Budget hole widens

The July budget deficit in Russia rose again, climbing by 724 billion rubles ($8.7 billion) to 6.45 trillion ($78 billion or 2.8% of GDP). This uptick is attributed to increased military spending, with state contracts, including defense orders, surging nearly 40% year-on-year to 8.44 trillion rubles ($100 billion), constituting 80% of the annual plan.

Simultaneously, oil-and-gas revenues fell by 16.8% to 4.6 trillion rubles ($56 billion). The government attempts to mitigate this shortfall by raising taxes: after the VAT rate increased to 22% at the beginning of the year, tax returns rose by 25% to 9.8 trillion rubles ($119 billion). Experts predict the budget deficit will reach 7 trillion rubles ($85 billion or 3% of GDP) by year-end, up from a previous forecast of 7.5 trillion rubles ($91 billion).

However, this projection remains double the government's target of a 1.5% of GDP gap without foreign capital. The finance ministry's borrowing options are constrained, as it has already raised 2.3 trillion rubles ($27 billion) through domestic debt in the first seven months, primarily via OFZs, which contributed to inflation of 6.09% by August 17.

The ministry halted bond placements due to high key rates. Servicing domestic debt is a significant budgetary burden, ranking fifth among federal treasury expenditures at nearly 9% of GDP. Analysts at the state bank forecast that gross borrowing could reach 7-7.6 trillion rubles ($85-92 billion) annually in 2026-2027, potentially approaching 8-9 trillion rubles ($96-108 billion) with long-term OFZs, given limited interest in long-term fixed-rate OFZs.

The Russian government faces mounting budgetary challenges, with no clear resolution beyond heavy borrowing, as the Central Bank's inability to cut interest rates will increase the cost of servicing debt.