Russia’s war funding may shrink as fresh sanctions loom
Assalamu Alaikum - a quick look at how Russia’s finances are holding up after more than three years of conflict.
After three and a half years of fighting in Ukraine, signs are emerging that Russia’s financial cushion is getting thinner. Experts say the country of about 143 million people has become heavily reliant on oil and gas export revenue, and a tougher round of sanctions could seriously strain its ability to keep funding the war.
On October 14, US President Donald Trump said he expected the Russian economy to “collapse.” The Kremlin’s spokesman Dmitry Peskov replied the next day that Russia’s financial system still has a “margin of safety” to carry out plans. But the data suggest the situation is less rosy: the Finance Ministry reported a $51bn budget shortfall in the first eight months of the year, already exceeding the $47bn gap it had budgeted for the whole year.
Documents seen by Reuters hinted the government may cut its 2026 defence budget by about $11bn to $154bn, roughly a 7% reduction. Some analysts, like Craig Kennedy at Harvard’s Davis Center, reckon the real drop in defence spending could be nearer 15% compared with 2024 once you account for much lower bank lending to the military sector this year.
Kennedy and others say state-directed lending to arms makers has fallen sharply, so funding for the war in 2025 - including these bank loans - looks set to contract by around 15%.
Even before these cuts, Russian advances were slow. Last year they captured only about 0.69% of Ukraine and suffered heavy casualties. Through the first eight months of this year they seized less than 1% again, while reports suggest tens of thousands of personnel have been killed.
For the first three years the Kremlin managed to run the campaign without big tax hikes or huge visible deficits by relying on oil and gas income and by directing banks to lend to the defence sector - keeping much of that spending off the official balance sheet. That helped Russia show GDP growth of over 4% in 2023 and 2024, while budget deficits stayed under 2% of GDP.
But those short-term fixes are starting to take a toll on the wider economy. The government plans to raise VAT from 20% to 22% and broaden who pays it, which could bring in about $14.7bn next year. The World Bank now expects Russia’s economy to grow only 0.9% this year and then stagnate.
Kennedy says the civilian economy is flat or shrinking, with only the defence sector showing positive numbers. An independent Russian think tank tracking the economy says all non-defence sectors have contracted by about 5.4% so far this year.
Central bank governor Elvira Nabiullina warned in June that Russia had used up many of the reserves that supported past growth - labour, spare production capacity, bank capital and funds from the National Welfare Fund - and that many of those resources are now depleted.
Liquid assets in the National Welfare Fund have dropped by about a third to $34bn, and roughly $10bn of that has been ring-fenced to support banks. Some experts say that reserve could be gone by 2026. At the same time, banks could face trouble if arms makers can’t repay what they owe - Kennedy estimates around $180bn in state-directed bank debt for the defence industry, a big chunk of corporate lending.
Signs of strain are already visible at major industrial firms - some have furloughed workers to cut payroll costs. And sanctions make it more expensive and slower for Russia to import goods needed for its military: intermediaries, longer supply chains and higher prices mean some items cost 30–80% more than before, according to analysts in Kyiv. That raises the chance of more delays, equipment failures, and reduced combat effectiveness.
Sanctions aimed at oil could have a faster, larger impact, because hydrocarbons remain the Kremlin’s main foreign income source. Europe has banned Russian oil imports, costing Russia tens of billions a year, though Moscow has shifted sales to markets like China and India. Russia has sold discounted, multi-year oil supplies to China in return for prepayments, which has helped its cashflow for now.
The EU, UK, Australia and Canada have set a price cap for third-party sales of Russian oil at $47.60 a barrel, but the US has not fully followed through with the same measures or threatened secondary sanctions against buyers. Some analysts say the lack of full US alignment has helped Russia keep revenue flowing.
The EU is considering a new sanctions package that would ban refined Russian petroleum products - a loophole that has allowed some continued imports - and clamp down on the fleet of tankers that dodge price caps. If done effectively, these steps could sharply reduce Kremlin income. One politically powerful idea under debate is to use roughly half of nearly $300bn of frozen Russian central bank reserves held in European banks to fund big loans for Ukraine’s defence and reconstruction. Russia has called that plan “delusional” and warned of countermeasures, but a number of EU countries are warming to the idea.
What all this means: the combination of shrinking reserves, strained banks, higher import costs for military tech, and tougher sanctions could make it harder for Russia to sustain the current pace and costs of the war. No one can predict an exact breaking point, but many analysts say the conditions for a deeper squeeze are building - and Insha'Allah, with wise policy and support, a peaceful resolution can be sought.
May Allah protect the innocent and guide leaders toward justice and calm. Peace.
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