A strong rouble and low oil prices are expected to widen Russia's budget deficit this year, intensifying pressure from military spending and compelling the government to borrow more than initially planned or draw from its remaining fiscal reserves, analysts warn.
The rouble has appreciated 26% against the dollar this year, as U.S.-Russia relations improve and hopes for an end to the conflict in Ukraine increase. However, the currency is also 12% stronger than the level assumed in the budget.
"A strong rouble is a blessing for the people but a burden for the budget," noted economist Evgeny Kogan. "We receive oil and gas revenues in foreign currency, which are then converted into roubles." If the currency remains around 81 per dollar throughout the year, Kogan predicts the deficit could expand to 1.5 trillion roubles, exceeding the planned 1.2 trillion.
The cabinet aimed to reduce the budget gap to 0.5% of gross domestic product, but early indicators are concerning: the deficit reached 1.3% in the first two months of the year.
While recent talks between the U.S. and Russia have sparked hopes for peace, there has yet to be any ceasefire. “Given the volatile geopolitical landscape, the Ministry of Finance's plans may need adjustments,” warned Natalya Orlova, chief economist at Alfa Bank, who also highlighted the inflationary risks of increased spending.
In the meantime, the international price of Russia's Urals blend of oil has fallen to a 14-month low of around $54 per barrel, pushing the rouble valuation used for fiscal calculations to a new low since June 2023—29% below the 2025 budget benchmark.
Typically, lower oil prices lead to a weakening rouble, and some economists view the current "decoupling" of the exchange rate from oil prices as a unique situation for the Russian economy. TsentroKreditBank economist Evgeny Suvorov believes budget cuts are inevitable if the oil price drops to $50 per barrel or lower, though he questions how this can be managed amid ongoing military operations.
Energy sales, accounting for about a third of Russia's budget income, fell 3.7% year-on-year to 1.56 trillion roubles in the year's first two months, according to the Finance Ministry. "The situation isn't catastrophic, but it's sensitive," stated Sofya Donets from T-Bank. "These significant losses must be addressed either through additional borrowing or by using the National Wellbeing Fund.” Donets estimates potential budget losses could reach 1-2 trillion roubles this year.
The National Wellbeing Fund (NWF) has emerged as the primary source of financing for persistent budget deficits, its liquid assets dropping about two-thirds to approximately $37.5 billion during the war. The Finance Ministry has highlighted risks to oil and gas revenues due to declining prices and acknowledged that the deficit may exceed planned targets.
Nevertheless, the government has some fiscal leeway due to its low overall debt and remaining reserves. Russia boasts one of the lowest public debt levels globally at 14.5% of GDP, up from 13.5% in 2023, which allows for additional borrowing.
The government has capitalized on decreasing geopolitical risk affecting its bonds this year, raising 1.4 trillion roubles through fixed coupon bonds—surpassing the planned deficit—while securing yields at a 10-month low of just under 15%.
Additionally, the government has halted bond issuance with floating coupons tied to the central bank's key interest rate, currently at 21%, the highest since the early 2000s, reflecting confidence in raising funds at fixed rates instead.
The central bank reported renewed interest from foreign investors, with purchases of state bonds in February reaching 43 billion roubles—three times the total for the previous year. Finance Minister Anton Siluanov stated that the rouble's value would adjust as demand for imported goods and foreign currency rises, downplaying concerns about the exchange rate's impact on the budget. "The budget does not depend on various exchange rate ratios; the main priority is that all planned expenditures will be funded, regardless of exchange rate fluctuations," Siluanov affirmed.