Putin asks oligarchs to donate to Russia’s dwindling defence budget

Russia's defence bill rose 42% to Rbs13.1tn (~£121bn) last year and President Putin has asked oligarchs to donate to cover a strained defence budget amid continued invasion of Ukraine. Moscow raised Rbs320bn (~£2.95bn) from a one-off 10% windfall levy in 2023, increased VAT to 22% to target Rbs600bn over three years, and is considering another windfall tax if the rouble weakens; the January–February budget deficit already exceeded 90% of the full-year projection. Continued hostilities over Donbas and sanctions-driven discounted oil sales create ongoing downside risks to Russian fiscal stability and to energy markets and sanctions-related spillovers.

Analysis

Moscow’s resorting to one-off private contributions and heavier taxation signals a fiscal balancing act that will be iterative, not instantaneous. Expect a 3–12 month cadence of ad hoc measures (windfall levies, higher VAT, selective carve-outs) that compress cash flow for large exporters and raise political tail-risk for owners of domestic strategic assets.

Sanctions-driven oil discounts and the need to fund prolonged procurement create two offsetting market forces: weaker ruble/FX-implied losses and downward pressure on Russian export realizations versus a concentrated, predictable demand shock into domestic defense suppliers. That widens margins for domestic defense incumbents (faster state payments, lower competitive entry) while reducing free-cash-flow for commodity exporters, which will depress capex and raise default/ restructuring risk over 6–18 months.

Second-order winners are global defense primes and parts suppliers who can substitute into allied procurement (order visibility and higher margins), and liquid USD-denominated sovereign/higher-quality EM assets that provide safe-yield pickup vs idiosyncratic Russian exposure. Main losers are Russia-centric commodity exporters and foreign counterparties with credit lines or repo exposure to sanctioned names — an operational liquidity squeeze can crystallize within weeks if counterparties pull lines or FX trading is curtailed.

Key Decisions for Investors

• Long defense primes vs Russia exposure (pair): Buy RTX (Raytheon Technologies, NYSE:RTX) or GD (General Dynamics, NYSE:GD) sized to target +25–40% in 12 months; fund with a 3–6 month short of VanEck Russia ETF (NYSE:RSX). R/R: asymmetry where defense revenue rerates fast on visible orders; stop-loss on longs -15% and cover RSX if major sanctions rollbacks occur.
• Short Russian commodity exporters / state-linked names: Initiate a 3–9 month short on RSX (or select ADRs) sized to limit portfolio exposure. Rationale: further windfall taxes and discounted export prices compress FCF and raise default risk; target 30–50% downside, stop if diplomatic progress materially eases oil discounts.
• FX hedge / directional: Buy 3-month USD/RUB forward or enter a long USD/RUB option (if available) to capture 10–20% ruble depreciation scenario over 1–3 months. Use as hedge against export-revenue drag; exit if RUB recovers >8% on clear diplomatic progress.
• Event-driven energy volatility trade: Buy a 3-month Brent crude 1x1 straddle (or long 3-month ATM call spread + put) to hedge against escalation in either theatre (Ukraine or Middle East) that spikes prices. Cost is the premium; expect sharp two-way moves—position size to target a 2–3x payoff if Brent moves ±15% within 90 days.