Senior government officials have warned Russian President Vladimir Putin that war spending in Ukraine is on an unsustainable trajectory – the most serious sign of internal division in Moscow since the start of the full-scale invasion.
Officials at Russia’s Finance Ministry and central bank have advised the Kremlin that the current level of projected military spending puts the budget deficit at risk of widening dangerously, according to people with knowledge of the matter and documents reviewed by the Bloomberg News.
These officials, increasingly concerned about the state of the Russian economy and public accounts in recent months, have proposed further cuts in defense spending, the sources said. They have recommended that it will be difficult to fix the country’s strained public finances without seeking greater efficiency.
There is, however, a split among policymakers: senior Defense Ministry officials and some in the Kremlin, determined to pursue Putin’s war aims, insist on protecting the military budget. Reducing these expenses, they argue, would harm the economy, as many companies depend on contracts linked to the defense industry.
Putin asked finance ministry officials to find cuts in other areas of the budget before moving on defense, some of the people said. All spoke on condition of anonymity to discuss concerns whose scope has not yet been made public.
Kremlin spokesman Dmitry Peskov did not immediately respond to a request for comment.
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The Defense Ministry is not only resisting cuts but also demanding more resources, according to two people close to the Russian government. Military spending will have to rise to fill a hole that could reach 3 trillion rubles ($36 billion) this year, they said.
The president is aware of budget pressures both last year and this year, so the challenges are not a surprise, the sources said. The scale of any spending cuts will depend solely on Putin, as no major budget decisions are made without his approval and he acts as the final arbiter, they described, calling it an “iron rule.”
When the 2026 budget was drawn up, officials understood that a deficit of around 1.2 trillion to 1.5 trillion rubles could emerge in the second half of the year, money that could be needed for the defense sector.
At that time, there was an expectation that the war in Ukraine would end after the summit in Alaska last August between Putin and US President Donald Trump. This hypothesis would make logical the assumption of reducing military spending in the second half of 2026, according to people close to the Russian government.
Discussions took place before and after the start of the U.S.-Israel war in Iran and remain ongoing between senior policymakers and Putin, people familiar said. They have gained momentum as Russia’s economy and finances face increasing pressure in the fifth year of the full-scale invasion, and show that Putin faces difficult choices in dealing with domestic warnings about the war’s impact.
The jump in oil prices caused by the war in Iran will not be enough to solve the problems, sources close to the Russian government said. According to them, oil would have to remain above US$100 per barrel for at least a year for the economy to improve significantly – and even then, this gain does not solve the structural problems that affect growth, inflation and the banking system.
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Defense spending was projected to remain broadly stable in the Economy Ministry’s three-year budget plan until 2028. After growing by around 30% in recent years to finance a major expansion in weapons production, sectors linked to state defense industry orders were expected to increase just 4% to 5% in 2026.
Russia is on the brink of recession after cutting its growth forecast in May. The Ministry of Economy now expects GDP to grow 0.4% in 2026, compared to a previous forecast of 1.3%. Official data shows that the economy shrank in the first quarter, for the first time in three years.
The worsening outlook came despite Putin having publicly ordered, in April, that government officials explain why the economy was performing below expectations. The admission that the country is facing difficulties appeared to signal his frustration at the failure to avoid a slowdown.
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The deficit in public accounts reached a record, despite the jump in oil revenues resulting from the war in the Middle East. The deficit in the first four months of the year reached 5.9 trillion rubles, or 2.5% of GDP – around 50% above the target for the full year, according to official data.
It is worth remembering that the budget has been in the red for four consecutive years and ended 2025 with a deficit of 5.6 trillion rubles. Although the imbalance is still well below the 3.8% of GDP recorded in the pandemic year, in 2020, the heavily sanctioned Russian economy is today more vulnerable, with reserves in the National Welfare Fund around 60% below pre-invasion levels.
The current budget was designed with relatively tight assumptions: a slight reduction in the deficit and a gradual drop in military spending. To preserve this fiscal framework and comply with the budget rule, the government raised some taxes this year, trying to rebalance an overheated “war mode” economy.
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As hopes for a peace deal have not materialized, the Russian government now needs to decide how to deal with the deficit — which, in practice, means cutting expenses or finding new sources of revenue.
Authorities are pessimistic about oil prices remaining at a high level. The strength of the ruble also worsens fiscal problems by reducing export revenue in local currency.
Finance Minister Anton Siluanov stated in an interview with the newspaper Kommersant on May 27 that “certain restraint” in public spending is necessary, pointing to Defense and the government’s social obligations as priorities. “The reserves are not infinite. Weakness in finances cannot be tolerated in a context of such broad transformations in the world,” he said, adding: “We need to improve the efficiency of budget spending.”
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Government spending rose almost 16% year-on-year in the period from January to April, while spending on public purchases rose 41%, according to data from the Ministry of Finance released in May. The government withdrew about 500 billion rubles from the National Welfare Fund in the first two months of the year as sanctions reduced oil and gas revenue.
Russia is considering a one-off tax on some commodity producers and banks to help plug a gaping hole in its accounts, Bloomberg previously reported. The Moscow city government announced cuts in staff and investments after revenue fell well below expectations.
The deepening fiscal hole provoked anger from a senior lower house lawmaker last week, although Valery Gartung, who chairs the competition protection committee, denied reports that he used an expletive when mentioning the hyperinflation that followed the collapse of the Soviet Union.
“What are we going to do about it?” he asked. “Print money or what? Like in 1992 when prices were going up 30% every week? We understand that’s not the solution.”
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