it has been for quite a while.
However, she points to the fact that the heavily sanctioned regimes in Venezuela, North Korea, and Iran remain in power despite economic calamity as evidence that sanctions alone will not save Ukraine.
“Sanctions can fix part of the problems, but they cannot solve all,” Ribakova said.
However, Chris Weafer thinks secondary sanctions in particular could force Moscow quickly to the table.
If the US were to put secondary sanctions on the buyers of Russian oil, then that would be very important, he argues.
“If you were to take, say, another 20-30% hit to oil export revenues, then that would tip the budget into unsustainable territory and could force massive changes to the domestic dynamics.”
Edited by: Uwe Hessler
