Twenty Years of Budget Deficits: How Russian authorities plan to maintain high spending by replacing oil revenues with debt financing

Twenty years of deficit: a paradigm shift

The Kremlin’s economic ideology is undergoing significant change. For a long time, Putin’s government was known for its extremely cautious macroeconomic policy, driven by a desire not to repeat the mistakes of the past, when a collapse in oil and gas revenues in the 1980s and 1990s led the country into a series of budgetary and financial crises. However, this macroeconomic purism coincided with two decades of relative political stability and generally favourable external conditions. Episodes of low oil prices in the 2000s and 2010s were brief, while periods of high prices were prolonged. This made it possible to accumulate more resources in 'fat' years than were spent in 'lean' ones.

The start of the full-scale invasion of Ukraine, which turned into a protracted military conflict, marked a shift by the Putin regime towards high-risk policies more broadly, which inevitably began to affect economic policy. In particular, as we have previously noted, under conditions of war and sanctions the government began to form the expenditure side of the federal budget not on the basis of revenues, but 'from needs'. As a result, wartime budgets were rewritten two or three times during the year, with spending increased even when current revenues were falling. Ultimately, budget revenues covered only about 90% of actual expenditures, producing a persistent deficit of around 2% of GDP (→ Re:Russia: Where does the road paved with tax manoeuvres lead?).

However, the long-term budget forecast to 2042 published by the government at the end of 2025 indicates that this is not simply a situational adaptation of fiscal policy to wartime needs, but a new ideology. Under the Budget Code, the government is required to publish a long-term forecast, covering 12 years or more and reflecting its fundamental approach to budget design, once every six years. The previous version of the forecast (to 2036) was produced in 2019. An updated version was released in December 2024, justified by changes in both external conditions and tax legislation, above all the structure and principles of calculating personal income tax and corporate profit tax rates. The forecast published in December 2025 differs little conceptually from the previous one, but is slightly more pessimistic regarding the dynamics of oil and gas revenues and extends the planning horizon to 2042.

Given that last year’s budget projections were revised every four months, the government’s ability to plan and forecast over such long horizons naturally invites scepticism and irony. The issue, however, is not the accuracy of the forecasts, but the fact that the 2024 and 2025 versions reflect a fundamentally different approach to budget planning from that followed by the Putin government over the previous two decades. This becomes clear when they are compared with the forecast published in 2019, which was produced under the old paradigm.

In the 2019 forecast, budget revenues decline from 19% of GDP in 2019 to 16% in 2025 and 14% in 2036. This reflects an expected fall in oil and gas revenues from 7.8% of GDP in 2019 to 5.2% in the mid-2020s and 3.5% in the mid-2030s. In other words, in the 2019 projections Russia ceases to be an oil and gas economy by the end of the 2020s. At the same time, non-oil and gas revenues remain stable, at 11% of GDP in 2019 and 10.7% in 2036. Expenditures decline from 17% of GDP in 2019 to 16% in 2025 and 15% in the mid-2030s, following the fall in oil and gas revenues. The surplus of the late 2010s and early 2020s gives way in the 2030s to a small deficit of 0.6–0.7% of GDP per year. This is an example of conservative fiscal planning in the spirit of the first two decades of Putin’s rule: spending falls in line with revenues, and the small deficit is financed by a slowly rising public debt, from 14% of GDP in 2019 to just over 16% in the first half of the 2030s.

In the 2024–2025 projections, the concept changes. Budget revenues in 2025 were planned at 18.4% of GDP, but are expected to fall to 15% by the mid-2030s. Oil and gas revenues decline even somewhat faster than in the 2019 plan, to 4.6% of GDP in 2026 and 2.6% in 2036. Non-oil and gas revenues, by contrast, increase as a result of a higher tax burden, reaching 12.7% of GDP in 2024 and 13.7% in 2025, before declining to 12.4% by the mid-2030s. At the same time, expenditures amount to 20.1% of GDP in 2024, compared with 16.3% envisaged in the 2019 plan, and then decline slightly. Their actual level over the entire period, however, remains around 17% of GDP, rather than falling to 15% as previously planned. As a result, the budget deficit in the long term remains at wartime levels, averaging about 2% per year and rising to 3% by the 2040s. This leads to relatively rapid growth in public debt, which finances the deficit, from 18% of GDP in 2025–2026 to 25% in the mid-2030s and 32% in 2042.

In the so-called conservative, or pessimistic, scenario of the government forecast, oil and gas revenues decline even faster, to 3% of GDP in the second half of the 2020s and to 1.5% in the early 2040s. Expenditures, by contrast, do not decline, remaining at about 19% over the coming decade, and then growing to 20–21% at the end of the forecast period. This scenario may assume a new military confrontation amid a sharp fall in oil and gas revenues, or at least a rapid build-up of military capacity. In any case, the deficit under this scenario amounts to around 3% per year over the next ten years and reaches 8% by the early 2040s. Public debt accordingly exceeds the 20% threshold as early as 2027, reaches 40% in the mid-2030s and exceeds 60% in the early 2040s.

Federal budget revenues, expenditures and deficit in 1995–2024 and in two forecast scenarios to 2042, % of GDP

Thus, the long-term scenario in the 2024 and 2025 format implies a fundamental shift in the paradigm of fiscal policy. Russia ceases to be an oil-dependent country and no longer relies on oil and gas revenues. At the same time, it maintains a relatively high level of spending by increasing the tax burden on the economy and running a stable budget deficit of 2–3% of GDP, which is financed through borrowing, that is, through an expansion of public debt.

At first glance, such a fiscal framework is closer to the standard of more developed non-oil economies. At the same time, after 22 years during which the gap between revenues and expenditures averaged a surplus of around 1% of GDP, Russia now faces 21 years of deficits. In the baseline scenario, these will average about 2% of GDP per year, and in the pessimistic scenario about 4%. Formally, even in the baseline long-term forecast, in terms of the relationship between revenues and expenditures Russia returns to a situation reminiscent of the mid-1990s, when attempts to finance the budget deficit through short-term government bonds ended in default and a financial crisis. In the conservative scenario, the situation looks substantially worse than in the mid-1990s. It is assumed, however, that unlike in the past, Russia will be able to manage public debt successfully in the new cycle.

Low, but expensive

The Russian authorities like to repeat that Russia’s public debt is at a minimal level, implying that this creates a large margin of safety for the fiscal system. The argument is that borrowing is always possible if the need arises. At his annual press conference on 19 December, Vladimir Putin once again emphasised this point, stating that the debt currently stands at 17.7% and assuring that over the next three years it should not rise above 20%.

Russia’s public debt is indeed very low. According to the International Monetary Fund’s Fiscal Monitor, its level in fact exceeded the 20% threshold last year, reaching 23.1% of GDP. This discrepancy reflects differences in calculation methodology. Russia’s Ministry of Finance counts only federal-level liabilities, while the IMF includes all liabilities of the so-called general government. Nevertheless, the Fiscal Monitor data confirm that Russia’s public debt is far below the average levels seen in both advanced and emerging economies. In the euro area in 2025 it averaged 88%, in advanced G20 countries 121%, and in the G7 126%. In the Middle East and North Africa, average public debt is estimated at 47%, in Latin America at 73%, and in emerging G20 economies at 78%. Countries with public debt levels comparable to Russia’s include Saudi Arabia, Kazakhstan, Turkey, Estonia, Azerbaijan, the Republic of the Congo, and Puerto Rico.

Until quite recently, however, the prevailing view within Russia’s Ministry of Finance was that a safe level of public debt for Russia was around 20% of GDP. This was justified both on macroeconomic grounds, including the negative impact on real GDP growth, and by Russia’s specific oil dependence, which determines the volatility of economic revenues (for more detail, see → Re:Russia: Military Finance Crisis). However, in the summer of 2023, Deputy Finance Minister Irina Okladnikova said: 'Although we understand that under the current circumstances we will have to increase debt, this is an unavoidable situation. We must do this because expenditure is rising. We need to support the economy, we must support the military sector, and our four new regions require substantial assistance. Therefore, we will increase debt, but we will try to remain within safe limits’. In other words, while the deputy minister referred to the 20% benchmark, she implicitly acknowledged that wartime ‘priority expenditures’ would be financed in any case. At the same time, part of the Russian economic community openly argued in favour of higher debt. Analysts from the Central Economics and Mathematics Institute of the Russian Academy of Sciences, drawing on IMF methodology, recently argued that a public debt level of 90–100% of GDP would be quite safe for Russia.

The caution shown by the authorities with regard to rising debt levels is linked to the fact that the pressure of the real debt burden is determined not only by the absolute size of debt, but also by its cost. The larger debt volumes that more developed countries can afford are associated with low servicing costs. At the end of 2025, servicing long-term obligations in EU countries cost on average 3.2% per year. In Germany it was 2.7%, in France 3.4%, in Italy 3.5%, and in Hungary twice as much at around 7%, according to CEIC Data. Yields on long-term debt stood at just 1.9% in China and 4.1% in the United States. Despite Russia’s relatively low level of public debt, the cost of servicing it is already higher than in the vast majority of advanced economies, even though their debt levels are far higher. In 2025, Russia was paying around 14.4% per year on its obligations. This is higher than in neighbouring Kazakhstan at 12.3%, though still about half the level seen in Turkey at 31.9%, a country that has suffered deep macroeconomic instability in recent years.

Cost of servicing public debt in various countries at the end of 2025, % per annum

As a result, according to the Scope Ratings report, EU countries’ payments for servicing public debt in 2025–2026 will average around 4% of total revenues. In Germany the figure is 2–2.2%, and in Hungary 9.3–9.9%. China was expected to spend 4.9% of revenues on debt servicing in 2025 and 5.6% in 2026. For Turkey the corresponding figures are 9.7% and 10.2%. Russia, according to estimates by the Centre for Macroeconomic Analysis and Short-Term Forecasting, already spent 10.2% of revenues on servicing public debt in 2025, and in 2026 this may amount to 9.7%. Only the United States records a higher share, at 11.7% in 2025 and 12.5% in 2026, although its debt, according to the IMF, stood at 125% of GDP in 2025.

The shadow of a new debt spiral

The high cost of debt servicing for Russia is determined by a number of factors, including the traditional weakness of its domestic financial sector and, more recently, its isolation from global markets. Before the war, a significant share of Russia’s public debt, around 20–30%, consisted of external borrowing, which is considerably cheaper than domestic borrowing. As a result of sanctions, however, the share of such borrowing has declined and will continue to fall as the overall volume of public debt increases. According to data from the Ministry of Finance as of 1 December 2025, domestic public debt amounted to 30.02 trillion roubles, while external debt amounted to $56.34 billion, equivalent to 4.4 trillion roubles. External borrowing therefore accounted for less than 13% of total public debt.

Dynamics of Russia's public debt, 2011–2025, billion roubles

In these circumstances, an increase in the size of public debt leads to a rapid rise in servicing costs. According to government plans, total public debt will reach 38.6 trillion roubles in 2025, almost twice the level of 2021 at 20.9 trillion. At the same time, servicing costs will increase almost fourfold, from 1.08 trillion roubles to 3.8 trillion (according to estimates by the Centre for Macroeconomic and Short-Term Forecasting). Thus, over four years of war, the average cost of servicing debt for Russia has almost doubled, from about 5.2% per year to 9.86%.

The rise in public debt servicing costs is directly linked to the Central Bank’s key policy rate. According to Anton Tabakh, chief economist at the Expert RA rating agency, more than 40% of public debt consists of bonds with floating rates linked to the key rate, while a further roughly 7% is indexed to inflation. According to the Ministry of Finance, as of 1 December 2025, 56% of domestic public debt consisted of federal loan bonds with fixed coupons. Tabakh argues that debt servicing costs will decline alongside the key rate and inflation. However, as pro-inflationary factors continue to put pressure on the economy, rate cuts are proceeding slowly and could be halted at any moment. Moreover, an expanding budget deficit, which is precisely what necessitates higher borrowing, is itself an inflationary factor and therefore obstructs any reduction in the cost of debt.

While the key rate remains high, the Ministry of Finance has sought to raise a larger share of funds through bonds with fixed coupons that are not linked to the key rate. These securities, primarily federal loan bonds (OFZs), are issued through auctions at which yields are determined. However, the yields demanded by investors do not always suit the ministry, forcing it to cancel auctions. In 2024, because creditors demanded excessively high yields, the Ministry of Finance had to declare 19 such auctions invalid ‘due to the lack of bids at acceptable price levels’. By contrast, over the entire period from 2015 to 2023, only 18 auctions in total had been cancelled. In 2025, five auctions were cancelled.

As a result of the risks associated with a sharp rise in servicing costs due to growing debt volumes, the inability to borrow abroad and a high key rate, the government may face a debt spiral effect, in which the primary purpose of new borrowing becomes servicing existing debt. According to the 2026 budget law, spending on public debt servicing will reach 3.9 trillion roubles, or 8.9% of total expenditure. As a result, for the first time it will match spending on national security and law enforcement, which is also set at 3.9 trillion roubles, and in 2028 it will even exceed it, at 4.5 trillion roubles versus 4.4 trillion.

There is, however, another factor that casts doubt on the debt-financing model embedded in the government’s long-term budget plans. The long-term forecast to 2042 is based on fairly optimistic assumptions about real GDP growth. Valery Vaysberg, head of the analytical department at Region Investment Company, assumes growth of around 3% per year. At the same time, over the past 18 years, following the end of the post-crisis recovery period in 2007, average growth rates of the Russian economy have amounted to 1.6% per year. The Central Bank estimates medium-term growth potential at roughly the same level, around 2%.

Even these estimates may prove too optimistic. In the near term, the economy will remain under pressure from several constraining factors simultaneously. These include a higher tax burden (→ Re: Russia: Military-style VAT), a high cost of credit and declining oil and gas revenues. As already noted, the government’s budget forecast rests on the key assumption that the Russian economy ceases to be oil-dependent, with the share of oil and gas revenues in the budget shrinking sharply. However, this also implies a reduction in the economy’s overall income from energy exports, which in turn will lead to weaker private investment capacity, a decline in purchasing power due to a weaker national currency and other negative effects. In previous periods, any contraction in oil and gas revenues has led to economic recession.

In other words, economic growth rates in the near term may turn negative, and over a horizon of several years are more likely to be close to zero, followed by a recovery to levels typical of the past two decades, around 1.5% of GDP. At the same time, the budget forecast assumes a noticeable increase in revenues from domestic tax sources, which are expected to partially offset the loss of oil and gas revenues. If this scenario fails to materialise under conditions of recession or stagnation, as already happened in 2025, the size of the deficit and, accordingly, the public debt required to finance it will grow much faster. The cost of borrowing, meanwhile, will not decline amid a shortage of funds in the economy and low confidence among external investors, even if sanctions are partially eased. As a result, the debt-financing scenario may once again in practice prove closer to the trajectories of the 1990s than to the ideal of a developed non-oil economy that is implicitly embedded in the budget forecast.