Russia's Budget in Crisis Over War: Neither Oil Nor Taxes Help

At the St Petersburg Economic Forum, Putin assured investors that Russia's economy is sound, but in reality military spending is growing faster than planned. Rising oil prices and increased VAT cannot fill the budget gap, and as the war continues, structural economic problems will deepen further.

The St Petersburg Economic Forum became this year a mirror image of Russia's problems rather than an exhibition of its achievements, problems into which the country has been driven by the protracted war in Ukraine. Despite this, officials showed no panic, and Vladimir Putin assured investors that the economy is in perfect order.

Putin's Optimism vs Reality

Putin claimed at the forum that the slowdown in economic growth is a deliberate and controlled process. Yet independent analysts and budget indicators tell a different story: the state budget deficit is shaping up to be larger by year's end than the authorities originally planned.

The spike in oil prices and the increase in VAT did provide additional revenue to the state coffers, but these measures cannot cover the continuing growth in war-related expenses. Defence spending exceeds planned levels, and maintaining the military machine requires ever more resources.

Structural Problems Deepen

According to economic experts, Russia's structural economic problems are deepening as the war continues: labour shortages, falling investment, sanctions pressure and capital flight affect the country's long-term prospects. The St Petersburg forum, traditionally the main platform for Russia's business community and investors to meet, reflected this year a sense of uncertainty rather than confidence.

In the final analysis, Russia's budget situation shows that the economic price of the war is higher than the country's official rhetoric admits, and the longer the conflict continues, the more painful the long-term consequences for the entire economy.