The Russian government has approved the outline of the 2027 federal budget. The full draft has yet to be presented to parliament and voted through, but the headline figures already follow a familiar formula. Fund the war and social payouts, trim the rest, tax the economy harder, and hope the numbers hold.
On paper, the plan looks prudent. The deficit is to narrow to 2.2% of GDP (5.5 trillion rubles, or $70bn) in 2027, from about 3% expected this year. Revenues will rise 7.5% to 43.3 trillion rubles. Spending is set at 48.8 trillion rubles, up from 46.15 trillion rubles, although with inflation at 6.8% this year, that represents a small real-terms cut.
The oil price cut-off under the budget rule falls from $59 to $50 per barrel of Urals, with oil and gas revenue above that threshold diverted into the rainy-day fund. For the first time since the full-scale invasion, the National Welfare Fund (NWF) is to be replenished rather than raided. Its liquid assets have fallen from 9.7 trillion rubles in February 2022 to about 4 trillion rubles today.
Yet the plan rests on generous assumptions. The government expects 1.4% GDP growth next year, above almost every other forecast. The central bank projects 1.2%; the OECD has just cut its estimate to 0.6%. There is also a huge disparity in inflation expectations: the Finance Ministry expects inflation to fall to the 4% target by end-2027. Households disagree. Their inflation expectations rose to 14.2% in September, and their estimate of the inflation they are actually experiencing reached 15.1%. The oil assumptions are more cautious. An average of $53 a barrel implies only a trickle into the NWF.
Two variables will decide the outcome, and the government is least willing to discuss both: real defense spending and fiscal discipline.
Finance Minister Anton Siluanov has been clear that defense and social payments come first. That means arms purchases, defense-plant upgrades, higher military pay, and support for soldiers’ families. Detailed figures are not yet public, and a large share of spending will again be classified. The published totals are merely an opening bid in the negotiation between the Finance Ministry and the security establishment. Previous budgets suggest they will rise.
The track record justifies skepticism. Moscow has not met a single deficit target since the invasion.
The 2025 budget planned a deficit of 0.5% of GDP and, after two revisions, ended at 2.6%. The 2026 budget promised 1.6%. After eight months, the deficit stands at 2.5%, and Siluanov now concedes it will be “no more than 3%.” Last year the ministry announced nominal cuts to military spending for 2026; it will likely finish the year having done the opposite.
A spring plan to trim “non-sensitive” spending by 10% was quietly shelved when the Iran war briefly pushed oil above $100. But little of that windfall reached the budget. A strong ruble and payments to oil companies to hold down domestic fuel prices swallowed most of it.
To narrow the deficit, the government must contain military spending and cut civilian outlays at the same time. It managed neither in 2026, and nothing in the new plan suggests 2027 will be different.
So why bother fiddling with the numbers? The reason is that it provides cover for the Bank of Russia to resume rate cuts. It offers what the central bank needs to see: a falling deficit, disinflation, restored NWF inflows, and a pledge of consolidation. The Finance Ministry plainly does not know what the war will cost next year. Its numbers reflect what it wants monetary policy to do, not what fiscal policy is likely to deliver. The central bank has seen this before. If spending overshoots again, inflation will again exceed target, rates will stay higher for longer, and the civilian economy will keep shrinking.
With major tax rises already implemented since 2025, the government has turned to narrower and more intrusive levies. Passive income will now be taxed on a progressive scale, with veterans exempt. That covers dividends, deposit interest, securities gains, and asset sales. The change affects about 4 million people and could raise 500–700 billion rubles a year.
Miners and fertilizer producers face a one-off 30% windfall tax, and gold miners 20%. That will weigh on investment and future output in the few sectors still able to earn abroad. Investors from “unfriendly” countries — nearly everyone who joined Western sanctions — will see the tax on their dividends rise from 15% to 35%. Purchases on foreign marketplaces will carry VAT. Higher excise on tobacco and alcohol is being prepared. Next year’s utility tariff increase will be steeper than planned.
Given that taxes cannot cover the gap, borrowing and inflation must. Siluanov admits this year’s domestic borrowing plan of 6.47 trillion rubles will be “slightly exceeded.” Domestic state debt has risen from 23.7 trillion rubles at the start of 2025 to 33.2 trillion in September. Debt-to-GDP remains low by Western standards. But Russia can borrow only at home, at double-digit rates. The money goes into shells rather than productivity, and so it fuels inflation.
The war, in other words, is increasingly paid for through inflation. It first eroded the savings and living standards of the urban middle class, the main target of the passive-income tax. Now it is reaching everyone who pays a utility bill or buys an imported phone case. Real incomes rose 5.4%, 7.3%, and 7.4% in 2023–25. They are expected to grow just 1% this year and 1.4% in 2027. The gap between Russia’s military and civilian economies will keep widening, and so will the gap between the haves and the have-nots.
The 2027 budget does not solve Russia’s fiscal problems. It postpones them for another year, hoping the war ends, oil rebounds, or Washington eases sanctions before the bill arrives. Each such year leaves a thinner reserve fund, costlier debt, a more heavily taxed private sector, and fewer tools for the next shock. If the war escalates in the coming months, as current signals suggest, the targets will be revised by spring, just as they were in 2025 and 2026.
The Kremlin is mortgaging Russia’s economic future to pay for its geopolitical present. The 2027 budget does not change that. It only makes the payments larger.
Alexander Kolyandr is a Non-Resident Senior Fellow at the Center for European Policy Analysis (CEPA), specializing in the Russian economy and politics. He is Director, Europe for Eurasia Group and was previously a journalist for the Wall Street Journal and a banker for Credit Suisse. He was born in Kharkiv, Ukraine, and lives in London.
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.
