For the first time since its full-scale invasion of Ukraine over three years ago, Russia’s military budget is seeing a slight reduction. This indicates that the Kremlin is beginning to feel the economic squeeze of the prolonged conflict, hitting a ceiling in its capacity to sustain the war effort.
According to a draft budget presented to Parliament on Monday, national defense spending is expected to drop from over $163 billion to approximately $156 billion next year, based on current exchange rates. When accounting for an anticipated 7 percent inflation, this reduction becomes even more substantial.
This budget suggests that Russia plans to continue its existing economic strategy for funding the invasion, committing to a grueling war of attrition where its forces have made slow progress. President Putin aims to show that Russia can ultimately wear down Ukraine’s determined resistance and achieve his stated objective of fully occupying all Ukrainian territories annexed in 2022.
Meanwhile, Ukraine is banking on Russia’s meager battlefield successes and increasing economic strain to persuade Mr. Putin that further conflict is pointless. However, Putin has recently reaffirmed his resolve to continue the war until his broad peace terms are met, a stance that appears increasingly disconnected from Russia’s current economic situation.
Russian budget data reveals a strategy to largely rely on highly-paid mercenary-like soldiers. This method has exacerbated a budget deficit, prompting the government to raise taxes on its citizens, including an increase in the value-added tax from 20 percent to 22 percent next year.
Despite this slight decrease, Russia’s military budget is still almost four times higher than in 2021, with this year’s allocation exceeding $160 billion—a post-Soviet record. It also dwarfs Ukraine’s military budget by nearly three-fold, even as Ukraine grapples with its own financial challenges, requiring an estimated $20 billion to fund its expenses next year.
Should Russia choose to further escalate its war spending, it would almost certainly mean more economic hardship for its populace, either through additional tax hikes or increased domestic borrowing. Such measures could undermine the government’s attempts to wage war without directly impacting the public, potentially sparking dissent.
Sergei Suverov, a Moscow-based investment analyst, commented that the government was compelled to find ways to ‘stabilize the treasury’ due to the budget deficit.
He explained, ‘To achieve this, they had to increase taxes and reduce certain expenditures, even in defense.’
Suverov further noted that the Russian government retains the ability to increase war spending by stretching its current financial model. He elaborated that while international markets are inaccessible to Moscow, ‘the government, in principle, has resources for more internal borrowing.’
For the past two decades, the Kremlin has meticulously worked to prevent an economic crisis reminiscent of Russia’s tumultuous post-Soviet transition to capitalism, a period when the state famously declared bankruptcy.
Moscow’s ability to boost military spending was partly fueled by elevated oil prices, a consequence of the war. However, over the last 15 months, crude prices have fallen due to global economic slowdown fears. Additionally, Western sanctions have compelled Russia to sell its oil at reduced rates. Consequently, the nation’s oil and gas revenues are anticipated to decrease from almost $135 billion in 2024 to approximately $100 billion this year.
Internally, Russia faces a changing economic landscape. Its economy grew over 4 percent in 2023 and 2024, largely driven by military-industrial spending. This surge in expenditure, however, triggered high inflation, which the central bank attempted to control by raising interest rates to a peak of 21 percent. Currently at 17 percent, this elevated rate has significantly slowed the economy, limiting growth to about 1 percent this year.
To address the escalating budget deficit, the Russian government is not only hiking the value-added consumption tax but also imposing new taxes on the gambling sector and small businesses. Furthermore, it’s slashing numerous expenditures, notably those allocated for the development of occupied Ukrainian regions.
While these tax increases might ‘improve the budget revenue situation,’ Mr. Suverov cautioned that they would inevitably ‘impact consumer demand and, as a result, slow down economic growth.’