Russia Is Entering A Phase Of Financial Exhaustion
- 30.05.2025, 13:25
The Kremlin is becoming vulnerable.
This year, the Russian authorities planned to reduce the state budget deficit to 0.5% of GDP; however, the other day the Russian State Duma had to triple the budget deficit to 1.7% of GDP. Russia is close to a budget crisis, which, unfortunately, is unlikely to affect its aggressive policy, but at least may weaken its military power.
Unrealistic Budget 2025
Russia's 2025 federal budget, approved in the third reading by the State Duma, envisages revenues of $400.2 billion (18.8% of GDP) and expenditures of $411 billion (19.3% of GDP), which forms a deficit of about $11 billion. The budget is clearly military in nature: 41% of all expenditures are aimed at needs related to the war against Ukraine, in particular, $133.6 billion is earmarked for defense - 25% more than last year. Increased spending is also envisaged for the power bloc, the presidential administration, and "patriotic education" as part of internal mobilization. The revenue side is already based mainly on non-oil and gas sources: increased taxes, excise taxes, dividends of state companies, privatization and the growth of housing and utilities tariffs by almost 12%. Despite the official inflation forecast of 4.5%, real macroeconomic dynamics and increasing pressure on expenditures make these calculations unlikely. The budget is obviously deficient and unreliable in its parameters, and its military orientation signals the Kremlin's strategic preparation for a protracted war.
Dropping oil and gas revenues: a systemic threat to the Kremlin's budget
The Russian economy is entering a phase of deep fiscal turbulence in 2025. According to the results of the first four months of the year, revenues from energy exports fell by 10% compared to the same period in 2024, and in April the drop reached 12% year-on-year - the third consecutive monthly decline. The main reason for this is the sharp decline in the price of Urals crude oil, which remains below $60 per barrel, and the general weakness of the global market. In the context of current Western sanctions, price ceiling restrictions, as well as increasingly complex shadow fleet logistics, this forms a steady trend towards a reduction in foreign currency revenues to the budget.
Budget deficit and macro-financial destabilization
The key indicator of the problem is the budget deficit. In April, the situation unfolded dramatically: the deficit reached 1.05 trillion rubles (about $13 billion). In total, for January-April 2025, the deficit rose to 3.2 trillion rubles (about $36 billion), almost three times more than in the same period last year. The Russian Finance Ministry was forced to revise its targets: the expected annual deficit was raised to 3.8 trillion rubles (about $43 billion), a record since the pandemic. This signals a systemic imbalance between revenues and expenditures, which makes it impossible to finance priority government programs without emergency measures.
The main reason for the deficit is the extra spending on the war, which Russia has no intention of stopping. Every day about a thousand Russians sign an army contract. The mobilization resource of the Russian Federation is 25 million. But the really prepared - 3 million. Since the beginning of a full-scale war, 1.3 million have already been mobilized, and almost a million more are casualties. Every contract and every loss is a huge financial burden on the aggressor's budget.
Another major costly sector is equipment. Today 80% of military equipment is old, with reduced characteristics, it requires modernization, and this is again a waste of precious resource, which is already in short supply. Overall, in the first three months of this year, Russia's military overspending has reached $5 billion. In more than three years of full-scale war, Russia's direct expenditures on so-called defense alone amount to more than $500 billion, and the total economic losses due to the war are estimated in the trillions of dollars.
Reduction of investments in industry and transport: the economy is eating up reserves
With revenues falling, the government has begun to cut funding for key investment programs that used to be positioned as engines of import substitution and technological breakthroughs. The program for the development of the aircraft industry, which provides for the replacement of Western aircraft with Russian ones, has lost 22% of its funding - only 78.8 billion rubles of the 101.2 billion rubles left. The program "Development of Industry" has lost 66.9 billion rubles, support for the automotive industry has been reduced by 35 billion rubles. Even projects on robotics, shipbuilding and innovative transport have been significantly reduced. Such actions not only hamper the structural modernization of the economy, but also create an additional burden on the labor market, especially in regions where the concentration of defense and industrial enterprises is critically high.
Devaluation, inflation and a new architecture of the "budget rule"
The growing deficit is pushing the government to radical financial maneuvers. A scenario of devaluing the ruble to 100 per dollar is being discussed as a way to increase ruble revenues from exports. But such devaluation will inevitably be inflationary, which, given the already high prime rate of the Central Bank of the Russian Federation (21%), threatens further unwinding of the price spiral. The reserves of the National Welfare Fund have already shrunk to $40 billion. - the lowest since 2008. At the same time, the budget rule that was supposed to stabilize energy revenues is not being implemented. It was planned that the NWF would receive 1.8 trillion rubles in 2025, instead a deficit of 447 billion can be expected. This means that the very mechanism of forming and spending reserves needs to be revised.
War as the main destabilizer of the financial system
The biggest structural challenge for the Russian budget is not only sanctions or oil prices, but the war against Ukraine. Budget expenditures rose by 21% to reach 15.5 trillion rubles in the four months of 2025. The lion's share of these funds is direct or indirect financing of the armed aggression: military salaries, equipment purchases, payments to the wounded and families of the dead, and financing the maintenance of the occupied territories. It is the war that provokes a critical gap between revenues and expenditures, because of which the Ministry of Finance is preparing a budget revision in the State Duma. Ukrainian intelligence has already officially reported the growing internal economic crisis in Russia and deep structural instability.
Prediction: depletion of reserves and growing vulnerability of the Kremlin
All of the above factors - falling oil prices, decreasing foreign currency revenues, a sharp increase in military spending, cutbacks in investment - indicate a gradual depletion of the Kremlin's economic resource.
The situation is unlikely to change in the coming months, and the Russian government will be forced either to resort to emission financing or to cut expenditures, particularly social expenditures, even more deeply. Both scenarios contain significant political risks even for a powerful autocracy like the Russian Federation.
The Russian economy is entering a phase of systemic instability due to the war in Ukraine. While the budget crisis is unlikely to stop aggression, it significantly weakens Russia's military capabilities and opens a window for increased international pressure through sanctions and financial isolation.
Oleg Sarkits, "Mirror of the Week. Ukraine"