An unusual report: Budget constraints and a new rhetoric of war
The Russian government’s annual report to the State Duma, presented by Prime Minister Mikhail Mishustin on 25 February 2026, revealed deterioration in the budget situation amid recent US sanctions and a fall in the rouble price of Russian oil. In this context, the authorities are seeking sources of financing to address the growing deficit and are beginning to prepare both elites and society for a policy of fiscal discipline and resource mobilisation.
Government and parliament in the Russian system of power
The government’s report to the State Duma is largely a formal procedure. In Russia’s system of separation of powers, parliament exercises little control over the executive branch, as the key instruments of such control are concentrated in the president’s hands. The prime minister is appointed by the president with the State Duma’s approval. However, if the Duma refuses to approve, it may be dissolved, and the prime minister may be appointed without its consent. A similar logic applies to a vote of no confidence in the government: the president may either dismiss the cabinet or dissolve parliament. This arrangement clearly demonstrates the actual balance of power among the branches of government and the limited role of parliament.
Political considerations can also explain the restrained nature of Mishustin’s speech. Under the Russian constitution, the prime minister is the second-ranking official in the state and serves as acting head of state if the president dies or becomes incapacitated. In a system where any senior official may potentially be viewed as a successor, the prime minister has strong incentives not to display independent political ambitions. The tone of the speech suggests that Mishustin sought to do exactly that.
Despite the event’s formally routine nature, it revealed crucial economic changes and a shift in the related political narrative.
Oil dependence
On the eve of the report to parliament, the government met with the president to discuss ‘how to choose the best solution’ to the problem of financing the federal budget deficit. The fact that this issue was discussed as early as February indicates the extraordinary situation the Russian authorities are now facing.
The US sanctions against the largest Russian oil companies, Rosneft and Lukoil, together with the Indian government’s promise to reduce purchases of Russian oil, led to a sharp increase in the discount at which Russian oil trades on the global market. According to estimates by Russia’s Ministry of Economic Development, the average price of Russian export oil in the three months preceding the prime minister’s speech in parliament slightly exceeded $41 per barrel, which is 35 per cent below the price of Brent1.
In addition, the Russian rouble was significantly stronger than assumed in the 2026 budget calculations. As a result, the rouble price of Russian export oil was 45 per cent lower than projected. According to the authors’ estimates, the budget received around 320 billion roubles ($4 billion) less than expected in January.
If January’s oil prices and rouble exchange rate persist, the budget may receive around 3.8 trillion roubles ($40 billion), or 1.5 per cent of GDP, less than planned over the course of the year. In that case, the government would need to double the deficit to finance all planned expenditures for 2026.
However, such a scenario appears unlikely under current circumstances. In the short term, developments around Iran are pushing global oil prices upward. If the military conflict lasts for several months, the Russian budget will improve. In the medium term, even if the military conflict ends within two or three weeks and oil prices fall back to their mid-February level, the discount on Russian oil will most likely decrease, as has happened before.
In search of a magic pill
If the scenario of a prolonged military conflict around Iran is excluded, the government may find it difficult to keep the budget deficit within the planned limits. The Russian Tax Code directly prohibits tax increases during the fiscal year. Although additional pressure on oil company profits cannot be ruled out2, a more likely way to control the deficit would be a modest sequestration of budget spending. This would involve reducing investment at both federal and regional levels and tightening control over regional budget expenditures.
Under any scenario, the authorities will have to choose the sources of deficit financing from a predefined list:
- Accumulated reserves from the National Wealth Fund, which amounted to 4.2 trillion roubles (around $46 billion), or 1.8 per cent of GDP, as of 1 February 2026;
- A reduction in the balances on treasury bank accounts, which amount to more than 8 trillion roubles ($87 billion);
- A change in the fiscal rule, which would reduce foreign currency sales by the Bank of Russia and weaken the rouble, thereby increasing oil and gas revenues and taxes related to imports (VAT, excise duties, and customs duties);
- Increased borrowing on the domestic market, in which case the Bank of Russia would need to provide banks with substantial loans.
The last two options would inevitably lead to tighter monetary policy, which in turn would deepen the recession in the non-military sectors of the economy.
Belt-tightening
The deteriorating economic situation is forcing the Kremlin to change its approach to how it presents the war in Ukraine domestically.
Instead of the usual abundance of election-year promises3 and social initiatives, the government outlined a strict macroeconomic framework to deputies. This demonstrated a shift away from the previous rhetoric of ‘living as if there were no war’ towards a policy of fiscal discipline and austerity. The Kremlin’s propaganda machine appears ready to transform the war in the mass consciousness from an insignificant and distant event for most citizens into a fateful historical event requiring effort from everyone.
A sequence of events accompanying the prime minister’s speech supports this interpretation. This year, the government’s report took place a month earlier than usual, and preparations in the Duma began with a meeting with the constitutional-majority faction United Russia, which traditionally concluded the series of meetings between the prime minister and parliamentary factions. Immediately after the government’s report, United Russia announced preparations for the party primaries scheduled for the last week of May.
In the near future, the Kremlin will have to choose the scenario for the Duma campaign that the propaganda machine will promote. Inevitably, all scenarios are built around the war in Ukraine, which has now continued for a fifth year:
- ‘A victorious country’ (optimistic);
- ‘A besieged fortress’ (pessimistic);
- ‘A country of heroes’ (realistic).
The last scenario appears the most likely. At the same time, the very range of options suggests that Kremlin ideologues still lack clear answers to two questions: why this war was necessary and what it has brought Russia.