Russia lifts defence spending to new wartime high as fiscal pressures mount

Russia is preparing another substantial increase in defence expenditure in 2027, even as slower economic growth, weaker energy income and rising borrowing place greater pressure on the federal budget. Government documents reviewed by Reuters show military spending is planned at RUB 17.1 trillion next year, around 27% above the previous allocation of RUB 13.5 trillion and the largest nominal amount since the full-scale invasion of Ukraine began in 2022.

The expansion is expected to extend well beyond a single budget year. Around RUB 50 trillion is earmarked for defence during 2027–2029. Direct comparisons with 2026 are difficult because the government originally allocated RUB 12.1 trillion this year but has classified the eventual figure. Some expenditure associated with military activity is also recorded outside the principal defence budget.

Financing this level of expenditure is becoming more demanding. Russia has revised its expected 2026 federal deficit to 3.2% of GDP from an earlier estimate of 1.6%, while total expenditure this year is expected to reach RUB 48.6 trillion. The government intends to increase net borrowing to RUB 5 trillion and use RUB 459 billion from the liquid portion of the National Wealth Fund.

Moscow expects the deficit to moderate in 2027, although substantial borrowing will continue. The government’s approved draft budget envisages revenue of RUB 43.3 trillion against expenditure of RUB 48.8 trillion, producing a deficit equivalent to about 2.2% of GDP. Government debt is expected to rise from 19.9% of GDP this year to 21.7% next year, while borrowing could reach RUB 7.7 trillion. Russia’s debt burden remains comparatively modest, but its financing requirements are increasing.

Energy income is adding to the pressure. The government has reduced its estimate for oil and gas revenues in 2026 to RUB 7.6 trillion from RUB 8.9 trillion. Russia also faces longer-term changes in its energy trade as European demand declines and sanctions complicate access to some international markets. Government economic assumptions for the next three years incorporate lower supplies to the EU and constraints affecting parts of Russia’s LNG industry.

Additional revenue will partly come from businesses and investors. The government is preparing higher taxes across several areas, including commodity producers, cross-border online trade and some investment income. Measures affecting metals and fertiliser companies form part of the package, reflecting Moscow’s efforts to broaden revenues while maintaining defence expenditure.

The budget is being prepared against a much weaker economic backdrop than during the initial years following the invasion. Russia’s Economy Ministry expects GDP to expand by just 0.6% in 2026 before growth reaches 1.4% next year. Industrial production is expected to decline by 0.2% this year, while capital investment is forecast to contract by 5.4%. High financing costs and sanctions are among the factors weighing on corporate investment.

The slowdown should not, however, be interpreted as an economy in broad contraction. The Bank of Russia described economic activity during the third quarter as continuing to expand moderately, with consumer demand remaining relatively strong and investment showing some improvement from the beginning of the year. Its policy rate remained at 14% in September, illustrating the restrictive financial conditions facing companies outside heavily supported parts of the economy.

For investment and commercial property markets, the changing allocation of capital creates an increasingly uneven environment. Industrial, manufacturing and logistics assets connected with defence production and strategic infrastructure could continue to receive support from public expenditure, while other businesses face expensive financing, weaker investment growth and additional fiscal demands. This divergence could become more pronounced if military expenditure remains at elevated levels for several years.

Russia’s proposed 2027 budget therefore points to a further concentration of state resources around defence and security rather than an imminent fiscal crisis. The government still has a relatively low public-debt ratio and expects to reduce the deficit next year, but maintaining record wartime expenditure is requiring substantially more borrowing and taxation at a time when underlying economic and investment growth has slowed.