Russia’s recently unveiled 2025-2027 budget plans reveal an ambitious increase in military spending, with defense outlays set to rise to 13.5 trillion roubles ($145 billion) in 2025, up 25% from the previous year. The draft budget indicates that national defense and security will account for nearly 40% of the government’s total expenditures, underscoring the country’s commitment to the ongoing war in Ukraine. However, analysts warn that this war-oriented economic shift carries significant risks for Russia’s financial stability, economic growth, and the living standards of its citizens.
Russia’s Budget Prioritizes Defense Amid Rising Costs
The sharp increase in military spending comes as Russia seeks to maintain its war effort and expand military production capabilities. Since the invasion of Ukraine in 2022, the Russian government has transformed its economy to support military needs, while international sanctions have largely restricted access to foreign military equipment and components. As a result, Russia’s military-industrial complex has grown rapidly, signaling its determination to continue prosecuting the war.
Prime Minister Mikhail Mishustin’s draft budget aims to position Russia as a formidable military power, but it also reveals troubling signs of economic strain. The defense budget for 2025 is projected to account for 6.3% of GDP, more than double the allocation for social programs such as pensions. Analysts caution that sustaining such high levels of military expenditure could deepen economic imbalances and undermine Russia’s long-term competitiveness.
Inflation, Interest Rates, and Economic Pressures
The elevated military spending is expected to exacerbate inflationary pressures, with Russia’s current annual inflation rate standing at 9.1%. The country’s central bank recently raised its key interest rate by 100 basis points to 19%, citing persistent inflationary concerns. The combination of higher defense spending, tax increases, labor shortages, and ongoing military recruitment could fuel further price increases in 2025.
Liam Peach, senior emerging markets economist at Capital Economics, highlighted the risks associated with Russia’s loose fiscal stance, noting that the budget plans will likely worsen demand-supply imbalances and keep inflation high. With sovereign bond yields at their highest levels in decades, the cost of servicing government debt is also set to increase. Another interest rate hike to 20% is anticipated as the central bank seeks to manage inflation.
The Cost of Military Expansion: Neglecting Other Sectors
While Russia views military growth as a driver of economic and technological development, analysts warn that the aggressive focus on defense spending comes at a steep cost. Investments in critical sectors such as education, healthcare, and infrastructure are likely to suffer, resulting in a decline in the quality of public services. Andrius Tursa, an advisor at consultancy Teneo, emphasized that this neglect could erode economic growth and competitiveness over the longer term.
The budget’s prioritization of military expansion over social programs is also likely to impact living standards. Although public dissent may not currently pose a significant threat to the government, there is a risk that dissatisfaction could grow if the economic situation deteriorates further. Tursa noted that while mass protests are unlikely in the near term, “public dissatisfaction over living standards could erupt at some point in the future, especially if Putin’s grip on power starts slipping.”
Oil Exports and Economic Resilience Amid Sanctions
Despite facing extensive international sanctions, Russia has managed to maintain economic resilience through continued oil and commodity exports to countries such as China and India. High oil prices and alleged sanctions evasion have helped sustain robust export revenues, with oil and gas sales projected to contribute 27% of state budget proceeds in 2025. Finance Minister Anton Siluanov stated that Russia has become more self-sufficient in the face of Western sanctions, with private consumption and domestic investment remaining strong.
The International Monetary Fund’s (IMF) spring economic outlook suggested that Russia’s economy would grow at a faster pace than all advanced economies this year, with a projected growth rate of 3.2%. However, the IMF’s latest forecasts for Russia are due to be published next week and may present a revised economic outlook. The draft budget’s assumptions include a 2.5% GDP growth forecast for 2025, but analysts are skeptical about whether these projections are realistic given the potential economic challenges ahead.
Balancing Military Ambitions and Economic Stability
Russia’s plans to maintain high levels of military spending until 2027 reflect its commitment to expanding its armed forces, but the economic consequences of this strategy are becoming increasingly evident. With the economy already operating at full capacity, the risk of sustained inflation and labor shortages could pose significant challenges. The combination of rising defense expenditures and tax increases may limit the government’s ability to invest in other areas, potentially stalling long-term growth.
As Russia’s budget prioritizes military needs over social investments, there are growing concerns about the sustainability of this approach. Analysts argue that while the government may present a confident front, the economic reality could prove more difficult to manage. The prolonged period of high interest rates, combined with the neglect of non-military sectors, may ultimately undermine Russia’s broader economic objectives.
The Geopolitical Context: A Show of Strength Amid Uncertainty
The draft budget not only reflects Russia’s economic priorities but also serves as a signal to the international community. By committing significant resources to defense, Russia aims to demonstrate its resolve in the conflict with Ukraine and signal its military capabilities. This aggressive stance contrasts with the more uncertain outlook on the Ukrainian and Western sides, as noted by Teneo’s Tursa.
The increased military spending aligns with Russia’s strategic objectives but also carries geopolitical risks. As arms control agreements deteriorate and global tensions rise, the country’s military ambitions may exacerbate existing conflicts and further strain its economy. The focus on military power, while providing short-term advantages, may come at the expense of long-term stability.
Russia’s 2025-2027 budget reflects a bold approach to military expansion, with defense spending set to reach unprecedented levels. While the government emphasizes the need for military strength, the economic implications of such high defense outlays are significant. Rising inflation, interest rates, and the neglect of key sectors could erode growth and living standards, raising concerns about the sustainability of Russia’s war-oriented economy. As the country navigates a complex geopolitical landscape, balancing military ambitions with economic stability will be crucial to ensuring long-term success.
