The Kremlin is bleeding money – but not running dry
Russia’s federal budget deficit has already blown past its annual ceiling by 60 per cent just four months into 2026, and the headline numbers are getting worse. But the Kremlin’s financial machine has not stalled: borrowing is cheap, reserves stand at 11 trillion rubles, and the oil and gas revenue target will be met even if prices fall steadily through year-end. The more likely outcome is not a fiscal squeeze but an increase in government spending.
Start with the deficit itself. Its existence does not mean that the Ministry of Finance has run out of money – it simply means that the government is funding its spending through borrowing, reserves, or privatisation rather than current revenues. Moreover, conditions for borrowing are unusually favourable right now. The Bank of Russia’s steady reduction of the key rate is boosting demand for government debt. The Ministry of Finance was prepared to pay between 14.5% and 15% interest per annum for government debt prior to the latest rate cut in April. Over four months, the treasury received 1.7 trillion rubles net from the Russian government’s OFZ bond placements, accounting for 45% of the annual deficit. The fact that debt service will consume an increasing proportion of the budget does not seem to concern the Minister of Finance for the time being.
Revenue collection in 2026 is running 3–4 percentage points behind the pace set in recent years. In the first four months of the year, the Ministry of Finance collected 29 per cent of its annual revenue target. In the previous two years, this figure was 32–33 per cent. However, starting in the second quarter, the increased VAT and income tax rates will take full effect. At the same time, for at least two months, May and June, the treasury will receive a ‘war premium’ – additional oil-related revenues due to the rise in oil prices caused by the conflict between the US and Iran. This will make the picture look more respectable as regards tax collection.
Something similar happened in 2023, when, after four months, the treasury had received less than 27 per cent of planned annual revenue, but starting in August, budget revenues rose sharply as the dollar exchange rate moved above the 100-ruble mark.
Some analysts point to the year-on-year decline in oil and gas revenues, but this comparison adds little to an analysis of the 2026 budget. The decline is fully explained by two external factors: the average price of oil, as calculated for tax purposes, fell from nearly $63 per barrel a year earlier to $50 per barrel in January–April 2026, while the average dollar exchange rate moved from 90 to 78 rubles. The compounding effect of these two shifts – oil prices fell by roughly 20% and the ruble strengthened by about 13% – implies a 30%-plus decline in ruble-denominated oil revenue, which is exactly what we see in the data. In other words, the year-on-year collapse is not a sign of any shortfall in oil and gas production or tax collection.
A real question, then, is not how oil and gas revenues compare with last year, but what it would take to meet this year’s budget projections. At what oil price does Russia hit its budgeted oil and gas revenue target this year? Most analysts cluster their estimates in the $100-$120-per-barrel range. Our estimate is markedly lower: an average export price of just $76 per barrel over the remaining eight months of the year would be enough. This calculation assumes that the current ruble exchange rate (75.5/$) remains unchanged, and that oil production volumes in Russia will not change significantly through the end of the year. Even if the war in the Persian Gulf lasts longer than this, the Russian oil industry can increase its production by no more than 0.3-0.5 million barrels per day (mbd).
In practice, an average price of $76 for the remainder of the year would result from a monthly decrease of 6.5% from the April price ($94.9), starting in May; i.e., the November reading, which determines December tax receipts, would come in just above $59.
If, by the end of the year, the Ministry of Finance collects the full budgeted amount of oil and gas revenue, then, to meet the annual overall revenue target, the treasury will need to generate non-oil and gas revenues averaging 2.75 trillion rubles per month over the remaining eight months of the year. This is 17% higher than the average monthly tax revenue from sources other than oil and gas in the first four months of the year. In the two preceding years, the corresponding increase was 15% and 13%. Higher tax rates will help; falling inflation and the recession will not.
The real challenge lies on the expenditure side. In the first four months of the year, the Ministry of Finance has funded nearly 40% of the annual spending plan (in 2023–2025, this figure ranged from 31.9% to 35.4%); on average, this amounted to expenditure of 4.4 trillion rubles per month. If the annual spending plan is not exceeded, monthly spending for the remainder of the year should amount to 3.3 trillion rubles, i.e., 25% lower than in January-April. If we take into account the ‘December bonus’, the traditional end-of-year spending surge (typically, at least 50% above the monthly average), then spending in the coming months should not exceed 70% of the average spending level for January–February. Taken at face value, the government’s management of this year’s budget therefore looks extremely dire after four months, with spending significantly exceeding the planned limits.
Yet the Ministry of Finance’s main problems do not lie in the budget deficit. The potential for borrowing on the domestic market is far from exhausted, and with 11 trillion rubles in fiscal reserves available as of early May,1 the Kremlin will not be left without funds, at least until the end of next year.
This changes how to read the Russian government’s actions in the months ahead. The economy’s shift into recession in the first quarter makes budget sequestration unlikely. While governments can and do cut spending during downturns, the Kremlin has every incentive to avoid austerity that would accelerate the decline, especially when reserves and borrowing capacity remain available.
Therefore, the more probable move is in the opposite direction: an increase in government spending. The Kremlin’s fiscal approach emphasises sustaining the war effort and preserving domestic political stability over deficit reduction. As long as the tools to finance a larger deficit remain on the table, the question is not whether the Ministry of Finance will tighten spending limits, but how much further it will loosen them.