ANALYSIS: An 80-billion deficit: Putin’s deadly arithmetic

An Unprecedented Budget Increase in "Peacetime"

The decision to increase military spending by an additional 4 to 5 trillion rubles in 2026—equivalent to approximately 50 to 60 billion dollars at the current exchange rate—is presented by the Russian government as a measure to “strengthen national defense capabilities.” In reality, it is an implicit acknowledgment that the previous pace of spending was insufficient to sustain the war effort. The Russian military is consuming resources at a rate that even an efficient war economy would struggle to sustain.

To put this figure in perspective: the planned increase represents an additional 3% of Russia’s GDP devoted to the war in a single year. That is substantial. And this money has to come from somewhere: either from printing money—which will fuel inflation—or from public debt—which will increase the cost of borrowing—or from cuts to other budget items—education, healthcare, infrastructure. In all three cases, it is the Russian people who foot the bill.

Russian Regions, Drowning in Debt

The increase in federal war spending is partly coming at the expense of transfers to the regions. According to dn.gov.ua on June 22, 2026, Russian regions are drowning in debt—a direct consequence of the federal government’s plundering of the budget to finance the war. Regional governors who were trying to maintain minimal public services are running out of funding, forced to borrow at prohibitive rates or drastically cut their spending.

This budgetary fragmentation between the central government and the regions is a source of latent tensions that Putin’s regime manages with a mix of political repression and mobilizing nationalism. But as the war drags on and costs rise, the room for maneuver is shrinking. The poorest, most indebted regions—those hardest hit by human losses, which are often the ones contributing the most soldiers in exchange for economic incentives—are harboring resentments that information controls cannot indefinitely contain.

Russia’s regions are a very different reality from the Russia of Moscow and St. Petersburg. These are poor, indebted territories that send their sons to die in Ukraine and see their regional budgets bled dry by the federal war machine. I don’t know if this divide will become political in the short term. But it exists, and it is deepening.

What the New Round of Sanctions Includes

The European Union has proposed a 21st package of sanctions against Russia, according to Daily Finland on June 27, 2026. This package comes on top of the extension of the entire regime of anti-Russian economic sanctions through 2027—covering trade, banking, energy, and cryptocurrencies—as confirmed by Euromaidan Press on June 26, 2026. Furthermore, the Baltic states are urging the EU to accelerate the embargo on Russian oil, according to the Kyiv Post on June 27, 2026.

Each new sanctions package seeks to plug the loopholes in the previous one. Russia has developed circumvention mechanisms—third-country transshipment, shell companies, and alternative financial channels—that allow certain transactions to slip under the radar of sanctions. The 21st and future packages aim to close these loopholes, particularly routes through countries such as Armenia, Turkey, and the United Arab Emirates, which have benefited from re-export trade to Russia.

The Oil Embargo: The Line the Baltics Want to Cross

Pressure from the Baltic states to accelerate the embargo on Russian oil is meeting with resistance from certain EU member states—including two countries that also oppose a travel ban on Russians, according to the English-language edition of Pravda on June 25, 2026—which fear repercussions on their energy supplies or trade relations. This internal tension within the Union is a weakness that Russia is actively exploiting by stoking the reluctance of those allies most dependent on its energy.

A total oil embargo would be one of the most devastating economic measures the West could impose on Russia. Oil revenues account for a significant portion of the Russian federal budget. Depriving Moscow of its oil revenues, even partially, would automatically accelerate the depletion of reserves and increase financial pressure on the war effort. But as long as some EU members block this option, it will remain out of reach.

It is difficult to understand why certain EU member states continue to protect their commercial interests with Russia while a full-scale war is devastating a European country. I will not name them here, but everyone knows who they are. And history will judge them.

GDP is falling, inflation is eating away at it

The Kiel Institute, cited by the Foreign Affairs Forum on June 23, 2026, documents a “structural exhaustion” of the Russian economy. According to its estimates, Russian GDP in the first quarter of 2026 fell by 0.2% compared to the previous quarter, and the IMF has revised its growth forecast for 2026 to 0.8%—well below previous years. At the same time, inflation remains high, eroding the purchasing power of a population already under pressure.

These figures do not signal an immediate collapse. As The Economist noted on June 22, 2026, the Russian economy “has problems but is not going to collapse.” Putin’s regime has demonstrated an ability to absorb significant economic shocks by controlling information, cracking down on dissent, and maintaining a war-like nationalism that makes sacrifices acceptable to part of the population. But “structural exhaustion” is an accurate description: this is not an acute crisis, but a slow and steady deterioration of the fundamentals.

Dependence on Domestic Military Demand

Russia’s growth in recent years has been largely fueled by public military spending—salaries for soldiers and the defense industry, arms contracts, and the construction of military equipment. This model creates an illusion of economic vitality that masks a profound distortion: productive civilian sectors—technology, export-oriented agriculture, and services—are constrained by a shortage of skilled labor mobilized into the military and the defense industry, by the ongoing brain drain despite barriers to emigration, and by isolation from the international financial system.

Zelensky’s sanctions advisor, quoted by RBC-Ukraine on June 26, 2026, stated that the Russian economy has reached a dead end. This may be optimistic in the short term, but the trajectory outlined by the available data confirms that we are approaching it. An economy that devotes 8 to 9% of its GDP to the war, faces increasing sanctions, and sees its civilian productive capacity deteriorating cannot sustain this effort indefinitely.

The Russian economy will not collapse this week or this month. But it is wearing down. Every additional month of war costs Russia a portion of its economic future that future generations will have to pay for. Putin is spending the capital of his successors. This may be his greatest betrayal of his own people.

The alternative routes Moscow is using

Since 2022, Russia has developed a sophisticated network to circumvent Western sanctions. Countries such as Armenia, Kazakhstan, the United Arab Emirates, and, at times, Turkey have served as transit hubs for goods and electronic components that would normally have been blocked by European and U.S. sanctions. These bypass routes allow Russia to access certain dual-use technologies—semiconductors, optical components, precision parts—that its defense industry needs.

The gradual closure of these bypass routes is one of the priorities of successive sanctions packages. The 21st package proposed by the EU, according to a June 27, 2026, report in Daily Finland, specifically targets entities that facilitate these bypasses. Secondary measures—threatening to exclude third-country companies that re-export sanctioned goods to Russia from Western markets—have also been implemented, with mixed results. Circumvention has decreased but has not been eradicated.

Russian Domestic Production: Between Constraints and Adaptation

Faced with import restrictions, Russian industry has sought to develop domestic substitutes. The results have been mixed. Some sectors—tank production, artillery ammunition, and certain missiles—have maintained or increased their output thanks to alternative sources. Others—advanced microelectronics, precision optics, and certain components of guided weapons systems—have suffered more from restrictions on access to Western technologies.

This sectoral asymmetry reveals a reality more complex than simple narratives—such as “sanctions work” or “sanctions are useless”—would suggest. Sanctions affect different industrial sectors differently, and their cumulative impact on the quality and quantity of weapons produced is difficult to assess from the outside. What can be stated with greater certainty is that without sanctions, the Russian defense industry’s production capacity would be significantly higher.

The “sanctions work/don’t work” debate is a false one. The real question is: to what extent do sanctions constrain Russia’s war-fighting capability? And the honest answer is: more than without sanctions, but less than with a total embargo. This is insufficient to force peace, but sufficient to make it worthwhile to maintain and strengthen them.

Inflation, Interest Rates, and Plummeting Purchasing Power

The consequences of Russia’s economic difficulties are not limited to macroeconomic statistics. They are evident in the daily lives of the Russian people. Inflation, fueled by war spending and the depreciation of the ruble, is eroding the real purchasing power of millions of Russian families. The Central Bank’s 21% benchmark interest rate makes credit inaccessible to households and small businesses. The real estate and consumer goods markets are showing signs of strain in several major Russian cities, beyond Moscow and St. Petersburg.

These economic pressures on Russian households are creating latent tensions that the regime manages through propaganda and repression. The forced depoliticization of the population—maintaining a facade of normality in major cities while the regions bleed their men and their money—is a social management strategy that the Kremlin has perfected. But it has its limits. The accumulation of economic grievances, combined with mounting human losses, constitutes political fuel whose flashpoint no one can predict with certainty.

The Russian Social Contract: A Gradual Crack

The implicit social contract of Putin’s regime has always been based on an exchange: economic stability and a sense of national power in exchange for acceptance of authoritarianism and limited freedoms. The war has altered this exchange: economic stability is eroding, freedoms remain limited, and national power is increasingly symbolic rather than real. For Russians who benefited from the previous social contract—the urban middle class, professionals, and entrepreneurs—the outlook is increasingly bleak.

I do not claim to know whether this gradual fracturing of the social contract will lead to political changes in Russia. The history of authoritarian regimes shows that they can survive considerable economic deterioration, especially when they control information and the public sphere. But the fracture is there, documented by economists and sociologists who observe Russia. And every additional month of war widens it a little more.

The Russian social contract is slowly breaking down. It’s not dramatic. It’s not immediate. But it’s real. And a regime whose social contract is breaking down is a regime that will sooner or later have to face a question that Russians have never really been allowed to ask openly: What was the point of it all?

The Price Cap on Russian Oil and Its Effects

The economic measure most directly linked to the financing of the war is the cap on the price of Russian oil at $60 per barrel, imposed by the G7 in late 2022. Combined with European sanctions on insurance and maritime freight services, this price cap forces Russia to sell its crude oil below market price to alternative buyers such as China and India, which benefit from significant discounts. Russian oil revenues have declined, though they remain substantial.

Pressure from the Baltic states to accelerate the oil embargo, as reported by the Kyiv Post on June 27, 2026, aims to go further: to completely eliminate Russian oil sales rather than simply capping them. Such an embargo would be economically more devastating for Russia, but it is politically complex to implement—it requires the agreement of third-party countries that purchase Russian oil and are not subject to Western sanctions.

Russian Oil via China and India: The Real Workaround

China and India have become the two main buyers of Russian oil since 2022, absorbing a growing share of the exports that the European market no longer accepts. These purchases, made at discounts to market prices, allow Russia to maintain a flow of oil revenues, albeit a reduced one. China, in particular, is using this opportunity to secure low-cost energy supplies while strengthening its strategic partnership with Moscow.

This bypass mechanism is the main limitation of the West’s oil sanctions policy. Without the participation of China and India, an oil embargo would be much more effective. With their active participation as alternative buyers, the embargo can only be partial. This is a structural dilemma of sanctions policy for which there is no easy short-term solution—and which the 21st sanctions package will not resolve either.

China buys sanctioned Russian oil at a discount. In doing so, it indirectly finances Putin’s war while presenting itself as neutral. This hypocrisy deserves to be clearly called out. China is not neutral in this conflict: it is an active trading partner of the aggressor state. And its leaders know exactly what they are doing.

Economic Pressure as a Complementary Strategy

An analysis of Russia’s war economy confirms what advocates of sanctions have been saying from the start: economic pressure works. Not as quickly, not as radically as one might have hoped. But it works. The $80 billion deficit, skyrocketing war expenditures, the structural strain documented by Kiel, and regions drowning in debt—all of this points to an economy that is truly suffering under the weight of war and sanctions.

The strategic conclusion is clear: we must maintain and strengthen sanctions, accelerate the oil embargo, close off bypass routes, adopt the 21st package quickly, and prepare the 22nd. Economic pressure is not an alternative to military support for Ukraine—it is its indispensable complement. Together, these two dimensions—military support and economic attrition—constitute the strategy that can lead to a favorable outcome.

Do Not Confuse Difficulties with Collapse

Putin can hold out for months, perhaps years, despite these economic difficulties. He controls the media, suppresses the opposition, and fosters a war-driven nationalism that enjoys genuine popular support among certain segments of Russian society. He can also adjust, pivot, and reduce the intensity of military operations to temporarily alleviate economic pressure. The grim arithmetic reflected in the deficit figures does not automatically translate into military defeat or political collapse in the short term.

But it reveals something essential about the direction Russia is heading if the West maintains its pressure. The war costs Russia more than it yields, both economically and in human terms. The question is whether the West has the patience and cohesion necessary to allow the pressure to build until it reaches a decisive breaking point.

Putin’s deadly arithmetic is simple: spend more than the economy can produce, borrow at unsustainable rates, plunder reserves and regions, and rely on time and Western weariness. That is the gamble he made in 2022. The West must ensure that this gamble proves to be a losing one. The figures from June 2026 show that it is getting closer to that point. We must hold firm.

By Maxime Marquette, columnist