Tag: Russian Inflation 2025

Russian Budget Deficit Widens as Growth Stalls and Oil Revenues Fall

Posted on October 10, 2025 | News

Falling chart line over Russian rubles and coins symbolizing economic decline and the russian budget deficit that widens.

Russia’s economy narrowly avoided a technical recession in the second quarter of 2025, but growth remains weak. Inflation eased, yet high interest rates continue to pressure consumers and businesses. Meanwhile, the Russian budget deficit widens as oil revenues decline and government spending rises.

The latest KSE Institute Russia Chartbook (September edition), “Economy Avoids Technical Recession; Budget Targets Revised Once Again,” highlights growing fiscal challenges despite temporary stabilization in output.

Russia Avoids Recession but Faces Persistent Economic Strains

The Russian economy expanded by 0.4% in the second quarter of 2025, following a 0.6% contraction in the first quarter, enough to avoid a technical recession. However, overall momentum remains fragile, with annual growth expected to hover around 1%.

The Central Bank of Russia (CBR) reduced inflation to 8.1% in August, down from around 10% earlier in the year, through tight monetary policy. Yet, borrowing conditions remain difficult as interest rates, cut from 21% to 17%, are still high in real terms.

Persistent issues such as a rising budget deficit, a tight labor market, and sanctions continue to weigh on the outlook. Ongoing Ukrainian attacks on Russian refineries may further raise fuel prices, complicating the balance between price stability and the government’s war-driven fiscal spending.

Russia Budget Deficit Widens Despite Revised Targets

From January to August 2025, Russia’s budget deficit reached 4.2 trillion rubles, slightly better than the 4.8 trillion rubles recorded in January–July. However, oil and gas revenues dropped 20% year over year, while non-oil revenues increased 14%, and expenditures surged 21%.

The government raised its full-year deficit target to 5.7 trillion rubles due to weaker revenues but left spending unchanged. Current trends suggest Russia may exceed this target by year-end.

Looking ahead to 2026, the Russian Ministry of Finance proposes raising and broadening value added tax (VAT) to offset declining oil and gas income. While war-related adjustments are common, the Kremlin aims to stabilize military and security spending, signaling a shift from the sharp increases of recent years.

Key Research Report Findings on Russia’s Budget Deficit

  • The federal deficit reached 4.2 trillion rubles in January–August, already 74% of the revised 5.7 trillion rubles target (page 8). 
  • Oil and gas revenues fell 20% year over year, while spending jumped 21% (page 9). 
  • Domestic bond (OFZ) issuance hit 3.3 trillion rubles in Jan–Aug, up 104% from a year earlier, with a notably flat yield curve (page 10). 
  • Liquid assets in the National Welfare Fund (NWF) are down to about 4.0 trillion rubles and could be used up within 6–12 months if trends persist (page 12). 

The Broader Economic Backdrop

GDP grew 0.4% quarter-on-quarter in the second quarter of 2025, following athe 0.6% contraction in the first quarter in 2025. Inflation slowed to 8.1% year over year in August, but policy rates remain high, and the ruble weakened again. Labor markets are tight, so spare capacity is limited. 

What the Widening Budget Deficit Means

Financing the Russian budget deficit will likely rely more on banks and the shrinking NWF buffer. If oil prices slip further, revenue pressure will rise. Enforcement against the shadow tanker fleet is tightening, which may also weigh on export earnings. Together, these forces point to constrained growth and frequent budget revisions. 

Meet the Researchers

  • Benjamin Hilgenstock: KSE Institute, Head of Macroeconomic Research and Strategy. 
  • Yuliia Pavytska: KSE Institute, Manager of the Sanctions Programme. 
  • Matvii Talalaievskyi: KSE Institute, Analyst.

Read The Full Report

Explore the full findings and detailed analysis by reading the complete report on the KSE Institute’s website. Additionally, you can view more policy briefs from the KSE Institute on the FREE Network’s website.

Explore Other Editions of KSE Institute’s Russia Chartbook