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[BUSINESS] · Russia · 100 sources

Russia’s war‑driven “dual economy” fuels a fiscal crisis

Russia’s domestic market has split into a volatile “dual economy” as massive state spending to sustain the invasion of Ukraine overwhelms non‑military sectors. The surge of wartime manufacturing that once drove growth has largely faded, exposing deep structural imbalances. To curb a ballooning budget deficit, the Kremlin has sharply raised taxes and expanded internal borrowing, choking civilian enterprises.

Defense outlays now account for about 40 % of the 2026 budget – roughly 16.8 trillion rubles – and internal data show the budget shortfall has jumped from a projected 3.8 trillion to 5.9 trillion rubles (about 2.5 % of GDP) in the first four months of the year. The finance ministry seeks to freeze 2.9 trillion rubles of peacetime spending.

The financial system is also under strain: state‑controlled banks report toxic and non‑performing assets above the 10 % crisis threshold for three consecutive months, and nearly half of Russian firms cite systematic payment delays, threatening domestic trade. Analysts warn the pressure will force further mobilisation of labour and resources and could erode the remaining post‑Soviet market freedoms. President Vladimir Putin has intensified long‑range attacks to bolster domestic morale amid the economic downturn.

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