War in the Middle East is pushing oil prices up, to the delight of the Kremlin — but the rise may prove too short-lived and too modest to save the Russian government from otherwise imminent spending cuts this year. Just two months into 2026, the Kremlin’s budget is already shot to pieces.
On March 3, Brent climbed to $83 a barrel, its highest since July 2024. Yet Russian oil trades at a significant discount because of sanctions, and the ruble is much stronger than the oil price level would normally suggest, which means the budget still receives fewer rubles than expected from hydrocarbons.
At the current exchange rate of 77.8 rubles per dollar, against the budgeted 92.2, oil would need to be around $70 per barrel just to meet fiscal assumptions — still too high given the discount at which Russia sells its crude.
The government is now preparing to cut spending amid declining oil revenues and a slowing economy — the first acknowledgement, just two months into the year, that it is impossible to meet its commitments within the ambitious parameters it set for the 2026 budget.
In a state TV interview on February 25, Finance Minister Anton Siluanov said the government will cut spending and revise the parameters of the so-called “budget rule,” which determines what share of excess revenues from oil and gas exports the state saves in the National Wealth Fund (NWF) and what share goes on day-to-day expenditure.
“Perhaps, taking external conditions into account, the indicators will be slightly shifted, slightly changed,” he said vaguely. He did not specify how exactly, but assured that social obligations, as well as “national and technological initiatives,” would be fully funded. Cuts to defense and core welfare are off the table.
So what is the budget rule, and how does it work?
The rule forms the cornerstone of Russia’s fiscal policy. It was designed to reduce the boom-and-bust cycle caused by volatile oil prices, prevent the ruble from strengthening too much when prices are high, and ensure spending commitments can still be met when prices are low.
It works by setting a cutoff price for oil exports — for 2026, this is $59 a barrel. Any revenue from oil sold above this price is saved in the NWF; any shortfall is topped up from the fund. When export revenues are high, the government buys foreign currency and saves. When they are low, it sells foreign currency and buys rubles. A lower cutoff price means the government has to save more — something that would automatically necessitate spending cuts.
After the invasion of Ukraine, the budget rule was suspended so the government could sharply increase military spending. It was reinstated in 2025, but with a cutoff price far higher than previously used — $60 a barrel versus the pre-war level of roughly $48. During the three-year suspension, the government was forced to spend more than half of the liquid portion of the NWF to cover the budget deficit. As of February 1, the fund held 4.23 trillion rubles ($55bn), down from 8.779 trillion rubles ($113bn) four years earlier.
Bloomberg reports the government is now considering lowering the cutoff price to $45–$50 per barrel, below even the levels discussed last year. A rough estimate suggests that a $10 reduction in the cutoff price, all else being equal, would reduce expenditure by around 0.5% of GDP.
With oil and gas revenues falling — they plunged 50% in January from a year earlier, to levels last seen in July 2020 during the Covid pandemic — the authorities are worried about the NWF depleting too quickly. In absolute terms, January oil and gas revenue came to around 400 billion rubles ($5.1bn). February is likely to show a similar picture. Higher oil prices would help, but whether they are sustained is a very big if.
Oil is not the only problem. The government is preparing to lower its economic growth forecast from 1.3% to 0.7–1%, meaning non-oil-and-gas revenues may also fall short of expectations.
In January, the federal budget ran a deficit of 1.72 trillion rubles, or 0.7% of GDP, against a full-year target of 3.786 trillion rubles, or 1.6% of GDP. At current revenue levels and without spending cuts, the deficit could be 1.5 times the annual target. Russia last year managed to hold the deficit to a target of 2.6% of GDP, but this was likely achieved in part by deferring spending planned for December into 2026. The government plans to cover almost the entire financing gap through domestic borrowing, which fuels inflation.
Russian authorities now appear ready to acknowledge the reality of their budget problems. Economic conditions are forcing the government’s hand, and it seems the technocrats have managed to persuade Putin to accept spending restraint, slowing the main driver of economic growth over the past three years.
But with cuts to military expenditure effectively impossible, the burden will fall disproportionately on already-stagnant civilian industries. A modestly weaker ruble and reduced inflationary pressure from lower borrowing may provide some cushion, but it will not be enough to offset the broader drag. Faced with a choice between weak growth and the risk of soaring inflation, Russia is opting for the former.
So the ripples from US-Israeli attacks on oil prices may help Russia (its gas exports have fallen to a multi-decade low) and could even bring a thin smile to Putin‘s lips. But the current temporary spike, filtered through sanctions discounts and an unfavorable exchange rate, is unlikely to change the fundamental arithmetic.
Unless oil prices stay higher for longer and the ruble weakens significantly, the Kremlin’s budget problems are here to stay.
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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