The sacrifice of the queen: what will happen to the budget deficit in Russia
Tax increases discourage business activity, but there is no other way out now, and the main players in the economy understand this. There are no signs of a budget crisis, but systemic risks to the budget and public debt are accumulating, and they will have to be addressed in the medium term. These conclusions were reached by economists during the Expert RA webinar on Russia's fiscal and budgetary policy over the past few years. Details can be found in the Izvestia article.
The structural shift
The Russian budget in recent years, as noted by Anastasia Drugina, associate professor at the Faculty of World Economics and World Politics at the National Research University Higher School of Economics, has become both more and less oil-dependent. On the one hand, external sanctions and geopolitical conditions make revenues from hydrocarbon exports extremely volatile. On the other hand, the tax reforms of recent years — changes in VAT rates, income taxes, and personal income tax modifications — were aimed specifically at increasing the share of non-oil and gas revenues, which increases the stability of the treasury. In the 2026 budget, oil and gas revenues dropped to 18%, and by 2029 this share will be below 16%.
The Ministry of Finance's initial revenue expectations for the coming years have been systematically revised upward. However, the causal relationship is reversed here.: First, the government's spending needs are growing, and then the tax base is being tightened to meet them. In the latest version of the three—year budget, expenditures for 2026 were increased by almost 10%, from 44 trillion to 48.5 trillion rubles.
When analyzing the open part of the budget, a change in government priorities is noticeable. In real terms, there is a decrease in spending on social policy, while spending on national defense and national issues is steadily increasing. The previously planned budget normalization is postponed: The structural primary deficit will persist in 2026-2028, and the balance is shifting towards the end of the decade.
Debt canopy
The key problem of the current economic structure is the conflict between fiscal and monetary policy. The government is stimulating the economy through budget injections, while the Bank of Russia is trying to cool demand with tight interest rates.
The budget, as Oleg Buklemishev, Deputy Dean of the Moscow State University Faculty of Economics, pointed out, is increasingly "stewing in its own juice", breaking away from the realities of the private sector. According to him, the main macroeconomic problem today is the gap between economic growth rates, which are around 1% or lower, and real interest rates exceeding 10% per annum, which makes Russia a "world record holder" in this indicator.
Because of this difference, fiscal policy becomes inherently unstable. The government has to finance the budget deficit by borrowing on the market through federal loan bonds (OFZ) at 17% per annum and above. The debt overhang is starting to work against the economy: the budget's interest expenses have already reached 3 trillion rubles, displacing productive investment items.
Buklemishev also pointed out the strangeness of the current structure of operations: the Ministry of Finance borrows funds at double-digit interest rates, directing some of them to replenish the National Welfare Fund (NWF), whose assets are denominated in gold and yuan, yielding zero or minimal returns.
Who will buy OFZ
The high cost of borrowing actually reflects the changing structure of buyers of Russian government debt. Sofia Donets, Chief Economist at T-Investments, stated that the Ministry of Finance is actually testing the market for strength.
The agency's historical strategy was based on the placement of long-term bonds with a fixed coupon, but today this balance has been disrupted. Non-residents, who generated demand for such securities, left the market. Retail investors are losing interest in long-term securities amid the tightening cycle of the Central Bank's tough policy, while banks are avoiding interest rate risk and demanding floating coupon bonds (floaters).
"Institutional players — pension and insurance funds — are ready to take out classic OFZs, but in limited amounts — conditionally, 20-30 billion rubles per week, while the Ministry of Finance needs to place over 100 billion rubles," the expert explained.
Yields under 17% per annum reflect the premium for uncertainty and oversupply. The volume of net borrowings of the Ministry of Finance reaches the level of 2.5% of GDP per year against historical 1-1.5%. In order for the market to digest this, the government will have to change the debt structure, increasing the share of floaters and short-term securities.
Everyone will pay
In conditions of trillion-dollar deficits, the issue of finding sources of coverage becomes central. Experts agreed that fiscal reserves are almost exhausted. Attempts to pinpoint the withdrawal of rents from certain industries (for example, in non-ferrous metallurgy) cause business resistance and do not give the desired macroeconomic effect.
The illusion of choosing between "development" and "stability" is a thing of the past, Sofia Donets is sure. The budget is obliged to finance security issues, and all economic agents will have to pay for it. Raising the income tax and ensuring the stability of VAT revenues became a conscious choice of the authorities, since the alternative would be either to accelerate inflation or direct expropriation of capital. Predictable taxation in this case is considered as the lesser of the evils.
An important question remains: who will replace the declining public investment in fixed assets, because future development depends on them, as well as overcoming budgetary problems. Expectations that the private sector will channel accumulated savings into infrastructure projects are hardly justified. With risk-free returns on deposits and OFZs at 17-20% per annum, businesses see no reason to take on the risks of long-term investment in the real sector, preferring a savings model of behavior.
Inflation as a taboo
Despite the growing debt burden, the Russian financial authorities do not plan to solve the problem by devaluing debt through the launch of an inflationary spiral. The webinar participants emphasized that the fixation on budget balance, even in our extraordinary circumstances, has deep historical roots — from the traditions of the Speransky reforms to the trauma of the 1998 default and the positive experience of accumulating reserves before the 2008 crisis.
The concept of "living within your means" and inflation targeting, according to Sofia Donets, are fundamental elements of Russian macroeconomic sovereignty. As long as this paradigm prevails, the government will not artificially accelerate prices in order to write off domestic obligations, realizing the disastrous consequences of such a step for social stability.
The participants of the discussion agreed that there is no budget crisis in the classical sense in Russia. The financial system remains manageable, and the Ministry of Finance is successfully adapting to external shocks. The root cause of the current difficulties lies in the geopolitical plane. The economy bears the cost of choosing national security, and the price of this adaptation will be systematically distributed through taxes, high cost of loans, and crowding out private investment, rather than through inflation.
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