Central Bank and Finance Ministry Warn Putin of War’s Impact on Economy
Central Bank and Finance Ministry Warn Putin of War’s Impact on Economy
Executive Summary:
- Senior Russian officials, including Ministry of Finance and Central Bank of the Russian Federation representatives, warned Russian President Vladimir Putin in early June that continued war spending is straining the economy. Defense spending is projected to consume about a third of the entire 2026 budget, making fiscal balance increasingly difficult.
- Russia’s Ministry of Economic Development cut its 2026 GDP growth forecast from 1.2 percent to 0.4 percent. The January–April 2026 budget deficit reached $79.3 billion, exceeding the entire 2025 deficit.
- Military spending is consuming an unprecedented share of state resources. In the first quarter of 2026, Russia spent $76.2 billion on defense, equal to about 65 percent of federal revenues for the same period and 30 percent more than the same period in 2025.
- The war is worsening broader economic pressures, with Ukrainian strikes damaging Russian refineries, contributing to fuel shortages and ruble weakness. The Central Bank lowered its 2026 GDP forecast range to 0.0–1.0 percent as inflation, sanctions, and falling energy revenues weigh on growth.
Senior Russian officials are warning Russian President Vladimir Putin that spending on his full-scale invasion of Ukraine is increasingly damaging the budget and the national economy. Russian Ministry of Finance and Central Bank representatives have told Putin that the treasury deficit could reach alarming proportions with planned defense spending, which this year is estimated to consume about a third of all budget expenditures (MSK Novosti, June 1). Officials also expressed concern about the state of the economy, which began to contract this year for the first time since 2023, causing Ministry of Finance and Central Bank representatives to suggest that Putin cut defense spending. Otherwise, it would become increasingly difficult to balance government finances (Klerk, June 2).
Russia’s Ministry of Defense is demanding an increased military budget. Some Kremlin officials back this stance because of their support for continuing Moscow’s war against Ukraine and because defense budget cuts will damage the economy, which is significantly dependent on military-industrial contracts (New Voice of Ukraine, June 1). Putin reportedly supports the Ministry of Defense’s budget and has directed the Ministry of Finance to find ways to reduce costs in other sectors (Gordon, June 1). Since the start of Russia’s full-scale invasion of Ukraine, entire regions, industries, and sectors of the population have become dependent on money streams related to the war, from men joining the military for high pay to weapons manufacturing.
The Ministry of Finance’s 2026 budget predicted that 2025’s deficit of $.3 billion would decrease to $59.1 billion. The Ministry of Finance designed the 2026 budget to lower the deficit, increasing value-added tax (VAT) for the second time in eight years and launching radical tax reform for small businesses. In a deeply unsettling statistic for the Kremlin, the January–April deficit was $79.3 billion, more than for all of 2025 (The Moscow Times, June 1). The Ministry of Economic Development has lowered its estimate of 2026 gross domestic product (GDP) growth from 1.2 percent to 0.4 percent, and has predicted an investment drop for the second year in a row.
For the first quarter of 2026, the Kremlin spent two-thirds of taxes collected during that period on the military. According to Janis Kluge, a researcher at the German Institute for International Security Problems, the share of military spending in federal budget revenues reached an unprecedented 65.26 percent in the first quarter of 2026, calculated based on data from the Ministry of Finance. From January–March, the treasury received $107.2 billion in revenue, of which $18.6 billion was generated by oil and gas sales, which is a 45 percent year-on-year decrease, and $88.5 billion came from non-oil and gas, a 7 percent year-on-year increase. For the same period, the Kremlin spent $76.2 billion on the military—30 percent more than in the first quarter of 2025, and five times higher than January–March of 2021, before Russia’s full-scale invasion of Ukraine. Budget revenues, meanwhile, were hit by new oil sanctions, a strong ruble, and a cooling economy at the beginning of the year (The Moscow Times, June 13).
At the end of May, Igor Sechin, the head of the state-owned Rosneft, Russia’s biggest oil company, sent Putin a letter suggesting ways to maintain an uninterrupted supply of fuel “in the face of an unprecedented amount of damage” to Russian refineries from Ukrainian drone attacks. Putin subsequently instructed Deputy Prime Minister Alekandr Novak to “consider and report.” On June 23, Novak called the situation in the fuel market “difficult, but controlled” (Kommersant, June 24).
On June 28, Putin acknowledged that the country was suffering from “a certain shortage” of fuel after repeated Ukrainian strikes on Russia’s energy infrastructure. Putin said, “Of course these attacks on our infrastructure facilities create problems, that is obvious. Right now we are observing a certain shortage, but it is not critical” (President of Russia, June 28).
At the June 30 annual Sberbank shareholder meeting, CEO Herman Gref compared the current economic and geopolitical situation in Russia to survival in a concentration camp. On June 5, at the St. Petersburg International Economic Forum, Gref said that a high interest rate, a growing tax burden, a strong ruble, and problems associated with administrative barriers are the Russian economy’s “four horsemen of the apocalypse.” Gref says that the combination of these factors against the backdrop of falling demand creates extremely difficult conditions for the country’s economic development (Izvestiia; Kommersant, June 30). Gref also compared Russia’s economy to a cow that, no matter how much it is milked, will not produce any more milk. According to him, the economy’s growth has been exhausted, meaning that its “capacity load is at the limit.”
In May, the Russian Ministry of Economic Development lowered its estimate of GDP growth for 2026 to 0.4 percent. GDP growth was 1 percent in 2025. The Central Bank of the Russian Federation, however, maintained its range of 0.5–1.5 percent until July 24, when it lowered its estimate to 0.0–1.0 percent, suggesting that the economy might not grow at all during 2026 (Central Bank of Russia, July 24). Amid an inflation increase and rising fuel prices because of Ukrainian strikes on Russian energy infrastructure, the Central Bank cut its key interest rate from 14.25 percent to 14 percent. Some analysts and institutions such as Russia’s Center for Macroeconomic Analysis and Policy Research estimate around 0.5–0.8 percent GDP growth. Ministry of Economic Development head Maksim Reshetnikov stated that Russia is currently undergoing a “structural adjustment” of its economy after a period of “great growth,” claiming that the economy has grown at a “very good pace” over the past three years (Finam.ru, May 13).
Russia’s war against Ukraine is also impacting the value of the ruble. The ruble was growing in strength over the first half of 2026, in part because of the closed Strait of Hormuz (RBC, May 19). In late June and July, however, the ruble began to weaken because of factors including Ukrainian drone attacks on Russian oil refineries driving up inflation, the short-lived ceasefire in Iran, and a downgraded growth forecast from Russia’s Central Bank (RG.RU, June 30). As a result, Russian individuals, businesses, and investors have increased their purchases of foreign currency as a protective asset. Sovcombank Chief Analyst Mikhail Vasil’ev observed that the main factors affecting the ruble exchange rate are the dynamics of exports and imports—oil and other commodity prices—and the dynamics of capital flows, depending on geopolitics and the key interest rate. According to him, the ruble’s dynamics in July will be heavily influenced by developments in Russia’s war against Ukraine and the Iran conflict. Vasil’ev continued:
So far, we have based our forecasts on the current state of both conflicts (we do not expect any significant changes in geopolitics). We expect the fragile truce in the Middle East to continue, and the supply of raw materials through the Strait of Hormuz to gradually recover. In June, the average price of Urals was $65–67 per barrel, compared to $87 in May and $95 in April. By the end of June, Russian Urals oil had fallen from above $100 per barrel to around $50 per barrel due to the Middle East ceasefire and the opening of the Strait of Hormuz. We expect Brent oil prices to trade in the range of $70–77 per barrel in July, while the price of Russian Urals oil is expected to be around $49–56 per barrel (Finam.ru, June 29).
The government nevertheless continues to present an upbeat assessment of the Russian economy. RIA Novosti, citing data from the UBS World Wealth Report, stated that Russia took second place in the global ranking of per capita wealth growth rates for 2020–2025. RIA Novosti stated that the indicator has increased by 37 percent in real terms, with “wealth” referring to financial assets including stocks, bonds, and deposits, and real assets, primarily real estate, minus debts, including mortgages and loans. The indicator is calculated in national currency, adjusted for inflation to eliminate the impact of price increases (RIA Novosti, July 1).
One of the main trends in the Russian economy since February 2022 has been the Kremlin’s unilateral seizure of businesses to fund its full-scale invasion of Ukraine. Since the beginning of 2022, the Russian government has seized assets worth almost $33 billion, more than 2 percent of Russia’s GDP for 2024. From January–March of 2025, prosecutors set records, seizing approximately two-thirds of what they took in all of 2024, when 157 companies with assets worth $14.1 billion (1.1 trillion rubles) were nationalized. In the first quarter of 2025 alone, the Kremlin nationalized 50 companies with assets worth $10.4 billion (Novaia Gazeta Evropa, March 25, 2025). The head of a Russian economic think tank, speaking on condition of anonymity, said that it was “the largest redistribution of property since the time of privatization” after the collapse of the Soviet Union in 1991. The most common wording in court decisions for seizures in both 2024 and 2025 cites “illegal possession” of a strategic asset to justify returning it to the state.
Major Russian oligarchs have started making voluntary contributions to the state budget in light of these seizures. At a closed meeting between Putin and business representatives on March 26, one of the participants proposed a “voluntary” contribution to the budget, according to media reports. Putin’s press secretary Dmitrii Peskov confirmed the reports, stating, “One of the participants said that he believed it was necessary to allocate a significant amount of money to the state,” not naming the businessman. Suleiman Kerimov, Vladimir Potanin, and Oleg Deripaska—some of Russia’s most prominent businessmen—reportedly promised Putin that they would help the state financially. According to Ekspert, the payments are to be made in tranches of several billion rubles from the accounts of their subsidiaries. By the end of the year, the budget is expected to receive around $3.8 billion from such payments, but the exact amount is difficult to predict due to the voluntary nature of the payments. According to a source close to one of the participants in the meeting with the president, Kerimov made the initial proposal. For the other businessmen who also met with the president that evening, Kerimov’s proposal was reportedly unexpected, putting them in an awkward position (Ekspert, June 1).
Bruegel, a think tank in Belgium, estimated that Russia’s GDP growth plummeted to around 0.6 percent in 2025, after its economy expanded by more than 4 percent in 2023 and 2024 (Bruegel, December 18, 2025). Research by the Oxford Institute for Energy Studies calculated that the share of oil and gas revenues in Russia’s federal revenue had fallen to 23 percent in 2025, the lowest percentage share in twenty years (The Oxford Institute for Energy Studies, February 2026). To reduce the revenue shortfall, Russia is implementing more expansive taxation policies, including by raising the country’s value added tax (VAT) from 20 percent to 22 percent, a decision that has generated complaints from many Russians operating small businesses (The Christian Science Monitor, April 20).
The government nevertheless remains publicly upbeat. In May, a Ministry of Finance official noted that GDP growth rates may be negative in 2026, saying, “There may be a negative growth rate in some quarters … but we do not expect it to be negative for the entire year” (Ekspert, May 12).
Worsening economic conditions may be in store for the Russian population. In its search for sources of additional revenue, the Finance Ministry may be preparing legislation that could give it access to $40 billion in pension savings held in privately managed funds (Fortune, July 12). An even more radical solution was proposed by the long-standing leader of the Communist Party of the Russian Federation, Gennadii Ziuganov. On June 23, the State Duma held a meeting of the Communist Party parliamentary faction, which announced its “Victory Program” campaign for the upcoming State Duma elections. Ziuganov called on the Duma to “mobilize” roughly $1.67 trillion held by businesses and individuals in bank accounts, saying:
That money is not being invested in production or anything else—not even in victory. This problem can be solved quickly. If I were the president, I would do it with a single decree. In wartime, he has the right to do so—he is the Supreme Commander in Chief. These gigantic funds, equivalent to three state budgets, are used by financial tycoons exclusively for personal gain, while bankers flatly refuse to invest them in the development of the real sector of the economy, domestic production, science, and education (Communist Party of the Russian Federation, June 23).
Should such draconian fiscal measures be implemented, the real victors are likely to not be the Russians invading Ukraine but the offshore bank accounts so beloved by Russia’s oligarchs.
