Russia’s military operations, most notably the full-scale invasion of Ukraine launched in 2022, demand enormous financial resources. Despite sweeping Western sanctions, President Vladimir Putin has sustained high levels of military spending—often estimated at 6–8% of GDP or more when including hidden costs—through a combination of energy export revenues, aggressive budget reallocation, domestic borrowing, reserve drawdowns, and sophisticated sanctions-evasion tactics. This war economy has shown resilience but is increasingly strained by deficits, inflation, and structural weaknesses as of 2025–2026.
The Lifeline: Oil and Gas Exports
Energy sales remain the cornerstone of Russia’s war financing. Oil and gas traditionally account for a substantial portion of federal budget revenues, frequently around one-third even after the war began. Russia has redirected most of its exports away from Europe toward China, India, and other non-Western buyers.
A critical enabler is the so-called “shadow fleet”—hundreds of aging tankers operating under opaque ownership, flags of convenience, and employing ship-to-ship transfers and AIS signal spoofing. These tactics allow Russia to bypass G7 price caps on Russian crude and Western insurance restrictions, selling Urals oil at premiums above the capped levels through discounts that are often offset by high global prices. While revenues dipped in 2025 due to softer oil markets, Ukrainian drone strikes on infrastructure, and tighter enforcement, energy exports continue to bankroll a large share of the military budget.
Indirect flows persist as well. Some Russian energy still reaches Europe through re-exports or limited pipeline and LNG arrangements, providing additional hard currency.
Budget Reallocation and Tax Hikes
The Kremlin has ruthlessly prioritized defense within the federal budget. In recent years, roughly 40% of spending has gone toward military and security needs. The 2025 budget allocated approximately 16 trillion rubles (around 7.5% of GDP) directly to war-related outlays, with the 2026 plan maintaining a similar war footing despite minor adjustments.
Non-military expenditures have been squeezed or postponed. To bridge gaps, the government has repeatedly raised taxes—on VAT, corporate profits, personal income, excises, and mineral extraction—placing a heavier burden on Russian businesses and citizens. This fiscal shift reflects Putin’s clear priority: the war comes first.
Deficits, Borrowing, and the National Wealth Fund
Russia has run persistent budget deficits of 1.7–2.6% of GDP or higher. With access to international capital markets curtailed, these shortfalls are financed domestically. The government issues OFZ sovereign bonds, which are heavily purchased by state-controlled banks and institutions.
The National Wealth Fund (NWF), Russia’s sovereign wealth reserve built from past energy windfalls, has been drawn down significantly. Liquid reserves have reportedly fallen by 50–75% since the invasion, with gold and Chinese yuan holdings used to plug holes. While still not exhausted, the fund is finite and cannot indefinitely substitute for structural revenue shortfalls.
Off-balance-sheet financing adds another layer. State banks extend preferential loans and credit lines to defense enterprises, effectively subsidizing war production without immediately appearing in official deficit figures. This approach masks risks but increases long-term financial vulnerabilities in the banking system.
Additional Revenue Streams and Tactics
Putin has pressured oligarchs and major state-owned companies like Rosneft and Gazprom to contribute “voluntarily” or through special arrangements. The parallel sanctions-evasion economy—using third-country intermediaries in Asia and the Middle East, barter deals, and limited use of cryptocurrencies—helps secure critical imports for the military-industrial sector.
High inflation (often exceeding 8%) and loose monetary conditions have also indirectly eased real spending burdens in the short term, though the Central Bank has responded with steep interest rate hikes (reaching 16% or more) to combat overheating.
Sustainability and Growing Strains
Russia’s wartime economy posted growth in 2023–2024, driven by massive military Keynesianism. However, by 2025–2026 the model showed clear limits: labor shortages, overheating civilian sectors, elevated interest rates, and volatile energy revenues. The economy is increasingly distorted, with defense production crowding out private investment and consumption.
While Putin has demonstrated willingness to accept long-term stagnation, debt accumulation, and demographic damage to sustain the war effort, the financing model is not infinite. Sustained low global oil prices, more aggressive enforcement against the shadow fleet, or secondary sanctions on major buyers could tighten the screws further.
In summary, Putin finances Russia’s wars primarily through redirected oil revenues secured by evasion networks, coupled with domestic fiscal manipulation and reserve spending. This approach has kept the military machine running far longer than many expected, but at a mounting cost to Russia’s future economic health and stability.
About The Author
