Russia will spend 9.1% of its federal tax revenue servicing its debt this year, more than double the share before the full-scale invasion of Ukraine, as the war pushes it to borrow at home on ever worse terms.

Russia's problem is not how much it owes, about 18.3% of GDP, but what the debt now costs. Normaly government debt servicing costs account for around 4% of total expenditure and Russia's budget was running at that healthy level until the invasion of Ukraine in 2022. During 2023 and 2024 the economy grew strongly due to a military spending boost that provided taxes to pay for defence, but since 2025 the economy has slowed sharply, leading the Ministry of Finace to turn to the domestic bond market to pay for its growing spending, according to Growford Institute, a Kyiv think tank,  Ukrainska Pravda reported on September 30, 

Russian government debt servicing costs as a share of federal budget tax revenues. Source: Growford Institute, via Ekonomichna Pravda.

Domestic borrowing has become the Kremlin's main way of covering a mushrooming budget deficit. Around 85% of deficit financing since the start of 2025 has come from domestic debt, according to the KSE Institute. In the first half of this year the deficit reached RUB5.7 trillion ($67.5bn), of which net borrowing covered RUB2.3 trillion ($27.2bn) and the National Wealth Fund RUB0.5 trillion ($5.9bn), with the rest drawn from Treasury cash balances that are running down fast.

With foreign investors gone, Russian banks are effectively the only buyers of the government's OFZ bonds, and they pay for them with customers' deposits. Deposits have grown 81% in four years as interest rates above 20% persuaded Russians to keep their money in the bank, but the inflow has slowed. The banking sector has run a growing liquidity deficit since February, which passed RUB3 trillion ($35.5bn) on September 14.

"Demand for cash is driving the banking sector's liquidity shortfall. Repo transactions are being used to cover it, and banks are also using them to finance the budget deficit by purchasing bonds," said Mykhailo Dzhus, head of the money markets department at the Growford Institute.

Most bond auctions in July and August were cancelled for lack of demand. The Finance Ministry raised RUB1.1 trillion ($13.0bn) in September, but only by selling at a discount and offering a higher floating rate.

"In other words, they were forced to accept less favourable borrowing terms that will cost them more," said Yuliia Pavytska, head of the Sanctions Hub of Excellence at the KSE Institute. Weekly fixed-rate auctions have since been clearing at yields above 16%.

The government has raised its 2026 net borrowing plan by 26% to RUB5 trillion ($59.2bn) and plans to borrow RUB7.7 trillion ($91.2bn) next year, when it has budgeted for a deficit of 2.2% of GDP. This year the Ministry of Finance has already almost doubled its estimate for the deficit from 1.6% of GDP to 3-3.2% of GDP by the end of the year. 

Pavytska wants that spiral to run its course. "We need to let this spiral continue until the cost of servicing the debt becomes so high that the government is forced to cut spending," she said.

Dzhus doubts the banks will crack first. "Despite numerous reports that the banking system is already in a pre-crisis or crisis state, the statistical data gives no grounds to conclude that it could become a source of destabilisation in the near future," he said.

If the money runs short, Pavytska expects the Kremlin to raise taxes again. "If the country finds itself in a tight spot, it will have one card left to play: a major tax hike that would force the economy to chip in to the common pot for the war," she said. Russians are already paying in less visible ways: regions have been allowed to fund the recruitment of contract soldiers by cutting spending on housing and communal services, and utility tariffs are due to rise in October.

None of this means the war effort is about to stall. Growford sees no sign of an "inevitable economic crisis" and reckons Russia can keep fighting at the current pace for at least two more years, assuming sanctions stay as they are, China keeps up its support, military spending holds at 2025-2026 levels and oil trades at $60-80 a barrel. Brent was close to $100 on September 23.

"At the moment Russia has enough money to maintain the status quo: wage the war, put pressure on the Ukrainian economy and keep its own economy more or less afloat. But it doesn't have enough to significantly expand its military capabilities and change the situation on the battlefield," Pavytska said.