Putin’s Budget Indulges the Military Industrial Complex

What happened: Russia’s 2026–2028 draft budget raises revenues and reforms the budget rule to grow savings. Defense spending is slightly trimmed, but security allocations remain dominant and enjoy flexibility.

Why it matters: The budget reflects Putin’s priority on war financing and social stability. It strengthens Finance Minister Anton Siluanov and Prime Minister Mikhail Mishustin, protects military industrial interests, but squeezes the energy sector.

What happens next: Expect tighter tax enforcement, ongoing security spending, and more burdens on energy companies, which continue to serve as the stabilizer of last resort.

Last week, the Russian government released its draft budget for 2026–2028. The key headline was a 2% VAT increase (to 22%), tightening the simplified tax regime for small businesses, raising social insurance contributions for some sectors, and reforming the budget rule, which determines the price above which energy windfalls are saved rather than used to finance spending.

Although the defense line item was trimmed slightly, combined defense and security allocations remain dominant, with most of the details classified. Deficits will be in the range of 3-4tn rubles (about $35bn-$47bn), financed by borrowing and reserve drawdowns.

President Vladimir Putin retains two key priorities: financing the war in Ukraine and maintaining domestic social stability. The budget is a victory for Finance Minister Anton Siluanov, who oversees Russia’s sovereign wealth fund. He can claim that he is making state coffers more resilient to sanctions pressures and safeguarding Russia from a sustained decline in energy prices.

The budget rule forces the government to tighten its belt. Meanwhile, the VAT hike and reduction of small-business tax privileges capture more predictable revenues, broadening the non-oil base.

In our view, the budget also bolsters Prime Minister Mikhail Mishustin. He is not the author of fiscal orthodoxy but the technocrat who ensures that policy priorities are executed efficiently. A trained software engineer with a doctorate in economics, Mishustin is a former head of the Federal Tax Service, where he built his reputation as a master of data systems and compliance. These skills make the VAT increase, small-business tightening, and debt servicing plan credible.

Though the defense line item is trimmed on paper, security spending, including classified items, remains immense. This reflects the war’s political centrality.

Resources will continue to flow to Defense Minister Andrei Belousov, Putin’s former economic advisor, minister of economic development and first deputy prime minister. The president views Belousov as a loyal, disciplined financial manager tasked with extracting efficiency and innovation from the historically bloated and corrupt military-industrial complex.

The energy sector’s position is becoming less favorable. Oil and gas remain the backbone of federal revenues, so their strategic missions must compete with the imperatives of fiscal management. The new budget rule ensures that high prices will not deliver any upside to companies, in terms of lower taxes or more investment support.

Nevertheless, taxes can be raised and “voluntary” contributions to social projects demanded later, if necessary.

Igor Sechin, Aleksei Miller and Leonid Mikhleson still have some capacity to negotiate special terms for flagship projects that Putin regards as strategic (Vostok Oil, Power of Siberia 2, and Arctic LNG 2). However, their bargaining power is narrowing as the war, the military-industrial complex and social stability take on greater importance. Reduced eligibility for tax privileges, higher social payments and the VAT hike will increase costs across energy supply chains, making their already expensive mega-projects even costlier.

Despite projecting discipline, the budget constraints are not absolute. The government retains the ability to amend spending plans or suspend the budget rule as political calculations dictate. This flexibility benefits powerful constituencies such as the military, which can overspend if needed.

Conversely, it hurts the energy sector, which is left to shoulder the resulting fiscal shortfalls, as no other bloc can yield resources at the necessary scale. In effect, energy remains the stabilizer of last resort.