Russia’s military budget is set to shrink slightly for the first time since the full-scale invasion of Ukraine more than three years ago, suggesting that the Kremlin has hit a limit in its ability to prosecute the war as the country’s economy comes under growing strain.
State spending on national defense is projected to go down next year to around $156 billion from more than $163 billion, under the current exchange rates, according to a draft budget submitted to Parliament on Monday. The decrease is larger when projected inflation of up to 7 percent is factored in.
The budget indicates that Russia is largely staying the course on the economic model that has funded the invasion, locking the country in a grinding war of attrition in which the Russian Army has advanced slowly on the battlefield. President Vladimir V. Putin is trying to demonstrate that Russia can outlast Ukraine despite Kyiv’s fierce resistance and eventually achieve its goal of fully occupying all the Ukrainian regions he declared annexed in 2022.
Ukraine is hoping that Russia’s limited battlefield gains and mounting economic pressures will eventually convince Mr. Putin that further fighting is futile. But in recent months, he has signaled his determination to continue the war until his expansive conditions for peace are met, even if that determination is increasingly at odds with Russia’s economic reality.
Russia’s budgetary figures show that it intends to continue conducting the war largely with soldiers who are effectively mercenaries, fighting only for the relatively high pay. This approach has helped widen a budget gap, and the government is responding by increasing taxes on Russians, with the rate of the value-added tax going up to 22 percent next year from 20 percent.
Even as Russia moves to slightly slow war spending, its military budget remains nearly quadrupled from the levels of 2021, and the budget of more than $160 billion this year represents a post-Soviet high. Russia’s military budget is nearly three times that of Ukraine, which is facing its own looming budget crisis, still needing some $20 billion to cover next year’s expenses.
If Russia decided to expand the war budget again, it would most likely need to increase the economic pain for Russians, either by raising taxes further or by ramping up domestic borrowing. That could damage the government’s efforts to carry out the war while shielding the Russian people from its effects and heading off any pushback.
Sergei Suverov, an analyst at a Moscow investment consultancy, said the government had been “forced to look for ways to stabilize the treasury” because of the budget shortfall.
“To this end, it had to raise taxes and cut some expenditures, even on defense,” Mr. Suverov said.
He added that the Russian government still had the capacity to spend more on the war if it chose to stretch its current funding model. “In principle, the government has resources for more borrowing,” he said, adding that while international markets had been closed to Moscow, it could still borrow internally.
Over the past couple of decades, the Kremlin has been careful to avoid plunging the country’s economy into the kind of crisis that Russians associate with the post-Soviet transition to capitalism, when the state effectively went bankrupt.
Moscow has been able to increase military spending thanks in part to relatively higher oil prices, which were boosted by the war. But over the past 15 months, the price of crude has declined because of fears of a global economic slowdown. And Western sanctions have forced Moscow to sell its oil at a discount. As a result, the country’s oil and gas revenues are projected to go down from nearly $135 billion in 2024 to around $100 billion this year.
Domestically, Russia is also facing a different economic reality. In 2023 and 2024, its economy expanded at a rate of more than 4 percent, propelled by increased military-industrial expenditures. The price for the increased spending has been high inflation, which the country’s central bank has combated by raising key interest rates as high as 21 percent. The rate, which remains elevated at 17 percent, has frozen the economy, reducing growth to around 1 percent this year.
To finance the growing budget deficit, the Russian government is not only increasing the value-added tax, a type of consumption tax, but also taxes on the gambling industry and smaller businesses. Russia is also cutting many expenditures, including on the development of the Ukrainian regions it occupies.
The tax increases “may improve the budget revenue situation,” Mr. Suverov, the analyst, said. But, he added, “it will hit consumer demand and consequently slow down economic growth.”
Ivan Nechepurenko covers Russia, Ukraine, Belarus, the countries of the Caucasus, and Central Asia.
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