By Steven Blatter
24/07/2026
The Kremlin’s precarious attempt to balance a high-intensity war economy with domestic stability appears to be unravelling. Under the cumulative weight of international sanctions and structural isolation, Russia’s public finances are entering a perilous phase, with state spending spiralling significantly faster than the treasury’s capacity to raise revenue.
Official data for the first half of 2026 paints a stark picture of a fiscal apparatus under severe strain. By the end of June, the federal budget deficit had surged to 5.73 trillion roubles (£51bn) – reaching a staggering 151.4 per cent of the total deficit projected for the entire year (3.78 trillion roubles). In effect, Moscow has managed to overshoot its annual borrowing target by 1.94 trillion roubles with fully six months of the financial year remaining.
At the heart of this fiscal dislocation lies the regime’s unrelenting focus on the front line. Front-loaded military procurement and defence outlays during the first six months of the year have cannibalised state reserves. A single state spending programme, “Ensuring the Country’s Defence Capability”, absorbed 2.80 trillion roubles between January and June against an annual ceiling of 4.05 trillion roubles. This rapid deployment of funds represents 69.1 per cent of its full-year allocation, accounting for 11.5 per cent of all state expenditure and swallowing nearly half (48.8 per cent) of the entire six-month deficit.
Concurrently, the foundational myth of Russia as an invulnerable “commodity superpower” is being eroded by global market restrictions. Hydrocarbon revenues – historically the bedrock of the federal budget – dropped to 3.66 trillion roubles over the first half of 2026, down 22.7 per cent (or 1.07 trillion roubles) from 4.73 trillion roubles over the same period last year. Consequently, oil and gas receipts now account for just 19.7 per cent of total budget revenue, down from 26.9 per cent a year prior, while their contribution relative to GDP has contracted from 4.9 per cent to 3.7 per cent.
A Systemic Divergence: A year-on-year analysis highlights a structural rift between income and expenditure. Total revenues grew by a modest 5.8 per cent to 18.62 trillion roubles (+1.03 trillion roubles), while state spending expanded by 16.1 per cent to 24.35 trillion roubles (+3.37 trillion roubles). The absolute increase in government spending has outpaced revenue growth by more than 3.2 times.
The Kremlin has attempted to frame a 16.3 per cent rise in non-oil and gas revenues (reaching 14.96 trillion roubles) as evidence of economic resilience and diversification. However, financial analysts view this growth as largely illusory. Far from reflecting genuine expansion in goods and services, the increase has been driven by heavy-handed state intervention: higher tax rates, stubborn domestic inflation, and one-off corporate levies. The regime is essentially squeezing remaining domestic enterprise harder, artificially inflating non-oil revenues to 80.3 per cent of total budget income.
Adding to the Ministry of Finance’s woes is the unintended backfire of currency management. The artificial strengthening of the rouble has effectively neutralized any windfall from global commodity markets. The US dollar averaged 76.6 roubles over the first half of 2026, compared to 89.2 roubles during the same period in 2025 – a 14.1 per cent appreciation. As a result, even though the average taxed price of Russian crude rose by 6.9 per cent from $59.80 to $63.90 per barrel, the exchange rate differential eroded domestic rouble yields, stripping the treasury of vital income.
The fundamental crisis facing Moscow remains spending control. By the end of June, total revenue collection stood at just 46.2 per cent of the full-year target, while overall spending had already hit 54.1 per cent. Forced to maintain its primary commitments – defence and social payouts – the Kremlin is systematically borrowing from the future, burning through reserves to fuel a conflict its economy can no longer comfortable afford.