Russian President Vladimir Putin has lost his luck with oil prices and the budget deficit has widened sharply as the budget revenues in June fall, but expenditure widened. Russia’s federal budget deficit surged to nearly RUB3.7 trillion ($41.4bn), or 1.7% of GDP, in the first half of 2025, according to Finance Ministry data, already hitting the full year target.

The budget deficit at the start of this year was projected to be a mere 0.8% of GDP, or around RUB1 trillion, but was tripled after oil prices began to fall on the back of a global economic slowdown and OPEC’s decisions to increase production to punish Kazakhstan which has been overshooting its production quota to make a bit of extra money.

Tripling the deficit forecast sounds more dramatic than it actually is, as the new projection is still only 1.7% of GDP, or just under RUB3.9 trillion, but the budget is clearly under increasing pressure as the war costs continue to grow.

For a few weeks it looked like the budget would be bailed out by the war in the Middle East that sent oil prices up by over $10 to nearly $80, but the war was over after only two weeks and oil prices almost immediately retreated to around $60. The increase in prices did not last long enough to make any significant to the Kremlin’s income this year. And with OPEC decision this month to keep production elevated by some 400,000 barrels per day (bpd) in August, there is no respite on the horizon for the moment.

The situation has been exacerbated by the economic slowdown this year that has already kicked in. After two years of 4.3% growth, Russia economy contracted in the first quarter of this year in real terms, but put in a nominal 1.4% of growth. In the last two years, the real economy has brought in twice as much revenue from things like a consumer boom driven VAT receipts than from oil and gas, but that boom is also expected to come to an end this year. The slowdown is so sharp that Russia’s top economic managers debated at St Petersburg International Economic Forum (SPIEF) if there is a recession looming or if the economy is merely cooling. The jury is still out on that question.

Revenues down, expenditures up

Despite a 13% rise in non-oil and gas revenues, totalling RUB12.9 trillion ($144.4bn), total budget income rose just 2.8% year on year to RUB17.6 trillion ($197.1bn), due to a 17% drop in oil and gas revenues, The Bell reports.

“The implementation of the current budget for 2025 is actually unlikely, since it will require a surplus in the second half of the year,” said Yegor Susin, an economist cited by The Bell. He noted that even accounting for front-loaded spending in January, the year-to-date deficit trajectory remains far above official projections.

In June alone, the deficit widened to RUB300bn ($3.4bn), up from RUB200bn ($2.2bn) in May, driven by a sharp 33% drop in oil and gas revenues and a 17.8% y/y increase in federal spending to RUB3.15 trillion ($35.2bn). Total spending for the first six months reached RUB21.3 trillion ($238.6bn), marking a 20% rise over the same period in 2024.

After a period of optimism after the ceasefire talks kicked off in February, these discussions are now dead in the water, and if anything, Putin has intensified his attack on Ukraine in an escalating missile war that will be very expensive. Despite saying the Kremlin intends to reduce military expenditure, this year it clearly going to go up again and is already at 7% of GDP.

The Ministry of Finance attributed the growing deficit to both lower oil and gas income and accelerated front-loading of spending commitments. But despite the imbalance, it insisted that “this will not affect the implementation of the target parameters of the structural balance for 2025 as a whole.”

However, Susin warned that “rolling” deficit data based on the last twelve months reveals an even deeper imbalance than the headline figure of RUB3.7 trillion – in effect the deficit has doubled again, after it was already tripled earlier this year.

With revenues falling short of plan (RUB37.2 trillion vs RUB38.5 trillion) and expenditures exceeding it (RUB43.8 trillion vs RUB42.3 trillion), the “rolling” deficit has jumped to an implied shortfall of RUB6.6 trillion ($73.8bn), or around 3% of GDP – that is more than 2.3% of GDP registered in the first year of the war in 2022.

Last year, the Russian budget benefited from non-oil and gas revenues amid an overheated domestic economy and stronger-than-expected commodity prices. But “no such miracles are expected” in 2025, The Bell reported, with the economic bloc in government now conceding a “planned cooling” and even the Middle East conflict failing to sustain higher oil prices.

The pessimistic economic channel MMI now forecasts a full-year deficit of RUB8 trillion ($89.5bn), or 3.6% of GDP. That would be more than double the current planned RUB3.8 trillion ($42.5bn) shortfall, The Bell reports.

Despite the darkening outlook, Russian Finance Minister Anton Siluanov remains upbeat and still has cash in reserve enough to get through this year and next. As bne IntelliNews reported, the Kremlin has replenished the National Welfare Fund (NWF) with a new RUB1.3 trillion ($14.9bn) injection in June, as the Ministry of Finance credited long-delayed foreign exchange proceeds and gold reserves purchased last year.

The increase is enough to cover all of this year’s official forecast budget deficit again and the fund is expected to start growing again over the rest of this year, depending on oil price dynamics, according to MinFin.

According to Ministry data published on July 1, the liquid portion of the NWF rose from RUB2.84 trillion (1.3% of GDP) at the beginning of June to RUB4.13 trillion (1.9% of GDP) by the start of July. The increase was driven by the transfer of CNY61.1bn and 74 tonnes of gold acquired in 2023 from additional oil and gas revenues (OGR), the ministry said.

But if the deficit does come in at the higher level of RUB8 trillion anticipated by the likes of MMI then MinFin will have to take more extreme action.

The more optimistic scenario is that CBR Governor Elvia Nabiullina plan to cool the economy by using non-monetary policy methods seems to be working and inflation has already dropped to around 9.45% in June. There is speculation that she will be able to begin to cut rates – possibly as soon as at the next meeting in July – that could boost growth again and increase tax receipts from the real sector of the economy. But everything will depend on just how fast this process goes: how fast inflation falls and how fast and by how much she can cut rates to encourage growth.