THE REAL STATE OF RUSSIA’S ECONOMY: ANALYSIS OF THE 2025 BUDGET AND 2026 FORECAST

Politics
Exclusive
Oleh Cheslavskyi
21 January, 21:50
The official figures look decent: budget deficit at 2.6% of GDP, debt at 16%. But this is a facade. Behind it lies a crisis.

Oil and gas revenues collapsed by a quarter — minus $30 billion in a year. To patch the hole, Moscow began squeezing money from its own economy: taxes rose 12.6%. In December, they implemented shock therapy — sharply cutting spending by 23.7%, otherwise the deficit would have reached $100+ billion.

The economy formally grew 1%, but only because the state pumped budget money into it at an 18% annual rate. It’s like maintaining body temperature with a heating pad — while it works, everything seems fine.

Russia enters 2026 with an almost empty National Wealth Fund, with Russian oil at $39 per barrel instead of the budgeted $59, and with a structural deficit that has doubled.

If things go badly (70% probability) — the system will lose control in summer 2026. Reserves will run out, forcing money printing to cover a deficit of $32–40 billion. Inflation will accelerate to 25–30%.

If things go well (30% probability) — they’ll manage to hold on. But at the cost of completely freezing the private sector and imposing new taxes.

The numbers show no third option.

WHAT HAPPENED IN 2025?

The Surface Success of Financial Technocrats

A deficit of 2.6% of GDP ($55.8 billion with GDP of $2,145 billion at the official rate of 92 rubles/$) and public debt of 16.1% of GDP ($345 billion) look like a model of fiscal discipline. Budget execution at 99% with spending growth of 7% ($464 billion vs. $434 billion in 2024) indicates high centralization and administrative control. But this is a victory of technique over economics.

The system has learned to spend almost everything planned regardless of market conditions. This is an achievement of financial managers, not a sign of a healthy economy. The main question is at what cost these parameters were maintained and whether the system can repeat this in 2026.

The Collapse of Oil and Gas Revenues: Minus $30 Billion Annually

Oil and gas revenues fell 24% — from $121 billion in 2024 to $92 billion in 2025. This is the minimum since 2020. Three reasons: falling world oil prices, sanctions discount up to 35% (Urals traded in December at $39.2 vs. Brent $60–65), and ruble strengthening to 78 RUB/USD vs. optimal 110–112.

The December collapse is particularly revealing: $4.9 billion vs. $8.6 billion a year ago (-43.3% year-on-year). This is no longer a cyclical fluctuation. This is a structural shift where the combination of sanctions, discount, and exchange rate policy is destroying the traditional budget base.

Growth of Non-Oil and Gas Revenues: Squeezing the Economy

Non-oil and gas revenues grew 12.6% to $322 billion. With official inflation of 9–10% and real GDP growth of about 1% (officially for 11 months), such a revenue pace means one thing: not expansion of the tax base, but tightening of fiscal extraction.

The sources of growth are VAT and excise taxes, i.e., indirect taxes falling on businesses and consumers. This is concealment of real pressure on the economy through the tax system. Administrative resources have become the new “oil fountain.” The budget works as a system with constant tightening of screws: to get the required amount, you have to tighten harder.

This model has a limit. Businesses are already transitioning to “splitting” services to reduce the tax base (the “Yandex.Drive” case). The next stage is a wave of tax assessments in 2026–2027, which will additionally slow investment activity.

Spending Growth of 6.8%: The Main Driver of Deficit

Spending rose to $464 billion from $434 billion (+6.8%), consistently outpacing even inflated official inflation. This means the state is not simply indexing obligations but increasing its intervention in the economy in real terms.

In the absence of detailed breakdown (data classified since 2022), it’s obvious that the drivers are military items and social obligations as a factor of political stability. The budget works as a tool for preserving the existing model, not transforming it.

Non-Oil and Gas Deficit of 6.5% of GDP: Dependence on Rent

The non-oil and gas deficit is $139 billion or 6.5% of GDP. This means that all social, security, and infrastructure functions of the state are two-thirds financed by oil and gas rent and borrowing. The economy does not generate enough of its own resources to achieve government goals.

The structural deficit of 1.2% of GDP ($26 billion) shows that even if all cyclical factors are excluded, the budget chronically spends more than it can earn on a non-commodity basis. This is not a temporary measure but a systemic feature.

December “Controlled Collapse”

By October 2025, the deficit was snowballing. Over 12 months it reached $84.8 billion (at a rate of 92 rubles/$), threatening to exceed $100 billion for the year. Spending grew at an 18% annual rate with GDP growth of about 1%. This is a classic overheating scenario where the budget was the only source of growth.

In December, shock therapy was applied. Spending fell 23.7% year-on-year: $62.5 billion vs. $82 billion a year ago. Simultaneously, non-oil and gas revenues grew anomalously by 21.4% vs. trend 4–10%, adding $4–5 billion.

This combination “saved” about $49 billion in spending relative to the first three quarters’ trend and became the main deficit stabilizer. The December deficit of $14.9 billion was the best result in years.

But this isn’t free. An economy accustomed to budget support of 18–20% with GDP growth of 1% received a sharply negative impulse of -14% year-on-year in the fourth quarter. This cannot but affect GDP dynamics. The main impact of this fiscal compression on the real sector, investment, and employment will manifest with a lag in Q1-Q2 2026.

STRUCTURAL PROBLEMS OF THE SYSTEM

Real Estate: From Cyclicality to Structural Crisis

The real estate market has ceased to be cyclical. A structural crisis has begun, where classical indicators (Central Bank rate, demand) give way to systemic risks.

In 2025, 25.6 million sq.m. were sold with 41 million sq.m. introduced to the market — a 61% imbalance. Prices rose 23% with supply reduction of 13.8%. This is not panic demand but the washing out of low-margin projects through rising costs.

The new driver of changes is not the Central Bank rate but the tax burden. The VAT increase to 22% from 2026 is not a one-time cost increase but a trigger for restructuring the entire value creation chain. Businesses are beginning to “split” services to reduce the tax base. Result: complication of developers’ financial models, growth in transaction costs, wave of tax assessments.

Housing affordability is no longer just a credit problem but also fiscal. Tightening family mortgage conditions and rising construction costs make the comfort-class economics unviable. The market is segmenting: elite housing vs. social rental. The middle class is being washed out.

Record mortgage delinquency (+110% year-on-year in St. Petersburg) with credit issuance growth is a paradox only at first glance. This is a symptom: borrowers have exhausted liquidity, supporting payments through new loans. Lowering the key rate won’t solve the problem of high household debt burden — it will only postpone the wave of defaults.

The “Overstrengthened Ruble” as a Redistribution Mechanism

Against the backdrop of falling oil and gas revenues and the forecast of their further compression to $65–67 billion in 2026, the question of the “overstrengthened ruble” (78 RUB/USD vs. often mentioned optimal 110–112) arises more frequently.

The 2026 forecast assumes further revenue compression, where the damage from the “overstrengthened” exchange rate is estimated at $33 billion, almost twice the losses from sanctions and oil discount ($18.5 billion in 2025).

So why don’t the financial authorities go for devaluation? The answer lies in the alignment of priorities:

Inflation control as an absolute priority. A strong ruble directly restrains price growth. In conditions of goods deficit and growing government spending, ruble weakening would lead to inflation acceleration. Authorities choose price stability at the expense of budget revenues.

Ensuring strategic imports for industry. For the economy to function, imports of components, machines, and technologies are critical. A “strong ruble” makes these purchases cheaper, acting as a hidden subsidy, reducing ruble costs. Exchange rate weakening would jeopardize the fulfillment of state orders.

Social stability. A stable exchange rate is a signal to key electoral groups about the manageability of the situation. Sharp devaluation could provoke a surge in currency panic.

Ambiguity of devaluation’s budgetary consequences. Devaluation would increase the ruble nominal of oil and gas revenues, but in parallel, foreign currency debts, salaries in dollar equivalent in some sectors, and the cost of import state purchases would become more expensive. The net benefit for the budget may be zero or negative.

The refusal to devalue has not only prohibitive but also distributive logic. It provides resources for the “distribution coalition”: the corporate sector of state orders, the budget sector, related households. This is not a single corporation but a system-forming group whose welfare depends on massive budget financing and inflation control.

The “overstrengthened ruble” has become a mechanism for hidden subsidization of the “distribution coalition.” Fiscal losses are converted into stability and operational capacity of the government.

Europe as a Latent Consumer of Russian Resources

The EU has indeed sharply reduced imports of Russian natural gas and on December 3 set a goal to completely stop supplies by September 2027. But dependence persists in another critically important area: the EU continues to purchase Russian fertilizers produced from natural gas.

Before February 2022, Russia provided about 30% of fertilizers purchased by European farmers. Subsequently, imports declined, but by Q2 2025 Russia’s share in the EU market rose to about a third, and in June imports reached 1 million tons — the highest monthly figure in a decade.

The EU is trying to solve the problem through gradual tariff increases. In July 2024, tariffs on Russian nitrogen fertilizers were introduced: a starting rate of €40 ($46) per ton with a pre-crisis price of $400–700 per ton. Further growth to €60 from July 2026 and to €315 after mid-2028 is planned. The mechanism allows for rate reduction if fertilizer costs start rising too quickly. For potash and phosphorus, tariffs are significantly lower.

Alternatives for the EU exist but are more expensive: Egypt and Algeria supply nitrogen fertilizers, Morocco — phosphorus. Increasing own production is limited: before 2022, 120 plants operated in Europe, covering about 70% of nitrogen fertilizer needs but depending on Russian gas or ammonia. After 2022, production fell 70%.

Meanwhile, data from the Centre for Research on Energy and Clean Air (CREA) shows that 65% of Russian crude oil transportation was provided by sanctioned “shadow fleet” tankers. The segment of fuel transshipment at sea is growing: $1.37 billion in November (+22% month-on-month), with 97% of operations performed by G7 tankers. Since February 2022, Europe has purchased Russian gas worth $115 billion — almost half of all RF gas exports over 3 years.

FORECAST FOR 2026

Basic Parameters and Initial Conditions

2026 begins with exhausted reserves and worsened market conditions:

Oil and gas revenues: The budget assumes Urals at $59/barrel and exchange rate of 92.2 RUB/USD, i.e., 5440 rubles/barrel or $59 at the budget rate. Actually at end of 2025: Urals $39.2/barrel, rate 78 RUB/USD, or 3100 rubles/barrel ($39.7 at current rate). The shortfall in oil and gas revenues is estimated at no less than $33 billion.

NWF: Reserves of about $43.5 billion will be exhausted by year’s end to cover the budget deficit.

Tax burden: VAT raised from 20% to 22%, several other taxes also increased to “patch the hole.” This is additional pressure on business and consumers.

Economic growth: Official forecasts assume 2.5% GDP growth built into the budget. Actually 2025 ended at 1% for 11 months with inflated official inflation. With restoration of real inflation, the country most likely shows a decline of 4–6%. At the same time, very uneven growth in military production against the backdrop of recession in the civilian sector.

Scenario A: Optimistic (30% probability)

Conditions for realization:

  • Urals stabilizes at $50–55/barrel by mid-year
  • Exchange rate holds in the 85–95 RUB/USD range
  • Additional fiscal measures succeed without mass protests
  • Western sanctions don’t tighten significantly

Trajectory:

Q1 2026: Continuation of December fiscal compression effect. Real economic growth near zero or negative -0.5% to -1%. Official statistics try to show 0.5–1% growth through inflation manipulations. Oil and gas revenues $13–15 billion (vs. budgeted $16.5 billion). NWF: $37–39 billion.

Q2 2026: Partial recovery of budget spending after January “advance payment.” Economy stabilizes at low growth level of 0–0.5%. New 22% VAT begins generating additional revenues of $2–3 billion per quarter but simultaneously slows consumption. Oil and gas revenues $15–17 billion. NWF: $30–33 billion.

Q3 2026: Critical point. NWF on the verge of exhaustion. Government transitions to emission mechanisms for closing budget hole through direct Central Bank loans or through commercial banks. Inflation begins accelerating to 12–15% annually. Economic growth 0.5–1% officially, actually near zero. Oil and gas revenues $16–18 billion. NWF: $20–23 billion.

Q4 2026: Full-scale emission financing of deficit. Inflation accelerates to 15–18%. Government resorts to administrative price controls on some goods. Economy shows 0–0.5% growth officially, actually stagnation or recession -0.5% to -1%. Oil and gas revenues $17–19 billion. NWF: $10–15 billion.

Year results:

  • GDP: +0.5% to +1% officially, actually -1% to -2%
  • Oil and gas revenues: $61–69 billion (vs. budgeted $82 billion)
  • Total deficit: $60–70 billion (5–6% of GDP)
  • NWF at year end: $10–15 billion
  • Inflation: 15–18% actually, 10–12% officially
  • Ruble devaluation in Q4 to 95–105 RUB/USD as compromise between budget needs and inflation risks

Realization markers:

  • Urals price holds above $48–50 until July
  • NWF not completely exhausted by end of Q3
  • Absence of mass social protests after tax increases
  • Relative stability of military logistics

Scenario B: Pessimistic (70% probability)

Conditions for realization:

  • Urals falls below $40/barrel or remains in $35–45 range
  • Sanctions pressure intensifies (additional restrictions on “shadow fleet,” banking operations)
  • Social tension grows through high inflation and falling real incomes
  • Problems with fulfilling state orders through shortage of imported components

Trajectory:

Q1 2026: Continuation of fiscal compression but against backdrop of even worse oil market conditions. Real economy in decline -1% to -2%. Official statistics try to show 0% but it becomes increasingly difficult to hide. Oil and gas revenues $11–13 billion (vs. budgeted $16.5 billion). NWF: $35–37 billion.

Q2 2026: First signs of losing control. New VAT generates less than expected revenues through falling consumption. Businesses massively transition to tax minimization schemes. Oil and gas revenues $12–14 billion. NWF: $25–28 billion. Beginning of emission financing. Inflation accelerates to 14–16%.

Q3 2026: Critical point passed. NWF actually exhausted. Full-scale emission financing through Central Bank loans. Inflation 18–22%. Government introduces administrative prices on basic goods, causing shortages. Real population incomes fall 8–12%. Oil and gas revenues $13–15 billion. NWF: $12–15 billion.

Q4 2026: Loss of macroeconomic control. Inflation 22–27%. Ruble devaluation to 110–125 RUB/USD, but this doesn’t help the budget through falling physical export volumes. Mass delays in payments to budget workers, social payments indexed with significant lag. Economy officially in recession -2% to -3%, actually -5% to -7%. Oil and gas revenues $14–16 billion. NWF: $3–7 billion.

Year results:

  • GDP: -2% to -3% officially, actually -5% to -7%
  • Oil and gas revenues: $50–58 billion (vs. budgeted $82 billion)
  • Total deficit: $80–95 billion (7–8% of GDP)
  • NWF at year end: $3–7 billion (almost exhausted)
  • Inflation: 25–30% actually, 18–22% officially
  • Ruble devaluation to 110–125 RUB/USD
  • Beginning of defaults on domestic debt or forced restructuring

Realization markers:

  • Urals price falls below $40 by May
  • NWF exhausted by end of Q2
  • Mass protests in regions through delays in social payments
  • Collapse in real estate market, wave of developer bankruptcies
  • Critical reduction of component imports through currency restrictions

Key Markers of State Change

Markers of transition to crisis (pessimistic scenario):

  1. Oil prices: Urals consistently below $42/barrel for three consecutive months
  2. NWF: Fall below $25 billion by end of Q2
  3. Inflation: Exceeding 16% annually by mid-year
  4. Exchange rate: Sharp weakening to 100+ RUB/USD by summer
  5. Social payments: Delays in payments to budget workers more than 10 days in more than 5 regions
  6. Real estate: Fall in new housing sales more than 40% year-on-year
  7. Banking system: Growth of problem loans more than 70% year-on-year
  8. Industry: Fall in production in civilian sectors more than 15% year-on-year

Markers of maintaining control (optimistic scenario):

  1. Oil prices: Urals above $48/barrel most of the time
  2. NWF: Balance over $20 billion at end of Q3
  3. Inflation: Holding below 14% annually until autumn
  4. Exchange rate: Fluctuations in 85–95 RUB/USD range
  5. Taxes: Fulfillment of planned receipts from VAT increase at least 90%
  6. Social payments: Indexation without significant delays
  7. Real estate: Fall in sales no more than 25% year-on-year
  8. Banking system: Growth of problem loans no more than 40% year-on-year

Critical decision-making points:

  • March-April 2026: Decision on additional tax measures or beginning of devaluation
  • June-July 2026: Point of possible transition to massive emission financing
  • September-October 2026: Critical moment for NWF and decision on administrative prices

CONCLUSION: A SYSTEM WITH NO WAY OUT

The 2025 budget showed the main conflict of the Russian economic model: between growing government spending and the limited capabilities of the non-commodity part of the economy to finance them.

The December “controlled collapse” of spending by $49 billion saved the 2025 indicators but created negative momentum for 2026. An economy accustomed to budget support of 18–20% with GDP growth of 1% received a sharply negative shock.

2026 begins with exhausted reserves, worsened oil market conditions, and increased tax burden. The projected shortfall in oil and gas revenues of $33 billion with NWF reserves of $43.5 billion means that by year’s end the system will exhaust its safety cushion.

Under the optimistic scenario (30% probability), basic parameters can be maintained at the cost of additional fiscal pressure, beginning emission financing in Q3-Q4, and inflation of 15–18%. The economy shows stagnation or minimal growth officially, actually recession of -1% to -2%.

Under the pessimistic scenario (70% probability), the system loses macroeconomic control in Q3 2026 through complete NWF exhaustion, uncontrolled inflation of 25–30%, devaluation to 110–125 RUB/USD, and recession of -5% to -7% actually.

To preserve the current model, either fiscal pressure must be further increased, risking freezing growth, or spending increases must be slowed, risking social stability. The numbers show no third path.

Spending money from the NWF to cover the budget deficit has exactly the same emission consequences as the budget borrowing from the Central Bank directly or through commercial banks. This will support inflation at a high level throughout 2026.

US sanctions are working. Militarization of the economy doesn’t come free. The system won’t withstand “eternal war.” It’s already failing to withstand it.

SOURCES

Budget deficit and debt

Oil and gas revenues

Urals crude oil prices

National Wealth Fund

EU fertilizer imports

CREA (Centre for Research on Energy and Clean Air)

EU tariffs on fertilizers

2026 budget projections

GDP growth and inflation

General analysis and overview

Links: sourcesource