For starters, the budget, which has saved the economy from collapse since Russia’s all-out war of aggression against Ukraine began in 2022, and which fueled growth in the following years, is in real trouble.
Officially, the finance ministry plans to curb this year’s surge in state spending by approximately 4%. In reality, this plan relies on numerous variables, primarily the situation in Ukraine and the state’s associated and largely inescapable financial obligations. As in previous years, Moscow’s annual spending will again be front-loaded at the start of the year, said Deputy Finance Minister Vladimir Kolychev. This early spending in itself increases demand and, consequently, drives inflation.
The state budget adopted in the fall also seems grounded in over-optimistic assumptions, including government revenue. In January, oil-and-gas income fell by half year-on-year, dropping to lows not seen since the height of coronavirus lockdowns in July 2020. In absolute terms, Russia brought in just 393bn rubles ($5.1bn) in energy taxes during the month, compared with 789bn rubles in January 2025 and 675bn rubles in January 2024.
Estimates from a government-linked think tank suggest the 2026 budget deficit might be triple the official target. This would be caused by a simultaneous slump in oil-and-gas revenues combined with rising expenses.
There are further clouds on the horizon. In late January, the UK and 12 other North Sea and Baltic Sea littoral nations issued a joint statement aimed at the Russian shadow fleet. This included a clear threat, stating the group “require[s] that all vessels exercising freedom of navigation strictly comply with applicable international law.” Media leaks suggest action against vessels is being prepared, but has not yet had the green light from ministers.
If enacted, shadow fleet seizures could have a serious impact on Russian energy revenues, as it would effectively close the Baltic for its oil exports.
Even without action against Russian vessels, the think tank estimated that the budget could lose about 18% of its energy income due to low prices and a likely reduction in oil sales to India (a condition of the Trump administration’s trade negotiations with New Delhi).
Overall revenues would be 6% below the current plan. At the same time, expenditure is likely to come in 4–8% higher. As a result, the budget deficit might be as much as 3.5-4.4% of GDP, instead of the planned 1.6%.
At the end of 2025, the finance ministry managed to keep the budget deficit to 2.6% of GDP, in line with figures revised in September. At the start of the year, the 2025 deficit was planned to be just 0.5%. Keeping it at 2.6% likely came by deferring some spending that had been planned for December, two sources close to the budget process told The Bell. This year promises to be tougher, one of them said.
With the budget in dire straits and the government in no position to cut spending, nor to collect more taxes from the already slowing economy, it needs to borrow. While 2.6% of GDP deficit is not huge compared to that of many Western countries, Russia’s borrowing must be sourced at home because the West denies it access to global capital markets.
However, as the sole buyers of public debt, local banks repossess government bonds with the Central Bank (CBR), and use its cash to lend more, primarily to the government. As additional money is pumped into a mostly stagnant economy, pressure on prices grows, which forces the Central Bank to keep the rates high (its key rate is currently 16%, down from 21% a year ago, and high enough to discourage most private and corporate borrowing). As a result, a rising share of new government borrowing goes towards servicing older debts, which creates a need for more borrowing. The result is Russia’s debt-inflationary spiral.
The CBR is under increased pressure from the corporate sector to cut borrowing costs, with almost seven out of 10 enterprises saying the high cost of credit is undermining the economy.
Its effects are already clear. The main issue for Russian companies in 2026 is likely to be non-payment by counterparties, a recent survey from the Russian Union of Industrialists and Entrepreneurs (RSPP) found. The problem worsened in the latter half of last year, with some 42% of respondents complaining about it in the fourth quarter, a big rise from the 26% mentioning it in the second quarter.
Insufficient working capital was the third most-serious problem reported by the industry lobby (cited by 26% of respondents). The dearth of credit was an acute issue in the first half of the year, though it began to ease as interest rates eased somewhat from their high. Just under one in five businesses said it was a concern at the end of the year, down from a third in spring 2025. Nonetheless, many large Russian companies are already encountering difficulties servicing their debt.
Building Sector
A recent example is Samolet, the largest property firm in terms of square footage under development. It asked the government for a subsidized three-year loan of 50 billion rubles ($650m). The company is prepared to secure the loan by offering a share to the state. Samolet believes its problems are short-term and surmountable, but it’s clearly not a great signal of economic good health.
Metals Sector
Builders are far from the only industry on rocky foundations and demanding state support. The Russian Steel Association, which brings together the country’s biggest metals companies, is preparing a package of anti-crisis measures for the government. The industry is facing a slump in domestic demand, which started back in 2024 when construction began to decline, imports increased, the strong ruble reduced the value of exports, and sanctions hit traditional export markets. The steelmakers are not asking for direct funding, but instead suggest legislation to stimulate demand, restrict imports, and ease the requirements for the costly transfer to using Russian-produced software. Granting the request would reduce budget revenues.
Coal
Russian coal companies have faced serious difficulties since last year as prices fall, while transportation and tax bills have rise. They have been granted tax deferrals, targeted subsidies, and discounts on rail freight services.
Rail
Meanwhile, the state rail monopoly Russian Railways has a serious debt crisis requiring state support. The government has been discussing a rescue plan since December, which could cost up to 1.3 trillion rubles ($16.9bn). With double-digit interest rates and reduced profits amid stalled economic growth, Russian Railways can no longer service its debts, which have almost tripled during the war from 1.5 trillion to 4 trillion rubles ($52bn).
The company has been forced to sell its skyscrapers and one of its service companies to manage debts without overburdening the budget. But even if (unlikely as it seems) Russian Railways manages to get by without a major government cash injection, its unprofitability means that this year it cannot make any dividend payments to the state.
The list of troubled companies and industries gets ever-longer as demand contracts amid increased costs to service loans and high inflation. This is partly a consequence of pumping budget funds into the economy from 2022 to 2024, which caused rapid growth and overheating.
So, what can be done? The CBR has two unpalatable options. Maintain high interest rates but at a high cost, holding back the economy while the state struggles for revenue; or cut them too fast and see inflation surge amid rising taxes and a budget deficit.
There is another and more profound problem. The authorities are steadily losing their capability to throw money at problems. As reserves dwindle, businesses will have less and less access to credit and government resources.
Those funds that are available will not be earmarked according to their effectiveness for the economy, but by the very different criteria of fiscal and political significance. Barring an unseen financial disaster, the economy is unlikely to collapse. But it will continue to worsen, and the Putin regime’s room for maneuver is fast narrowing.
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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