Russian defence spending set to fall slightly in 2026, draft budget shows

Russia's draft 2026 budget projects national defense spending at 13 trillion roubles ($157 billion), a slight decrease from 2024's 13.5 trillion, yet above preliminary estimates, with total defense and security spending remaining near current levels at 16.8 trillion roubles. Despite the headline reduction, sources indicate classified spending (84% of defense) can be rapidly increased if needed, and actual outlays often exceed targets. To fund these expenditures and curb the budget deficit, the Finance Ministry has proposed raising the VAT rate to 22% from 20% in 2026, signaling sustained fiscal strain from the ongoing conflict.

Analysis

Russia's draft 2026 budget indicates a headline decrease in national defense spending to 13 trillion roubles from a 2024 post-Soviet high of 13.5 trillion roubles. However, this figure is misleadingly precise, as 84% of this expenditure is classified, granting the state significant discretion. Sources suggest that funding can be rapidly increased and that actual military outlays frequently exceed targets, sometimes concealed within other budget lines, as evidenced by additional capital for the PSB bank serving the military-industrial complex. The broader fiscal picture confirms a sustained commitment to the war effort, with total defense and security spending remaining nearly flat at 16.8 trillion roubles, or approximately 7% of GDP. The proposal to raise the VAT rate to 22% from 20% to fund this spending and manage the deficit is a clear signal of enduring fiscal pressure, indicating the state is prioritizing military funding at the cost of a higher tax burden on the wider economy.

Key Decisions for Investors

• Investors should discount the headline reduction in defense spending, as the 84% classified portion and stated budgetary flexibility suggest actual military-related outlays will remain structurally high, cementing Russia's war economy footing.
• The proposed VAT hike to 22% is a critical signal of Russia's deteriorating fiscal position and implies future headwinds for domestic consumption and non-state enterprises, increasing the economic risk of any exposure to the Russian market.
• The sustained high level of security-related expenditure reinforces the thesis of a prolonged geopolitical conflict, which will likely continue to support elevated geopolitical risk premiums and volatility in global energy, commodity, and grain markets.