Moscow is operating on a wartime budget, allocating record sums to defense—equivalent to 7.2% of GDP. Energy revenues are shrinking under the pressure of sanctions, while rising taxes and a growing budget deficit signal mounting fiscal strain. After 2027, Russia’s capacity to finance the war could drop sharply.
The country will be able to conduct large-scale military operations for at least the next two years, but the costs will continue to rise: higher inflation, a larger budget deficit, and escalating social tensions. This is the conclusion of analyses by international research institutes. In 2025–26, Russia is effectively functioning under a wartime budget, with defense and security spending reaching levels comparable to late-Soviet mobilization.
The Stockholm International Peace Research Institute (SIPRI) estimates total planned military expenditure in 2025 at roughly 15.5 trillion rubles, or 7.2% of GDP. Moscow officials indicate that when classified items are included, this figure could reach 7–7.5% of GDP.
The Bank of Finland projects that between 2026 and 2028, defense and internal security spending will remain around 20% of total government expenditures, maintaining a structurally militarized budget.
Sanctions hit Russia’s energy revenues
Oil and gas revenues remain the backbone of Russia’s war financing, though sanctions are steadily eroding profit margins. The 2025 budget projected energy revenues at 8.7 trillion rubles, down from the originally planned 10.9 trillion—mainly due to lower prices and discounts on Russian Urals crude.
EU and G7 sanctions include a ban on LNG imports by the European Union and strict oversight of Russia’s so-called “shadow fleet”—557 vessels on the control list. In practice, this raises transportation and insurance costs and increases the risk of future revenue shocks. Independent analysts argue that further pressure is needed to more significantly limit Russia’s ability to fund its war. One proposed solution, supported by Ukraine, is a $30-per-barrel price cap, which could cut Russia’s oil export revenues by an additional 40%.
“Whether fiscal pressure and sanctions will actually affect Russia’s war momentum in 2026 will depend on the firmness and consistency of their enforcement,” says Grzegorz Małecki, former head of Poland’s Intelligence Agency. He also highlights the social consequences of militarizing the economy. “If sanctions are maintained or even tightened, they could, over the medium and long term, weaken Russia’s war effort. The question remains whether Ukraine’s resistance will hold until then.”
An Asian Pivot at a Russian Price
When the West closed its energy markets to Russia in February 2022, experts predicted an imminent economic collapse—which never materialized. Moscow found new buyers in Asia, and trade with China and India exploded to levels unimaginable just three years ago. Yet the balance of this exchange is far from even.
By the end of 2025, China accounted for roughly 30% of Russian exports and 35% of imports. Russia ships oil, gas, coal, and raw materials to China—often at significant discounts—providing revenue that funds about one-third of Moscow’s budget. In return, Beijing supplies machinery, automobiles, electronics, and as much as 90% of the sanctioned microchips for Russia’s defense industry.
Meanwhile, New Delhi imports around 40% of its oil from Russia—up to 1.75 million barrels per day—while Russia’s imports from India remain minimal.
“The growing dependence of Moscow on China and India carries a real risk of losing the imperial status that Russia values so highly,” notes Grzegorz Małecki. “The country is gradually becoming a pawn in the political maneuverings of these nations and a tool in their competition with the U.S. and other Western states. There is no doubt that continuing down this path will degrade Russia’s standing on the international stage and subordinate its interests to those of other powers, rather than advancing its own political agenda.”
Energy dependence works asymmetrically. Russia needs oil and gas revenues to fund its war—these revenues cover about one-third of the budget. China and India, by contrast, have alternatives. Moscow has no such flexibility.
Rising Deficit, Higher Taxes
Russia’s 2025 budget deficit is projected to reach a record 6.9 trillion rubles—nearly double the previous year—equivalent to 3.2% of GDP. In response to falling energy revenues, Moscow is boosting tax income, including a 2-percentage-point increase in VAT to 22%, which the Ministry of Finance expects will generate a 20% rise in revenues.
Oil and gas revenues in 2026 are expected to grow by only 3%, with their share of federal budget revenue falling to 22%. Defense spending is planned for a modest 5% reduction, while national security expenditures are set to rise by a comparable amount.
“The draft budget for next year seems to anticipate the end of the war in Ukraine,” comments Heli Simola, economist at the Bank of Finland. “Ending the conflict would remove the need for further increases in military spending, while national security expenditures will likely rise significantly to maintain control over occupied territories.”
Other budget categories show planned increases as well: national economy spending is set to rise by 13%, and social policy and healthcare by 7%. “Culture, with a 20% increase in funding, will become the largest beneficiary among smaller categories, including programs promoting patriotism and traditional cultural values,” adds Simola.
2027: The Limit of Capacity
Analyses by the Bank of Finland indicate that Moscow plans to replenish depleted reserves even after active military operations end. In their assessment, Russia appears capable of sustaining military and security spending above 7% of GDP over the next two years by combining reduced but still significant energy revenues with higher taxes, domestic bond issuance, and the use of reserves.
Stricter or better-enforced sanctions on oil, LNG, and the shadow fleet could sharply reduce hard currency inflows and increase financing costs. The cumulative effects of militarization—“draining society,” reduced investment, and low productivity—narrow the tax base and force tougher domestic trade-offs between guns and butter, i.e., military priorities versus social needs.
“In the longer term, this will lead to destabilization, triggering uncontrolled social unrest, especially in non-Russian republics. It could potentially threaten the federation’s cohesion and fuel rising chaos,” warns Grzegorz Małecki. Moscow, however, may attempt to suppress internal opposition to declining living standards—at least in the short term—through tight political control and targeted social spending aimed at key societal groups.
