.jpg "The Non-Victory Budget: The burden of increased military spending will fall on businesses and citizens, while the government is no longer hiding that war is forever")
The Non-Victory Budget: The burden of increased military spending will fall on businesses and citizens, while the government is no longer hiding that war is forever
Russia’s 2025 budget contains three pieces of bad news. The first is that next year’s increased budgetary expenses will be paid directly by businesses and citizens from their own pockets. The second is that, despite its formal balance, the budget remains inflationary. And the third – this is now forever.
Total budget spending will increase by 12% next year, mainly due to military expenditures. The ‘National Defence’ section alone is projected to consume 13.5 trillion rubles – a quarter more than this year. This already amounts to 6.3% of GDP. If we add security expenses to that, it will reach 8% of GDP. But almost certainly, part of the war-related costs is hidden in other sections of the budget. Therefore, a conservative estimate for defence and security spending is 9% of GDP.
Although the authorities boast that the budget is balanced without a structural deficit, in reality, it is inflationary and will require adjustments to monetary policy. The burden of rising expenses will be placed on businesses and citizens through increased tax burdens and mandatory payments. At the same time, budgetary stimulus, including preferential loan programs, will remain the key factor in supporting business activity, improving conditions in some sectors at the expense of others.
In addition to these two pieces of bad news, there is a third. Unlike previous years’ budgets, which assumed that next year, after the war ended, budgetary expenditures would be sharply reduced, the current three-year government budget plan does not even suggest this possibility. War or preparation for war – with Ukraine or someone else – has become the baseline scenario for Russia’s budgetary policy in the foreseeable future.
The fact that Russia’s 2025 budget has, for the first time in five years, been formulated without a structural deficit is a point of pride for the government only because it is not accountable to the electorate, but rests solely on Putin's opinion. In reality, the government has simply shifted the burden of further increasing military spending onto citizens and businesses, as required by the top leadership.
The absence of a structural deficit means that expected revenues exactly match planned expenditures, excluding debt servicing costs. The total budget deficit is expected to be just 1.18 trillion rubles, or 0.5% of GDP. Expenditures are projected at 41.4 trillion rubles, while revenues will total 40.3 trillion. Total budget expenditures will increase by 12% compared to the previous year.
The primary driver of this spending growth, predictably, is the increase in military expenditures, and the scale is striking. The ‘National Defence’ section alone is set to receive 13.5 trillion rubles, which amounts to 6.3% of GDP. This is 25% more than in 2024 (even accounting for inflation, real spending growth will approach 20%). It’s also 60% higher than what the government had planned to spend on defence just a year ago. In reality, Russia is spending even more on the war with Ukraine: some of these costs are embedded in the ‘National Security and Law Enforcement’ section, which is set to increase from 3.4 trillion to 3.5 trillion rubles in 2025.
In general, the government has classified a third (32%) of the planned budget expenditures – totaling 13.1 trillion rubles, according to The Bell. In the ‘National Defence’ section, 84% of all spending, or 11.4 trillion rubles, is classified. This means that 1.7 trillion in spending is concealed in other budget sections. The declared expenses for the two sections – defence and security – thus amount to 8% of GDP. However, it is almost certain that there are war-related expenses hidden in other budget categories. Therefore, we estimate defence and security spending conservatively at 9% of GDP.
Budget expenditures for 2024 and 2025, trillion rubles
Redistribution budget
The achievement of structural balance amid rising expenditures will be ensured by increasing taxes, primarily on businesses and, secondarily, on citizens. Tax changes adopted in 2024 (→ Re:Russia: Military Levies) will allow the government to collect an additional 2.5 trillion rubles. Starting in 2025, businesses will pay a profit tax at a rate of 25% instead of 20%. Some organisations that previously used a simplified tax system will now have to pay VAT. For citizens, a multi-tiered progressive income tax scale will be introduced. But that's not all: an additional burden for citizens and businesses will come from higher mandatory payments for utilities and Russian Railways (RZD) tariffs.
As a result, the government plans to increase non-oil and gas revenues to 29.4 trillion rubles, which in nominal terms is 18% more than in 2024. Oil and gas revenues are expected to be 10.9 trillion rubles, slightly below the 2024 level (11.31 trillion). Despite the slowdown in global demand (→ Re:Russia: Chinese Correction), the government does not expect a significant drop in oil prices. Revenues are expected to decline mainly due to reduced tax income from gas production and increased subsidies to oil refiners. However, even if oil prices drop, the budget may not necessarily suffer. With oil priced at $69.7 per barrel and an average exchange rate of 96.5 rubles per dollar, the government plans to replenish the National Wealth Fund by 1.8 trillion rubles. This amount will serve as a buffer if oil prices fall.
While the government takes pride in the absence of a structural deficit, the Central Bank was clearly shocked by the draft budget. The Central Bank called the absence of a structural deficit ‘an important stabilising factor’, but noted that ‘there are several unexpected elements in the budget that may require adjustments [to monetary policy]’. The absence of a structural deficit is a disinflationary factor. At the same time, the Central Bank, when speaking about ‘returning to a path of sustainable and balanced economic growth’, meant a reduction in the fiscal impulse, not the search for new revenue sources to support growing military spending. Some of the government’s planned measures are clearly inflationary. For instance, the budget envisions a 11.9% increase in utility tariffs (with forecasted inflation of 4-4.5%) and a 10.2-13.8% increase in RZD tariffs. In addition, the government is raising the recycling fee on foreign cars. On October 1, it was increased by 70-85%, and further increases of 10-20% per year are planned. By raising this fee, the budget is expected to collect about 2 trillion rubles in 2025, compared to 1 trillion in 2024. These measures alone will add around 2 percentage points to inflation, according to economist Dmitry Polevoy. As a result, inflation in 2025, according to his forecast, will be no less than 5.5%.
It should also be noted that the increase in spending in 2025 will occur with adjustments upwards throughout 2024. The 2025 budget draft reveals that this year’s spending will exceed the initial plan by 1.5 trillion rubles. It is likely that spending in 2025 will also exceed the plan, warns Dmitry Polevoy: ‘The scale of fiscal stimulus in 2024 will exceed the initial plan by almost 1% of GDP, which was likely not factored into the Central Bank's forecasts. Much has been said about adherence to the budget rule, but even its softened version had to be violated again this year’. The likelihood that a structural deficit will emerge by the end of the year (due to further increases in spending) seems quite high.
The continued militarization of the economy, sudden increases in spending in 2024, and rising tariffs are described by the Telegram channel MMI as a ‘new inflationary shock from fiscal policy’. The channel's authors expect the Central Bank to respond to this shock at its next key rate meeting. Alexei Zabotkin, Deputy Chairman of the Central Bank, has already confirmed that the Central Bank's forecasts from the recently released ‘Basic Monetary Policy Guidelines’ need to be revised. Bloomberg Economics’ Chief Economist for Russia, Alexander Isakov, calculated that an increase in spending by 1% of GDP would require a rate hike of 1.5-2 percentage points. The Central Bank had not ruled out raising the rate to 20%, and now this scenario appears to be the base case.
According to Rosstat, from 24 to 30 September, the consumer price index increased by 0.19% – compared to +0.06% and +0.1% in the previous two weeks. As a result, price growth since the beginning of the year has already reached 5.72%, corresponding to an annual inflation rate of 8.6% – against the Central Bank's forecast of 7.3%. Meanwhile, the Central Bank has been raising the rate since August 2023, but inflation has continued to rise throughout this period. This indicates that the Central Bank is losing the inflation battle to the government and its fiscal stimulus.
Inflation by month in annual terms, 2019-2024, %
The Non-Victory Budget
In the current version of the Basic Monetary Policy Guidelines, the Central Bank considers inflation at 5.5% by the end of 2025 as part of the so-called pro-inflationary scenario. The average key interest rate in this scenario is expected to be 16-18% in 2025 to mitigate the effects of preferential lending programs through which budgetary funds will be distributed. The Central Bank identifies these programs as the main reason why, even with a 19% key rate, credit growth in Russia continues, along with rising inflation (→ Re:Russia: Preferential Burden). Half of the corporate loan portfolio with fixed rates has a servicing cost of no more than 10% per year, and for 20%, it is below 5%, according to Central Bank data.
The injection of budget funds into the economy could result in GDP growth of 1.5–2.5% in 2025 (compared to 0.5–1.5% in the baseline scenario), but a recession may follow in 2026. As a result, in the long run, GDP dynamics, according to the Central Bank's forecast, will be the same as in the baseline scenario, which did not anticipate a sharp increase in budget expenditures. In other words, by raising taxes and tariffs, the government is simply shifting the costs of the war onto businesses and citizens, without yielding any benefits for the economy.
Thus, there are three pieces of bad news in the presented budget. First, the increase in budget expenditures next year will be paid for directly by businesses and citizens. Second, despite the structural balance, the budget is still inflationary. And third, this situation is now permanent.
The authorities called the 2024 budget a ‘victory budget’, emphasising its extraordinary nature. For 2025, a return to normal budgetary policy was announced, with a sharp reduction in military spending to 8.5 trillion rubles. The implied condition for this scenario was the end of the war with Ukraine. Now, however, normalisation is no longer being discussed. While there is a slight decrease in military expenditures planned for 2026, it will only be down to 12.8 trillion rubles (5.5% of GDP). In 2027, spending is set to return to 13 trillion (5.3%), a minor reduction when adjusted for inflation. In 2021, Russia's military expenditures were 4% of GDP. In other words, regardless of the course of the war with Ukraine, the Kremlin no longer intends to take the Russian economy off its military footing. Just last year, the government assumed that the war with Ukraine was a temporary ‘special military operation’. This third piece of bad news, by the way, has significant international and geopolitical implications.