Kremlin’s economic plans – the Russian government’s federal budget proposal for 2025 and the planning period 2026–2027

The Russian government submitted its draft federal budget for 2025–2027 to the State Duma on September 30, 2024. The budget is expected to be signed into law by the end of November. This report analyzes the budget’s main characteristics.

Preliminary Russian estimates for future GDP growth are relatively optimistic. The Russian Ministry of Economic Development expects an increase in GDP growth from 2.5 percent in 2025 to 2.8 percent in 2027. This is considerably higher than market estimates, which projects a yearly GDP growth between 1.0 and 1.5 during the same period. However, future developments are highly uncertain. The Russian economy is overheated, with high inflation (8.5 percent), well above the authorities’ 4 percent target, and the economy experiences a historically low unemployment rate (2.4 percent). To control the situation, the Central bank has raised the key rate several times. As of November 2024, it currently stands at 21 percent. The high key rate has caused discontent among both businesses and the political leadership. Several factors will probably contribute to future developments. In this regard, developments in the petroleum market are highly important, as are the result of the Centrals bank’s efforts to reduce inflation and the effects of the sanctions currently imposed on Russia.

Since 2022, the federal budget has consistently posted significant annual deficits. However, compared to recent years, the deficit in 2025 is expected to be slightly reduced. This is likely a result of the government’s efforts to cool down the economy and may also be a sign of the federal budget reaching its limit.

Unsurprisingly, the new budget bill calls for a further increase in Russian defense spending. The defense budget will amount to 33 percent of all federal expenditures next year. This amounts to 6.3 percent of GDP, the highest GDP share recorded after the collapse of the Soviet Union. The high defense expenditure is also starting to affect the government’s ability to fund other important areas. The 2025 budget sees a significant reduction in social spending, and a new tax reform will help collect more money to fund the war.

We argue that civilian parts of the budget, i.e. spending outside the defense and security chapters, are increasingly used to finance the military and Russia’s warfare in Ukraine. By adding spending outside of Russia’s defense budget to the effective defense budget, we estimate that the defense spending will amount to 8.8 percent of GDP in 2025.

The militarization of the Russian economy makes it difficult to estimate precisely the amount of resources Russia directs towards the military and the war in Ukraine. It also shows that the regime uses a broad array of tools to succeed in its current military buildup.