Fiscal Policy in ‘Manual Control’ Mode
The Russian federal budget is increasingly operating under a regime of ‘manual control,’ as the Kremlin scrambles to finance escalating military expenditures that now account for 46% of total appropriations. According to recent data, the first-half deficit reached 5.7 trillion rubles, a 70% increase compared to the same period in 2025. Despite a rare budget surplus in June, driven by temporary oil price volatility, analysts at The Insider note that the overall fiscal trajectory remains deeply unstable.
The State Duma’s passage of Law No. 195-FZ on June 26 has effectively removed significant parliamentary checks on the Finance Ministry. This legislation grants the government broad authority to adjust budget processes, borrowing levels, and spending priorities without the need for public scrutiny or further legislative approval. By sidelining the Duma, the Kremlin aims to maintain secrecy regarding the true scale of its war-related spending, though the maneuver has introduced extreme volatility for private investors and businesses.
Monetary Friction and Economic Contraction
The Bank of Russia has adopted a more conservative stance, slowing key interest rate cuts to 14.25% in June. Governor Elvira Nabiullina has explicitly linked this cautious approach to the ‘stimulative’ and inflationary nature of the government’s fiscal policy. The central bank warns that if the state continues to pump money into the economy to cover its deficit, it will be forced to pursue even tighter monetary policies, further restricting the ability of the private sector to borrow cheaply.
The real-world impact is already visible in the domestic market. Investment in fixed capital plummeted by 14.3% in the first quarter of 2026 compared to the previous year. Furthermore, the share of loss-making enterprises has grown to 35%, up from 30% in 2024. While the state continues to extract higher tax receipts from non-military sectors, the underlying economic health is deteriorating as resources are redirected toward the defense industry.
The Hidden Cost of War
While official Treasury reports show 24.4 trillion rubles in spending, the true figure is masked by a massive volume of classified expenditures. Analysis by economist Janis Kluge suggests that nearly 38% of all spending is hidden, with approximately 85% of those secret outlays directed toward military operations. The ‘Social policy’ budget section also masks significant military costs, including signing bonuses and disability payments for personnel, which have already seen heavy disbursement in the first quarter.
Looking ahead, the Finance Ministry faces the challenge of managing a projected year-end deficit that could reach 9.6 trillion rubles. The lack of transparency in how these gaps will be filled—whether through domestic borrowing or further tax hikes—leaves the Russian market in a state of high uncertainty.