Military spending consumes 80% of tax revenue, debt doubles and interest rates surge, plunging Russia’s economy into a dead-end recession.

The key factor shaping Russia’s economic outlook is revenue from oil and natural gas. Yet post-war hydrocarbon revenues have plummeted—precisely the primary funding source for the Kremlin’s war against Ukraine. According to data released by Russia’s Ministry of Finance, oil and gas budget revenues in the first half of 2026 fell 22.7% year-on-year, dropping from approximately 4.735 trillion rubles (about $46 billion) in the same period of 2025 to 3.661 trillion rubles ($46 billion). On a quarterly basis, the decline varied markedly due to sharp oil-price fluctuations triggered by the Iran war. In January 2026, Russian oil-and-gas revenues plunged 50.2% to 393 billion rubles—the lowest level since February 2022. First-quarter oil-and-gas revenues declined 45.4% year-on-year to 1.443 trillion rubles. In the first quarter following the outbreak of the Iran war, however, soaring global oil prices led to a modest 6% increase in Russian oil-and-gas revenues, reaching 2.218 trillion rubles. The Ministry of Finance attributed the overall decline primarily to earlier drops in oil prices. Notably, although oil prices rebounded temporarily in July—driven by Middle East tensions—and a one-time windfall tax boosted revenues, cumulative oil-and-gas income for the first seven months stood at 4.5945 trillion rubles—still about 16.8% lower than the same period last year. This indicates that even favorable external conditions and short-term price spikes are insufficient to reverse the trend. Tensions around the Strait of Hormuz briefly pushed up global oil prices, lifting Russia’s monthly export earnings above $20 billion. Yet once the Iran war paused and maritime traffic resumed, oil prices quickly retreated—and this effect dissipated almost immediately. Russian oil-and-gas revenues are highly likely to continue shrinking in the second half of the year. Professional MarineTraffic data shows vessel transit through the Strait of Hormuz rapidly recovered starting late June: zero vessels passed on 17 June; on Monday, 10 tankers departed and 11 entered; by Thursday, 17 tankers had left the Persian Gulf; and even more transited in July. This swift logistical recovery eased global market pressure and drove oil prices down. As of Friday, Russia’s Urals crude price had stabilized at $58.83 per barrel. In its 2026 budget, the Kremlin assumed an oil price of $59 per barrel—a highly optimistic assumption. The first-half 2026 budget deficit reached 6 trillion rubles ($7.7 billion), exceeding the full-year target by 60%. Second, surging Russian military expenditures are relentlessly squeezing economic and social spending priorities. In Q1 2026 alone, Russia’s defense spending totaled 5.9 trillion rubles ($7.5 billion)—48% of total state expenditure. By year-end, this figure could reach 18 trillion rubles ($22.9 billion). In 2025, roughly 75% of Russia’s tax revenue funded defense; in 2026, that share may exceed 80%. To cover these shortfalls, Russia has increasingly borrowed domestically. Domestic public debt has risen to 32.4 trillion rubles (~$34 billion)—double the pre-invasion 2021 level of 16.49 trillion rubles. With weak domestic market demand for government bonds, mandatory bond allocations surged 54% year-on-year in the first half of 2026.

Oil has become a burden for Russia.

The main channels for extracting oil rents remain the mineral extraction tax (MET) and the additional profit tax (APT). In 2025, MET revenues fell 24% to approximately 8.5 trillion rubles. Introduced in 2019, the APT—more sensitive to oil prices, the ruble exchange rate, and transportation costs—generated about 1.6 trillion rubles, roughly 20% less than the previous year. The industry’s largest taxpayer remains Rosneft. According to Igor Sechin, in 2025 the company paid 5 trillion rubles to federal, regional, and local budgets—down from a record 6.1 trillion rubles in 2024. Its revenue totaled approximately 8.2 trillion rubles, EBITDA reached 2.2 trillion rubles, and net profit stood at 293 billion rubles. Liquid hydrocarbon production declined from 184 million tons in 2024 to 181.1 million tons in 2025. Rosneft attributed this trend to adjustments in government-set production quotas. However, Rosneft not only pays taxes—it systematically receives tax benefits. Since 2017, under favorable pricing conditions, the Samotlor field—which peaked in production back in 1980—has received annual tax exemptions of about 35 billion rubles. Since 2024, this exemption has risen to 50 billion rubles annually. These funds reduced the field’s average annual production decline from 5% during 2008–2017 to roughly 1%. The Priobskoye field receives comparable support—approximately 45.96 billion rubles per year. Yuganskneftegaz, which operates the field, manages long-established license blocks in the Khanty-Mansi Autonomous Okrug and accounts for about 30% of Rosneft’s output. Promising assets include the Vankor cluster and the Eastern Oil project, with declared resource bases of approximately 650–700 million tons of low-sulfur crude. Yet Arctic projects require massive capital investment, complex logistics, and technologically restricted access due to sanctions. Lukoil extracted approximately 75 million tons of oil in Russia and paid roughly 1.33 trillion rubles in taxes in 2025 (excluding corporate income tax). Gazprom Neft, having achieved a record-breaking output of 130.7 million tons of oil equivalent, reported tax payments of approximately 97.9 billion rubles. At the same time, the company receives temporary tax relief totaling 13 billion rubles annually: 79.2 billion rubles from April 2023 to March 2029, followed by repayment between 2029 and 2035. This is the fundamental contradiction of Russia’s oil model. The budget depends on maximizing rent extraction—but the aging resource base demands ever-increasing subsidies. The state needs tax revenue today, while companies need investment tomorrow to sustain output. The greater the fiscal pressure, the higher the industry’s compensation demands. The more compensation granted, the smaller the net budgetary benefit derived from high oil prices.

Russian Oil Tax Price Surges 60% Above Budget Assumption

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Reuters reports Russian oil tax prices averaged $103.4 per barrel in October, surpassing budget assumptions by 60%. High global crude prices boost government revenues despite widening budget deficits.

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Russian Oil Tax Price Surges 60% Above Budget Assumption

Russian Oil Tax Price Surges 60% Above Budget Assumption

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