Is Russia close to collapse? Russia vs US wartime budget deficits
One of the EC executive assumptions for wanting to extend the war in Ukraine by two years is they seem to believe Russia’s economy is close to collapse. EU foreign policy chief Kaja Kallas keeps banging on about the pain Russia is feeling. It seems the EC elite believe that if they can only tighten the sanctions regime a little more then that will be enough to tip Russia over the edge of the abyss.
That view is delusional. It’s true that the Russian economy is hurting with growth close to zero now, inflation very high (although down from 10% a year ago to 6.6% now), interest rates at 16.5% (also down from 21% a year ago). And most important a swelling budget deficit is becoming a problem.
Currently the deficit is of 1.9% of GDP when it was forecast to be 0.5% at the start of this year. Given a fifth of all spending happens in December it will probably be closer to 2.6% end of year or even over 3%.
Sounds bad and Russia never runs budget deficits thanks to its oil export subsidy. But 2% of GDP is a million miles away from a collapse or even a crisis.
The French deficit is now 5.5% of GDP, over the 4.4% they are targeting which busts the EU’s excessive deficit threshold. And it will probably rise to 6% next year if they don’t get it under control - which they won’t without an entirely new government. In fact, France is close to asking for an IMF bailout. The UK is in a similar position.
Russia hasn’t even broached the EU’s excessive deficit threshold of 3% yet – although it might by the end of this month. However, the CBR is confident after this temporary spike the deficit will fall again in 2026. In January a two-percentage point hike to VAT – which accounts for 40% of Russia’s tax revenues – kicks in and will go a long way to fixing the damage.
Russia is at war and has put the whole economy on a war footing. Of course, the economy is stressed. But if you look back at WWII what is remarkable is how unstressed it is.
In 1942 after the US entered WWII it also put its whole economy on a war footing, which is why the Allies beat the Nazis as they simply outproduced them. In 1942 the US ran a 14% of GDP budget deficit that rose to a massive 27% of GDP in 1043 and was around 22% for the next two years of the war.
US Federal Budget Deficit During World War II |
Year | Deficit ($) | % of GDP |
1942 | $21bn | 14.0% |
1943 | $55bn | 27.0% |
1944 | $48bn | 23.3% |
1945 | $47bn | 21.5% |
Source: bne IntelliNews |
To raise money, they introduced a universal income tax for the first time; they introduced income tax withholding from wages for the first time; they massively expanded the tax base; hiked corporate taxes; and issued $180bn in war bonds to tap the population’s savings. All of this was revolutionary stuff.
Russia has done none of this. It hasn’t needed to. And it still has some of the lowest tax rates in Europe. All it did was add two points to VAT and has increased domestic bond issues to tap the ample liquidity in the banking sector. There is still enough in the National Welfare Fund (NWF), Russia’s rainy-day fund, of RUB6.8 trillion to cover the current deficit almost twice over. The French and UK economy economies are going to collapse before Russia’s.
The story in Ukraine is of course even worse. The IMF say it needs $136bn over the next two years and the EU has just proposed to raise €90bn ($105bn) loan. That will go a long way to keeping Kyiv in the fight, as well as staving off a looming macroeconomic collapse, but everything will be squeezed as it is not quite enough to pay for everything.
One of the failures of the sanction’s regime is that the West massively underestimated the quality of Russia’s economic and financial management team, while at the same time massively overestimated the quality of its own management team or the bounce back effect of sanctions on Europe’s economy.
Russia's economy boomed in 2023 and 2024. That military Keynesianism boost as worn off now and growth has fallen under 1% in the last three quarters. But it will probably recover to 1%-2% next year, although CBR governor Elvia Nabiullina warns there could be a recession next year or even stagnation unless more reforms are put in place. By comparison almost all of Europe is putting growth of under 1% and Germany has already been in recession for the last three years.
Russia: Federal budget deficit (2021–2026, nominal and % of GDP) |
Year | Federal Budget Deficit (USD) | Deficit (% of GDP) |
2021 | $11bn | 0.8% |
2022 | $47bn | 2.3% |
2023 | $41bn | 1.9% |
2024 | $17bn | 0.8% (preliminary) |
2025 | $37bn | 2.0% (estimated) |
2026 | $33bn | 1.7% (forecast) |
Source: CBR |
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