Tag: Sanctions Impact On Russia

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

Record-Breaking Russian Budget Deficit as Oil Revenues Collapse and Economy Stalls

Posted on September 24, 2025 | News

The record-breaking Russian budget deficit has become a central challenge for the country’s economy in 2025. Consequently, falling oil and gas revenues have collided with soaring government spending, pushing the fiscal gap to record levels. Moreover, analysts warn that this trend highlights the increasing strain on Moscow’s financial system and its ability to maintain stability. Therefore, the latest KSE Institute report stresses that these pressures will continue shaping Russia’s economic outlook in the months ahead.

A Record-Breaking Russian Budget Deficit

The Russian budget deficit reached 4.9 trillion rubles in January through July 2025, or 129% of the full-year target (KSE Institute, August 2025). Furthermore, this shortfall is 4.5 times larger than during the same period in 2024 and exceeds all recent records.

The growing Russian budget deficit highlights worsening fiscal stress, fueled by weak oil revenues and expanding government spending. As a result, Brent crude is projected to fall near 60 dollars per barrel by year-end, which will increase fiscal pressure. Consequently, Moscow will likely miss its 3.8 trillion ruble target.

Analysts warn that financing the gap will drain sovereign reserves and require more debt issuance. However, both approaches carry lasting economic risks. In addition, the imbalance raises concerns about economic stability under sanctions and falling global energy prices.

Oil and Gas Revenues Slump Despite Stable Exports

Russia’s oil export volumes remain steady. However, oil and gas revenues fell 19% year-on-year in the first seven months of 2025 (Bank of Russia). Although July saw a temporary boost from quarterly tax payments, this did not reverse the decline. Revenues were still 27% below July 2024.

Export earnings rose to 14.3 billion dollars in July, thanks to a brief oil price rise. Russian export prices averaged 60 dollars per barrel, the G7 price cap. Nevertheless, markets expect weaker global oil prices in late 2025 and early 2026. That trend would deepen the Russian budget deficit.

Debt Issuance Grows as Welfare Fund Shrinks

The Ministry of Finance issued 3.0 trillion rubles in OFZ bonds between January and July, a 114% increase from 2024 (MinFin). Moreover, yields remain low, which shows continued demand from domestic banks.

At the same time, the liquid portion of the National Welfare Fund fell to 4.0 trillion rubles, or 48 billion dollars, in July. The government also sold about 16% of its gold reserves (KSE Institute, August 2025). As a result, analysts caution that liquid NWF reserves could run out within a year. This would leave Russia more vulnerable to its growing budget deficit.

Inflation Moderates but Growth Falters

Inflation slowed to 8.8% in July, down from double-digit levels earlier in 2025 (Central Bank of Russia). Consequently, policymakers cut the key interest rate by 300 basis points to 18%. This marks the beginning of limited monetary easing.

However, the gains come at a cost. GDP growth fell to 1.1% year-on-year in the second quarter, down from 1.4% in the first. On a quarterly basis, growth stalled completely. In addition, severe limits on labor and capital remain. Forecasts from the IMF, OECD, and World Bank predict weaker growth in 2025 and 2026.

A Fragile Outlook for Russia’s Economy

The August 2025 Chartbook shows an economy under serious strain. Oil revenues are weak, expenditures are high, reserves are shrinking, and growth is slow.

With sanctions tightening and global oil prices falling, Moscow may depend heavily on domestic borrowing and possibly money creation. Both options aim to fund military spending and social programs. Ultimately, analysts conclude that the Russian budget deficit is unsustainable and threatens fiscal stability heading into 2026.

Record-Breaking Russian Budget Deficit: Insights, Experts, and Further Resources

Explore Other Editions of KSE Institute’s Russia Chartbook

Meet the Researchers

  • Benjamin Hilgenstock — KSE Institute. 
  • Yuliia Pavytska — KSE Institute. 
  • Matvii Talalaievskyi — KSE Institute.

Additional Reading 

Explore other policy papers and reports on Ukraine’s economic transition and development on the KSE Institute’s website. Read more policy briefs on Eastern Europe and emerging economies on the FREE Network’s website.