Russia's GDP Growth Revised Down to 1.8% as Military Spending Reaches 41% of Federal Budget

GDP Revision and Economic Structure

Rosstat's downward revision of 2025 GDP growth reflects the maturation of a wartime economic pattern that was initially more robust than Western analysts predicted. The economy benefited in 2023-24 from a fiscal demand boost — government spending on military salaries, procurement, and logistics injected significant purchasing power into domestic consumption — and from high energy export revenues that persisted despite Western price cap mechanisms and alternative routing through Indian and Chinese buyers. The revision to 1.8 percent reflects slower-than-expected performance in civilian manufacturing, where component shortages from import restrictions have constrained output, and in real estate, where elevated mortgage rates (a consequence of the Central Bank's anti-inflation stance) have dampened residential construction activity.

The IMF's independent assessment, published in its October 2026 World Economic Outlook, estimates Russian GDP growth at 1.5 percent for 2025, below Rosstat's revised figure. The divergence reflects methodological differences in how imputed services and informal sector activity are measured, as well as the IMF's application of a price deflator based on international energy prices rather than domestic Russian prices, which the IMF assesses as artificially suppressed by regulated tariff structures. Neither figure suggests economic collapse, but both indicate that the military-fiscal stimulus effect is diminishing as structural bottlenecks — particularly in labour markets, where unemployment is at 2.4 percent nationally and engineering and manufacturing wages are rising sharply — constrain further capacity expansion.

Military Spending and Budget Architecture

The 2026 federal budget draft, presented to the State Duma on 15 October by Finance Minister Anton Siluanov, allocates approximately 13.2 trillion rubles to the combined national defence and national security and law enforcement chapters — equivalent to 41 percent of total federal expenditure and approximately 9.7 percent of GDP. This represents the highest defence and security share of the Russian federal budget since the Soviet period and reflects both absolute spending increases and the contraction of civilian expenditure categories as revenue constraints tighten. Education, healthcare, and infrastructure spending are all declining in real terms after adjustment for inflation, a structural shift that economists warn will compound long-term productivity and human capital challenges.

The budget's revenue projections rely on an oil price assumption of $70 per barrel for Urals crude — a conservative number relative to current Urals spot prices around $65-68, meaning even modest energy price softening would require mid-year supplementary budget revisions. Non-oil revenue projections assume 12 percent nominal growth in corporate and personal income taxes, a target that appears optimistic given that actual tax collection is tracking at approximately 7 percent nominal growth through the first three quarters of 2026. The shortfall is being absorbed through the National Wealth Fund, whose liquid foreign-currency assets have declined from approximately $182 billion before February 2022 to an estimated $54 billion as of October 2026, based on Finance Ministry quarterly disclosure.

National Wealth Fund Trajectory and Policy Constraints

The National Wealth Fund's decline from its pre-2022 level of $182 billion to approximately $54 billion over four years represents an average drawdown of approximately $32 billion per year, with acceleration in 2025-26 as budget deficits increased. The Fund's projected depletion horizon, at current drawdown rates, is approximately 18-24 months before liquid assets fall below a threshold considered operationally necessary for reserve management purposes. The Russian Finance Ministry has not published official projections of the Fund's depletion date, but independent economists including at the Moscow-based BOFIT (Bank of Finland Institute for Emerging Economies) have modelled scenarios placing liquid asset exhaustion in late 2027 to mid-2028 under baseline conditions.

The Central Bank of Russia's policy response to inflation — holding the key rate at 18 percent since December 2025 — reflects a deliberate prioritisation of inflation control over credit-driven growth. High interest rates constrain civilian investment while having limited impact on military procurement, which is funded directly by budget appropriation rather than commercial credit. The resulting economy is bifurcated: a large and well-funded military-industrial sector operating in effective isolation from interest rate signals, alongside a civilian economy experiencing investment drought, labour shortages (due to military mobilisation), and declining real household incomes. This structural bifurcation is analytically significant for assessing Russia's medium-term resilience, as it suggests that the financial constraints visible in sovereign wealth drawdown and inflation do not translate directly into military-operational capability degradation on any near-term timeline.

Sources

• Rosstat – GDP growth revision announcement Q3 2026
• Russian Ministry of Finance – 2026 Federal Budget draft presentation
• IMF – World Economic Outlook October 2026: Russia country assessment
• BOFIT – Bank of Finland: Russia economic monitor Q3 2026