Russia’s War Economy Forces Sharp Cuts as Federal Treasury Faces Liquidity Crisis

The warning was unusually stark. In April, Finance Minister Anton Siluanov told Prime Minister Mikhail Mishustin that the government risked running out of liquidity to meet its obligations on time. The balance of the federal Treasury’s single account fell to minus 5.5tn roubles, equivalent to about $65.3bn.

For a system accustomed to maintaining positive cash buffers, the negative balance was more than an accounting curiosity. Former deputy finance minister Oleg Vyugin described such a position as an extraordinary departure from decades of normal Treasury practice.

The immediate response was austerity. From April, federal ministries and agencies were ordered to reduce non-war civilian expenditure by 35%, while preparing for staff cuts of up to 15%. Non-essential procurement was frozen, including office renovations, vehicle upgrades and IT infrastructure.

Military salaries, social transfers, regional subsidies and sovereign debt servicing were protected.

That distinction is the real story. Moscow was not cutting the budget evenly. It was creating a hierarchy in which the war came first, and civilian government absorbed the adjustment.

The fiscal deterioration was accelerated by the timing of expenditure. War-related spending was pushed forward into the beginning of the year, while oil prices fell before the Iran war disrupted energy markets. The result was a cash-flow squeeze that could not simply be explained by a temporary seasonal imbalance.

Even subsequent energy price increases did not reverse the deterioration.

The deficit is moving faster than the original budget

Russia entered 2026 with a budget deficit target of 1.6% of GDP, or roughly 1.6tn roubles. By the end of the first quarter, the gap was already 4.5tn roubles.

By early August it had reached 6.5tn roubles, equivalent to 2.8% of GDP. On August 24, the government's Electronic Budget system recorded a deficit of 8.654tn roubles.

Internal projections now put the full-year deficit at about 9tn roubles, or between 3.2% and 3.8% of GDP. That would return the deficit to territory last seen during the peak of the 2020 pandemic.

The comparison matters less for the headline number than for what has changed underneath it. Russia is not simply spending more. It is changing the mechanism through which the state absorbs the cost.

For years, Moscow's fiscal model relied on conservative budgeting, substantial cash buffers and relatively low public debt. The Treasury could hold surplus liquidity and use it to smooth spending across the year.

That cushion is now being consumed.

The National Wellbeing Fund has become one of the principal shock absorbers. Its liquid assets fell by $9.24bn in July alone, leaving $46.2bn readily available by late July. Physical gold holdings have also been sold down to their lowest level since January 2020.

The broader reserve picture is considerably less alarming: the Bank of Russia reported $761.2bn in international reserves in late August. But headline reserves are not the same thing as immediately deployable fiscal liquidity. The shrinking liquid component of the sovereign wealth fund is therefore a more revealing measure of the government's room for manoeuvre.

The war is being pushed down the federal system

The most consequential adjustment may be occurring far from Moscow.

Fifty-six of Russia's 89 sub-entities, including occupied territories, are now running budget deficits, with a combined shortfall of 1.9tn roubles. The federal centre has reduced development transfers while regional governments are simultaneously carrying costs associated with military recruitment.

Recruitment bonuses have reached 1.8m-1.9m roubles per contract in some cases. For regional administrations, that creates an awkward arithmetic: they are being asked to sustain the human pipeline for the war while receiving less support for ordinary development.

The pressure is particularly visible in regions that once benefited from strong industrial and resource revenues.

Kemerovo, Vologda, Komi, Yamal-Nenets and Khanty-Mansi are among those confronting severe fiscal strain. In some industrial regions, deficits can consume as much as half of internal revenues. The problem is compounded by weaker access to European markets, Chinese tariffs and logistics constraints, and falling corporate profit-tax receipts.

This is an unusual form of federalism. Revenues and strategic priorities remain concentrated at the centre, while an increasing share of the financial consequences is pushed downwards.

For regional administrations, the choice is consequently less about whether to cut spending than about which part of civilian capacity can be allowed to deteriorate first.

What disappears when defence spending does not

The answer is not necessarily dramatic in the short term. It is cumulative.

School and hospital construction can be postponed. Public transport can be maintained without modernisation. Road programmes can be delayed. Municipal heating and water systems can remain unrepaired. Civil-service vacancies can go unfilled. IT and capital investment can be cancelled.

None of these decisions produces an immediate macroeconomic shock.

Together, however, they amount to a form of capital depreciation. A government can preserve current consumption while running down the infrastructure and administrative capacity required to sustain it in the future.

This is where Russia's wartime economic model is changing character.

Earlier in the war, defence spending could support parts of the domestic economy through higher wages, recruitment payments and orders for the military-industrial complex. Defence factories and contract soldiers received direct injections of state money, while civilian sectors could benefit indirectly from that demand.

The fiscal squeeze changes the balance. Increasingly, preserving military expenditure requires withdrawing resources from activities that do not directly contribute to the war.

The military-industrial complex therefore remains a protected island inside a broader civilian economy that is being asked to absorb the adjustment.

Moscow still has tools - but they are becoming more expensive

The Kremlin is not yet cornered financially.

It can continue borrowing through domestic government bonds, including OFZ securities, while state-controlled banks such as Sberbank and VTB absorb substantial volumes of government debt. But that financing comes at elevated interest rates set against a high-rate monetary environment.

This creates a second pressure point.

The state can replace depleted cash with borrowing, but expensive debt transfers part of the burden to the banking system and increases the future cost of servicing the sovereign balance sheet. State banks gain influence as major purchasers and underwriters of government debt, while the government becomes increasingly dependent on them to sustain wartime borrowing.

The June legal amendments allowing spending increases without formal revisions to the budget law offer Moscow additional flexibility. They do not, however, create additional resources.

That distinction is becoming central to the Russian fiscal problem: legal and accounting mechanisms can postpone the moment of constraint, but they cannot eliminate the underlying mismatch between available resources and wartime commitments.

Why this is not yet a collapse

Russia's financial authorities are confronting a structural rebalancing rather than an immediate economic implosion.

That is partly because the state retains substantial gross reserves and still has access to domestic borrowing. It can also prioritise expenditure with unusual force. Defence, military wages and recruitment payments can be protected precisely because other areas of government are being compressed.

This makes the current model more durable than a simple balance-sheet crisis might imply.

It also makes it more corrosive.

A state can sustain a great military effort for longer if it is willing to reduce everything around it. The relevant question is therefore no longer whether Moscow can find enough money to pay for the next tranche of military expenditure. It is how much civilian capacity it must sacrifice to do so.

The regional numbers indicate that the adjustment is already spreading beyond the federal budget. The reserve figures show that one of the principal financial cushions is shrinking. The civilian spending cuts show that ministries have been instructed to operate with materially less money.

And the deficit is still rising.

Russia's wartime fiscal system has consequently acquired a new logic: rather than using accumulated financial strength to smooth the costs of war, it is increasingly using the rest of the state to preserve the war's financial priority.