Russia’s Low Debt Masks High Borrowing Costs and Mounting Budget Strain

Budget Deficit Surges Amid Heavy War Spending

The federal budget shortfall climbed to 2.5% of gross domestic product between January and August 2026. Addressing the fiscal gap in early September, President Vladimir Putin acknowledged the deficit but framed it as manageable. “There is a deficit, but it is not critical given that we have one of the lowest levels of government debt in the world,” Putin said, noting that Russia’s debt-to-GDP ratio remains far below major economies including China, the United States, France, and Britain.

Despite that low ratio, sanctions have effectively locked the Russian government out of foreign debt markets. This isolation leaves Moscow reliant on a shallow pool of domestic buyers, predominantly major Russian banks, to finance its shortfalls. To attract these domestic investors, the government has issued high-yield and floating-rate OFZ government bonds tied to the RUONIA overnight interbank rate. While these instruments protect buyers against rising interest rates, they expose the federal budget to soaring debt servicing costs.

Soaring Debt Servicing Costs Strain Federal Finances

Yields on 10-year Russian government bonds hovered between 14% and 16% throughout 2025 and 2026, contrasting sharply with an average yield of roughly 4.3% across Group of Seven economies. These elevated yields stem from the Central Bank’s high key interest rate, maintained to combat inflation driven largely by sustained military expenditures.

Debt servicing costs are projected to approach 4 trillion rubles, equivalent to about $47.2 billion, this year. This expenditure accounts for approximately one-tenth of total federal spending and exceeds the combined national budgets for education and healthcare. By comparison, Germany allocates about 6% of its federal budget to debt servicing despite maintaining a debt-to-GDP ratio of roughly 64%, which is approximately three times that of Russia.

Finance Minister Anton Siluanov has highlighted these domestic financial constraints as a barrier to further borrowing. “If we keep increasing debt, it will crowd out all other spending. We will have less money left for our priorities,” Siluanov stated, pointing to the risk of leaving insufficient funds for core government functions.

Proposed Tax Increases and Spending Cuts for 2027

With fiscal reserves depleted by prolonged military operations, Moscow’s budget proposals for 2027 rely on approximately 2 trillion rubles in spending cuts alongside aggressive tax reforms designed to suppress the deficit. The planned measures include raising taxes on income derived from property sales and deposit interest to as much as 22%, introducing a 22% value-added tax on cross-border online purchases, and levying a 100-ruble customs fee on parcels valued under 200 euros.

Analysts warn that these fiscal measures threaten to suppress economic growth and business investment further. Fixed investment fell 9.9% year-on-year to 16.2 trillion rubles in the first half of 2026, according to figures cited by analyst Kirill Rodionov, who noted that earlier corporate profit tax and VAT increases had already depleted corporate capital.

“A higher tax burden will inevitably push up prices and make investment less attractive,” said analyst Boris Kopeykin, noting that government spending accounts for roughly 40% of GDP. Analyst Anastasia Rusakova added that the reforms could temporarily discourage stock market participation while driving businesses toward the informal economy to evade taxation, alongside a projected 5% to 10% price increase on foreign goods sold via online marketplaces.