Russia’s budget recorded another deficit in May, with the total annual deficit rising by 200bn rubles ($2.55bn) to reach 3.4 trillion rubles (or 1.5% of GDP), the Finance Ministry reported. So far this year, March has been the only month to record a budget surplus.
The main drag is oil. Russian crude was trading at an average of $54.80 per barrel in April compared with $75 per barrel a year earlier. As a result, the fiscal revenue from oil is declining. In the first five months of 2025, this fell 14.4% year-on-year to 4.2 trillion rubles. The pace of the fall is accelerating: in May, it was 35% compared to May 2024. Although this may change if the recent escalation of the Iran-Israel conflict leads to a prolonged increase in oil prices, for the moment, the rise in oil prices is limited.
Russia’s broader economy is holding up so far. Total revenue between January and March was up 3.1% compared with the same period last year. Non-energy revenues have been a significant source of support for the budget, particularly VAT, which has increased for the third consecutive year due to an overheating economy, and corporate income tax. However, the taxes the budget collects from sales and profits are also deemed to decline — economic growth is slowing.
In the first three months of this year, Russia’s GDP grew 1.4% year-on-year, according to the State Statistics Service (Rosstat). That’s the smallest rise since the second quarter of 2023, when the economy began to recover from the impact of sanctions imposed by the West following the full-scale invasion of Ukraine a year earlier.
On a quarterly basis, it is already contracting. Signs of slowing are everywhere — from a decline in corporate lending to a growth in private deposits, from lower industrial output to contracting imports. Even the labor market, as overheated as it is, is showing some slight signs of declining demand.
There is nothing unexpected here. The Russian economy has been growing for two years on budgetary steroids, driving up inflation, demand, salaries, and investments. Now it has hit a wall. That’s being felt by consumers, with everyday items like potatoes rising by 173% year-on-year, and the government proposing price controls for the so-called Borscht Index of the popular soup’s ingredients.
The Central Bank has been fighting tooth and nail to cool growth, with a historically record-high lending rate of 21%, reducing it to 20% only in June. It seems it did the job too well. The government is no longer discussing growth, but rather a soft landing and a managed slowdown.
This will impact the state budget, the primary source of growth, as well as the Kremlin’s military outlays. Spending, while still greater than before the full-scale invasion of Ukraine, is starting to slow. In the first quarter, about half of the additional spending went on the military. The upcoming data for June will indicate whether this trend continues.
The Finance Ministry has said that an increased rate of expenditure in the first half of the year is the result of an effort to spread the load more evenly throughout the whole year. Other plausible explanations for this phenomenon include an attempt to smooth over the effects of an economic slowdown or preparations for a summer offensive in Ukraine.
This front-loaded spending, coupled with lower revenue, is pushing the budget into deficit. As noted above, Russia’s budget deficit in the first five months of this year was 1.5% of GDP (in ruble terms, it increased 0.2% last month). Initially, the government had planned a budget deficit of 0.5% for the entire year of 2025, but later revised that target to 1.7%.
This is bad news for the Kremlin, but not disastrous. While three times wider than initially planned, this deficit will not capsize the economy.
Firstly, there is enough liquidity to borrow domestically. Secondly, the shortage in oil revenues can still be offset by the National Wealth Fund’s (NWF’s) rainy-day reserves. According to the Finance Ministry, the Fund’s assets on June 1 were 1.3% of GDP, and that should rise by a third in the coming months due to additional revenues from last year that have not yet been transferred. This buffer could last for a year or more, depending on Russia’s spending plans and the oil price.
The latter depends a lot on the longevity and the dynamics of the war between Israel and Iran. So far, it has spared the main oil export routes and production sites, keeping oil prices just slightly elevated.
Russia’s spending plans will provide the battlefield for a protracted fight between industrialists hungry for more fiscal spending, and the Finance Ministry, which guards budgetary prudence. The final verdict lies with Vladimir Putin, but historically, he has been skewed towards fiscal stability, rather than runaway spending.
This means that the economy will continue to slow, and the budget dry up somewhat. However, overall macroeconomic stability would more likely than not remain one of the two priorities, the second being the war in Ukraine.
Who will pay the price? Russia’s businesses and workers are in the crosshairs. Then again, they’ve never had it so good as for the past two years. Putin will likely be deaf to their pleadings.
Alexander Kolyandr is a Non-Resident Senior Fellow at the Center for European Policy Analysis (CEPA) specializing in the Russian economy and politics. Previously, he was a journalist for the Wall Street Journal and a banker for Credit Suisse. He was born in Kharkiv, Ukraine, and lives in London.
More on this and other aspects of the Russian economy in a weekly summary produced by the independent publication, The Bell.
Europe’s Edge is CEPA’s online journal covering critical topics on the foreign policy docket across Europe and North America. All opinions expressed on Europe’s Edge are those of the author alone and may not represent those of the institutions they represent or the Center for European Policy Analysis. CEPA maintains a strict intellectual independence policy across all its projects and publications.
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