Cash overflow: Russia’s budget deficit is rising but remains under control
The Russian Ministry of Finance’s preliminary data on federal budget execution for January–July 2026 allows for an initial assessment of the expected outcomes for the whole year. Budget expenditure will significantly exceed expectations (previous estimates suggested that spending would increase by RUB 2–3 trillion; the figure is now RUB 4 trillion or more). There is no doubt that the government will be able to finance this spending. The budget’s ‘margin of safety’ is narrowing, but it remains sufficient to finance expenditure next year as well.
Revenue
The Ministry of Finance’s position here looks sound: the pace of revenue collection ensures that the targets set in the Budget Law will be met by the end of the year. Oil and gas revenue is below target – the Ministry of Finance may receive RUB 500–700 billion less than planned – but other revenue is growing rapidly. VAT revenue (domestic and import VAT combined), for example, has increased by 25 per cent compared with last year. The reasons for this include the increase in the VAT rate from 20 to 22 per cent, the extension of VAT to medium-sized businesses,1 the detection of tax avoidance schemes, inflation, and rouble depreciation. Revenue is unlikely to exceed the target by a large margin, but this is not necessary: an additional RUB 100–200 billion in revenue would not change the budget situation.
Expenditure
Expenditure continues to rise. It was clear from the outset that this increase could not be limited to 2.6 per cent, as set out in the Budget Law, which was based on the assumption that military spending would decline in nominal terms, without adjusting for inflation. In the first seven months of 2026, expenditure was 14.5 per cent higher than in the same period last year. If this rate of increase continues until the end of the year, expenditure will exceed the planned level by RUB 5 trillion.
The same estimate can be obtained by assuming that expenditure in the first seven months of this year will account for the same share of annual expenditure as the first seven months of last year – just over 58 per cent (this trajectory is shown by the dashed line in the chart above).
If the Ministry of Finance’s statements that expenditure is being brought forward this year relative to last year are correct, the amount by which actual expenditure exceeds the planned level may be slightly smaller. However, there are no grounds to expect spending to overshoot the target by less than RUB 4 trillion.
The deficit
In the first seven months of the year, the budget deficit exceeded the full-year target by RUB 2.7 trillion, reaching RUB 6.5 trillion. Over the next four months (August–November), the budget may record a small surplus – last year, the surplus over these four months was RUB 346 billion (in 2023 and 2024, it was as high as RUB 1.8 trillion and RUB 1.1 trillion, respectively). However, a deficit in December is inevitable. How large will it be? If the Ministry of Finance’s statements on spending being brought forward are correct, it will be around RUB 1 trillion; if not, around RUB 1.5 trillion. The full-year deficit will therefore amount to RUB 7–7.5 trillion, and this is where the main uncertainty lies.
Over the first seven months of the year, the Ministry of Finance raised RUB 2.3 trillion on the debt market through the issuance of federal government bonds. Almost RUB 460 billion was withdrawn from the National Wealth Fund, around RUB 200 billion came from the sale of nationalised assets, and the remaining deficit of RUB 3.5 trillion was financed by drawing down federal budget funds held in bank accounts and other financial instruments.
The question is how the government will finance the deficit in the remaining months of the year. One option is to increase borrowing on the debt market, although the Central Bank’s tight monetary policy may make this more difficult. If market demand for new issues of federal government bonds (OFZs) proves insufficient, the Ministry of Finance will have to force state-owned banks to buy them. The least likely scenario is a further drawing down of available federal budget funds, of which just over RUB 4.5 trillion remains.
The budget’s ‘margin of safety’ (i.e. National Wealth Fund assets and other financial reserves) is likely to shrink significantly by the end of the year: it stood at around RUB 13 trillion at the beginning of the year and is now around RUB 8 trillion. But this also means that the government will probably be able to finance its planned expenditure next year as well.