Russia Can Still Finance Its War, but Costs and Risks Are Rising, KSE Institute Says

The KSE Institute’s new report, "Assessing Russia’s War-Financing Capacity," reveals that Russia can still finance its war, but the costs and risks are escalating. As the budget deficit expands and fiscal reserves dwindle, the Russian government's ability to sustain war financing is dwindling. Despite Russia’s current stability, the study warns that a sudden drop in global energy prices or a breakdown of financial system confidence could quickly destabilize the situation.

Russia's financing approach has undergone a significant shift since the war’s onset. Initially, the government depended on NWF withdrawals and domestic borrowing while deferring part of the war’s expenses off-budget through a surge in corporate credit. However, this wartime credit boom has largely diminished, transferring more financial burden back onto federal and regional budgets, bolstered by domestic borrowing and significant liquidity support from the Central Bank of Russia.

While budgetary funding channels remain accessible, they are becoming increasingly restricted. The federal deficit expanded by 48% to RUB 5.8 trillion in the first eight months of 2026 compared to the same period in 2025, surpassing the anticipated yearly figure. NWF assets have dwindled by nearly 60% since 2022. Domestic borrowing is now the primary financing source, though bond issuance restarted in September, albeit at considerably higher rates.

The banking system is being strained by the government’s financial demands, a structural liquidity shortfall, and the aftermath of rapid wartime credit expansion. Although banks possess robust capital adequacy, profitability, and asset-quality metrics, the report cautions that this may mask underlying stress due to regulatory leniency, provisioning, and evaluation methods, as well as state assistance.

Russia retains the capacity to continue funding the war, but the required measures are becoming costlier and potentially destabilizing. The most prudent option is to persist in market-based domestic borrowing at more favorable terms, supplemented by additional CBR liquidity; or resort to fiscal measures or more coercive tactics, but both come with burgeoning economic, financial, social, and political consequences.

The authors suggest that Ukraine’s allies should curb Russia’s energy revenues, curb foreign involvement in sovereign debt, target banks that disproportionately absorb government debt, restrict the immobilization of Russian reserves, and limit the liquidation of sovereign gold.