Russia’s Fiscal Fortress Is Made of Sand
Julian Brown is an alumnus of the George Washington University’s Elliott School and Onero, currently pursuing an MSc in Global Governance and Diplomacy at the University of Oxford. At Oxford, Julian is researching how technologies such as artificial intelligence and the energy transition are reshaping geopolitics and global governance. Through his previous role as Vice President of External Affairs for Delta Phi Epsilon, Foreign Service Society, he collaborated closely with Onero to organize and moderate events with ambassadors, foreign ministers, and intelligence officials. While at GWU, Julian also interned at the White House and the U.S. Department of State. After graduating, Julian joined the U.S. Army Reserve through Officer Candidate School and worked as a teacher at the Maya Angelou Academy at the D.C. Jail. In September 2025, he launched his own Substack, where he writes on the intersection of governance, technology, political economy, and economics.
The reality of Russia’s economy is far bleaker than either its own propaganda or much of the Western commentary suggests. Official statistics tell a story of stability and adaptation; Western headlines often echo the surprise that Russia has “defied sanctions” and returned to growth. Moscow’s cafés are full, unemployment is low, and GDP figures appear robust. To the casual observer, the Kremlin seems to have weathered the storm and turned isolation into endurance. Yet this appearance of resilience is a mirage. The Kremlin has played every economic card it has; buying time at the cost of Russia’s future, gambling away the savings and stability built over two decades to sustain a war it cannot win. The empire it sought to rebuild is rotting from within, undone by delusions of imperial glory, plunging into economic ruin and political extremism. The soldiers returning home broken, and the families compensated for their sons’ deaths, will soon discover that the rubles they received are worth little more than the paper they are printed on. When that moment arrives, the devil’s bargain — to trade truth for pride, and prosperity for war — will stand revealed as Russia’s latest and most consequential act of self-sabotage.
The Mirage of Resilience
What passes for growth in today’s Russia is no real growth at all. The wartime boom is a distortion, an economy running hot but creating little enduring value. What the Kremlin calls ‘reindustrialization’ is in fact retro-industrialization: rebuilding old capacity, but at lower technological levels and under shrinking productivity. The factories revived to produce shells and tanks rely on obsolete designs and imported components; their expansion crowds out investment in advanced manufacturing, electrification, and digital technologies. Resources, labor, and credit have been siphoned from civilian industries into the defense sector, starving innovation and locking the economy into technological regression. Russia’s factories hum, but they build obsolescence, not progress. What Moscow hails as a revival is really a managed decline, a command economy reanimated to fight a war, consuming its future to recreate its past.
Before the war, Russia’s economy was marked by underuse, not exhaustion. Growth had stagnated, factories ran below capacity, and millions remained outside the formal labor force. Years of tight budgets, high interest rates, and restrained consumption left domestic demand weak. Still, they produced something the Kremlin prized far more: a fortress economy, a system designed not for prosperity but for endurance. Oil and gas revenues were channeled into two great stockpiles. One, held abroad by the Central Bank, was the shield: over $600 billion in foreign-exchange reserves built up to defend the ruble and insulate Russia from sanctions. The other, kept at home, was the treasure chest: the National Wealth Fund, worth roughly 10 percent of GDP in 2022, financed by energy surpluses and managed through state accounts. Together, these buffers, backed by public debt kept below 20 percent of GDP, gave Russia a real foundation of fiscal strength on the eve of war.
Russians were told to accept stagnant wages and declining public services so that the state could save. When war came, those savings became fuel. Idle workers, dormant factories, and hoarded wealth were all mobilized at once, turning two decades of deferred consumption into a short-lived surge of wartime output. What had been an insurance policy became ammunition. Analysts misjudged not the outcome but the timing; they underestimated both the depth of Moscow’s reserves and its readiness to exhaust them. Russia has spent the equivalent of its retirement savings, accumulated at immense social cost, to finance a grinding war and maintain domestic calm, rather than to secure its long-term future. The wealth once meant to modernize the country, diversify it beyond fossil fuels, and anchor it in the industries of the twenty-first century is being squandered to preserve a political illusion and a vanished empire.
From 2022 to 2024, Russia experienced a wartime boom driven by defense orders, subsidies, and emergency construction, a command economy running at full tilt. After contracting about 1.4 percent in 2022, GDP rebounded 4.1 percent in 2023 and 4.3 percent in 2024, but according to the IMF, growth is slowing sharply to a projected 0.6 percent in 2025 and 1 percent in 2026. Unemployment has fallen to 2.4 percent, but the tight labor market has triggered a costly wage race as defense-linked industries compete for scarce workers. Flush with state contracts, they can afford sharp pay increases, drawing labor away from the civilian economy and igniting a salary war that yields diminishing returns. Nominal wages have surged, but inflation, still near 8 percent, has eroded most of those gains, and real incomes for Russians not in the defence sector are falling behind as their employers cannot match rising costs. The result is a two-tier economy: defense workers insulated by subsidies, and everyone else poorer in real terms. With the Central Bank’s key rate near 17 percent, private borrowing, and investment have collapsed, deepening the divide. Again, none of this expansion will outlast the war. Factories making shells and engineers retrofitting old Soviet tanks cannot pivot to semiconductors or electric vehicles in any significant way.
By 2025, Russia’s transition to a full war economy is complete, and so are its gains from mobilization. Virtually every factory that can run is online, and nearly everyone who can work is already employed. There is little more room to grow in Russia’s existing demographic and technological frontier. Further expansion now delivers only marginal, costly returns. The Kremlin can still command more production, but only by bidding up wages and prices, worsening shortages, and eroding real incomes in the civilian sector.
Hidden debt behind the façade
Russia’s official debt numbers tell a reassuring story; in short, it is very misleading. The government reports gross public debt of just 23 percent of GDP as of late 2025, up modestly from 18 percent in 2022. That ratio remains far below Western levels, but this appearance of fiscal prudence rests partly on accounting fiction. To preserve the illusion of stability, the Kremlin has shifted much of its borrowing off the federal balance sheet, funneling debt through state-owned banks and enterprises that act as shadow fiscal agents of the state.
Before the war, state-owned enterprises (SOEs) and banks were a significant part of the economy but possessed relat independence and primarily focused on profit generation. That has since changed completely. Under sanctions and cut off from Western markets, the Kremlin has turned these institutions into conduits for deficit financing. Instead of borrowing directly, the government directs state firms such as Gazprom, Rosneft, Rosatom, Rostec, and Russian Railways to issue ruble bonds or take on subsidized loans for military production, logistics, and infrastructure. Meanwhile, state banks such as Sberbank, VTB, Gazprombank, Rosselkhozbank, and VEB.RF, provide the credit, often backed by deposits from the National Wealth Fund (NWF) or liquidity from the Central Bank of Russia. The result is a closed circuit of state-directed finance that blurs the line between fiscal, corporate, and banking-sector liabilities.
The numbers reveal the scale of this quiet transformation. Non-financial corporate debt has risen from about 40–42 percent of GDP in 2021 to 47.5 percent by mid-2025, with total domestic debt across “organizations and households” climbing from 65 percent to roughly 79 percent of GDP. Corporate borrowing has expanded more than 40 percent in nominal terms, driven mainly by SOEs in energy, infrastructure, and defense. Financial-sector liabilities have grown from around 10 percent to 11.5 percent of GDP, while banking-system assets are up roughly 25–30 percent since 2021, growth almost entirely fueled by state lending mandates.
This architecture allows Moscow to sustain vast off-budget war spending without formally increasing sovereign debt. It is fiscal monetization by proxy: SOEs borrow and spend, banks lend under instruction, and the state backstops both. Official debt stays low, but contingent liabilities accumulate across the entire public sector. When a state enterprise or sanctioned borrower struggles to repay, state banks absorb the losses, forcing the government to recapitalize them. What looks like a balanced budget is, in reality, a highly leveraged ecosystem of state-controlled credit.
When also taking into account the liabilities of SOEs, state-controlled banks, contingent government guarantees and other off-balance-sheet commitments, the effective public-sector debt burden could plausibly be in the 30–35 percent of GDP range, though quantification is somewhat uncertain. The result of this finacial engineering is an insulated but opaque and fragile system: if oil and gas revenues weaken, interest rates rise, or sanctions tighten, the Kremlin could be compelled to bail out its banks and industries, turning today’s hidden IOUs into tomorrow’s sovereign-debt crisis.
Russia’s War Chest Is Emptying Fast
Russia’s fiscal trajectory depends on three interlocking forces: energy revenues, inflation and interest rates, and the rapid depletion of its remaining financial buffers. Oil and gas receipts remain the lifeblood of the budget, supplying about 30% of federal revenues in 2024, according to the Oxford Institute for Energy Studies. The same analysis shows that total revenues rose 28% year on year in ruble terms, supported by high oil prices and a weaker currency. Yet by basing its budget on oil-price assumptions close to market highs, the government has left itself far more exposed to any downturn. Every a 10 percent drop in oil and gas revenues now adds roughly one percentage point of GDP to the primary deficit, highlighting how deeply Russia’s fiscal stability depends on energy income. This vulnerability became clear in the first half of 2025, when the average Urals crude price slipped to about $65 per barrel, below the government’s forecast of roughly $70, forcing the Kremlin to tap the National Welfare Fund to plug the widening budget gap.
Russia’s Exports in 2023 by Type, Value, and Origin —Credit to OEC
This financial fragility is now being amplified by the war’s direct assault on Russia’s energy sector. Ukraine’s intensifying drone campaign has become a decisive front in the conflict, striking deep into Russian territory and disrupting roughly 17–21 percent of the country’s oil refining capacity, about 1.2 to 1.4 million barrels per day, by late August 2025. The attacks have forced Moscow to export more unrefined crude at steeper discounts while importing refined fuel to offset domestic shortages. This has dealt a double blow to Russia’s finances: energy export revenues have dropped to near five-year lows amid declining oil and gas income, while domestic gasoline prices have risen by more than 10% this year, contributing to higher inflation. Together, these pressures reveal the precarious foundations of Russia’s war economy: a budget dependent on volatile energy income, undermined further by the unpredictable physical and financial toll of Ukraine’s long-range strikes on its energy infrastructure.
Credit to Reuters
For now, Moscow has postponed a full fiscal reckoning by drawing on its two main cushions, the National Wealth Fund (NWF) and its foreign-currency reserves, to mask the widening gap between spending and revenue. On paper, these cushions still look substantial: as of October 1 2025, the Bank of Russia reported $713 billion in international reserves, while the NWF stood at about ₽13.16 trillion (≈ $159 billion), according to official data. Yet the real picture is far less reassuring. Roughly $300–350 billion of those reserves remain frozen in Western jurisdictions, and a large share of the rest is held in gold and Chinese yuan, assets that are difficult to liquidate or use for direct budget financing. When only unfrozen, hard-currency assets are counted, Russia’s usable reserves shrink to roughly $210–315 billion. A more generous accounting that includes some of the gold and yuan that could be mobilized through swaps or secondary channels raises the figure to about $450–530 billion, but even that is well below the Kremlin’s headline total of nearly $870 billion.
Although Russia’s wartime economy is now financed largely in rubles, access to convertible currencies remains critical. Hard-currency reserves, dollars, euros, and other freely traded assets, are the only instruments the Kremlin can deploy quickly to stabilize the ruble, pay for essential imports, or service external obligations. Russia still relies on foreign suppliers for advanced machinery and electronics that feed its defense industry; even when routed through ‘friendly’ countries such as China or the UAE, many of those transactions are invoiced in dollars or euros. Without access to these currencies, Russia faces higher transaction costs, weaker bargaining power, and growing dependence on barter or costly yuan settlements.
The yuan, while politically convenient, is not a true substitute: it is not fully convertible, its use is confined largely to the Chinese financial system, and any conversion into dollars or euros depends on Beijing’s consent. Gold, meanwhile, must be physically sold or pledged, often at a discount, and cannot be mobilized fast enough in a financial crisis. This distinction matters because it defines Moscow’s true emergency capacity, the difference between a reserve stockpile that looks vast on paper and one that can actually be spent in a crisis. By that stricter measure, Russia’s immediately usable financial cushion is closer to $210–315 billion, underscoring how thin its real line of defense has become despite record-high headline reserves.
Russia’s national wealth fund and foreign exchange reserves operate as the twin engines of wartime finance. The Central Bank sells foreign currency to stabilize the ruble while the Finance Ministry drains the National Wealth Fund (NWF) to plug deficits, recapitalize banks, and subsidize state industries. One props up the currency, the other sustains the economy, and both are draining fast. Since 2022, the NWF’s liquid assets have fallen by roughly $45–50 billion, its readily spendable share (cash and FX deposits) shrinking to just about 2 percent of GDP. Meanwhile, the defense budget has surged to ₽13.5 trillion (≈ $145 billion) for 2025, with further off-book spending coursing through state banks and enterprises financed by NWF deposits or Central-Bank liquidity lines. Each intervention, subsidy, and recapitalization draws from the same dwindling pool that also defends the ruble. Analysts estimate that Russia is burning through $50–150 billion a year from these combined buffers. At that pace, the government has perhaps until 2026 or 2027 before the reserves are largely depleted, forcing a reckoning through austerity, higher taxes, or outright money printing.
Once the National Wealth Fund is exhausted, the federal budget will have to assume its functions directly, issuing the same subsidized loans and absorbing the losses of banks and state enterprises that can no longer finance themselves. This marks a structural break: the state will not only carry the cost of new wartime spending but also the balance-sheet risk of its entire state-controlled financial sector. Each politically mandated loan that fails becomes a direct claim on the Treasury.
Starting from a public-debt ratio of 23 percent of GDP at end-2025, Russia’s fiscal outlook can be modeled using a standard debt-dynamics framework, in which each year’s debt stock depends on nominal interest costs, real growth, and the primary balance. With borrowing costs already near 17 percent, real growth around 0.5 percent, and primary deficits ranging from 3 to 10 percent of GDP, three timelines emerge if the National Wealth Fund (NWF) is largely depleted in late 2026:
• Baseline (2026–2028): Assuming Urals crude holds at $55–60 per barrel and the war economy maintains its current momentum, the NWF cushions the 2026 budget but cannot prevent rising debt thereafter. The ratio climbs from 23 percent in 2025 to about 30–32 percent in 2026, 40–44 percent by 2027, and 45–47 percent by 2028.
• Stress case: If Ukrainian strikes permanently remove roughly 10 percent of refining capacity and energy receipts fall 10 percent year-on-year, the primary deficit widens to 7–8 percent of GDP once NWF support ends. Debt rises to ≈ 35–37 percent in 2026, 47–49 percent by 2027, and ≈ 50 percent by 2028.
• Severe shock: With Urals prices in the low $40s, sustained infrastructure damage, and major SOE or bank bailouts, the deficit reaches 9–10 percent of GDP. Debt then breaches 50 percent as early as 2027 and moves into the mid-50s by 2028, as interest costs compound.
These projections already include moderate recapitalization outlays; a wave of simultaneous bank or enterprise failures could add another 5–10 percentage points almost overnight. Even allowing for the NWF’s temporary buffer through 2026, Russia’s present mix of high borrowing costs, weak growth, and persistent primary deficits would shift it from a low-debt to a high-leverage economy within just two fiscal years—without the deep capital markets or investor confidence to sustain such debt.
Structural limits on debt capacity
The most fundamental fact to grasp is that Russia’s debt-carrying capacity is far lower than that of advanced economies, and the reasons are structural. Western states can sustain debt ratios well above 100 percent of GDP because they borrow in currencies that command global demand, enjoy low interest rates, and rely on deep, trusted capital markets. Russia has none of these advantages. Its borrowing costs hover around 17 percent, more than double nominal GDP growth; it has been shut out of international credit markets since 2022; and the ruble is non-convertible. The domestic bond market is shallow, and fiscal credibility rests entirely on volatile oil and gas receipts. The result is an economy forced to finance itself domestically, at punishing rates, through banks that are themselves extensions of the state.
Every additional ruble borrowed tightens the noose. With capital trapped inside the system, deficits crowd out private credit and fuel inflation. When interest rates exceed growth, debt service compounds faster than national income, forcing continual fiscal contraction merely to keep the ratio stable. Under such conditions, even a 50 percent debt-to-GDP ratio, trivial for the United States or the Eurozone, would be crippling for Russia. Servicing that debt would devour budget resources, squeeze real spending, and feed back into higher rates and weaker growth. In effect, the country would be paying interest not to expand its economy, but simply to survive.
This is why Moscow’s fiscal stance, though superficially conservative, is far more precarious than it appears. Russia cannot borrow cheaply or widely; it cannot diversify away from fossil-fuel exports; and it cannot stabilize its currency without draining its remaining usable reserves. As oil prices soften and export volumes stagnate, every macroeconomic pressure amplifies the next. Slower growth erodes tax revenues. Higher rates choke investment and push up refinancing costs. Lower energy receipts force additional borrowing and money creation. Inflation accelerates, rates rise further, and the spiral tightens.
Eventually, the state runs out of levers. Raising taxes risks crushing what remains of private demand; cutting spending undermines both the war effort and the regime’s social compact; and printing money invites another ruble collapse. Each option is self-defeating, yet the Kremlin must keep choosing. War has become both the cause of Russia’s economic crisis and the instrument of its political control. The military-industrial complex now sustains employment and regional patronage; it keeps factories open and men occupied. To retreat would expose the hollow core of the economy and the fragility of the regime’s legitimacy. To persist is to consume the state’s financial base and future.
Russia has therefore entered the classic phase of an empire in decline, gambling for resurrection. Each new escalation promises redemption but deepens the economic wound. The leadership can no longer afford victory, yet it cannot politically survive defeat. The result is a permanent state of mobilization in which fiscal exhaustion is postponed by repression, propaganda, and coercion. The longer the war continues, the higher the domestic cost required to sustain it.
Unless a political rupture produces a government willing to end the war, restore legitimacy, and reopen access to global markets, the trajectory is clear. Sanctions on energy and finance will likely endure regardless of how the fighting ends, and the loss of Western capital and technology is irreversible. An economy tied narrowly to oil, gas, and metals remains exposed to every commodity downturn. Without genuine diversification, each future shock (military or financial) will reverberate through an already fragile fiscal system.
This is the same pattern that destroyed the Soviet Union. In the 1980s, a militarized economy overextended abroad and reliant on volatile oil income collapsed when energy prices fell. Inflation, shortages, and debt crises followed. The command system could no longer fund both the military and its citizens’ basic needs. Russia today faces the same contradiction, only with fewer resources and greater isolation.
In sum
The writing is on the wall. Even if Russia avoids outright default or hyper-inflationary spiral in the several coming years, the combination of high debt-service costs, dwindling reserves, and structural stagnation ensures a slow, grinding deterioration. What remains is a state trapped between its ambitions and its means, too committed to the war to end it, too depleted to win it, and too isolated to rebuild. The Kremlin has gambled everything on imperial restoration and finds itself trapped, economically, militarily, and politically, in a cycle it cannot escape in its current form.
