Funding Russia's Military Campaign
Under Western sanctions that restrict its access to global capital markets, Russia has been forced to increasingly rely on domestic financial institutions to fund its war in Ukraine. The country’s budget deficit for the first half of 2026 reached $77 billion, driven primarily by military spending. To cover this shortfall, Moscow is compelling state-owned banks to purchase federal loan bonds (OFZ). The Bank of Russia provides the liquidity for these acquisitions through monetary issuance, effectively masking a ballooning budget shortfall.
The Russian government obligates its state banks to acquire OFZs, with the central bank supplying the necessary funds. Russia’s Ministry of Finance has registered two new floating-rate OFZ issues: one worth $6.4 billion maturing in 2037 and another valued at $12.8 billion maturing in 2042. As of July 1, Russian banks held a total of $248.1 billion in government bonds, equivalent to roughly 9% of the banking sector’s assets. Since the beginning of the year, the state-bond portfolio held by these banks has grown by $6.5 billion.
Budget Deficit and Military Spending
The projected annual deficit stands at $105.1 billion, with additional war-related expenditures expected to exceed the budget plan by $51.3 billion to $64.1 billion. In June and July, the Russian Finance Ministry canceled at least three OFZ auctions after investors demanded higher yields.
Ukraine’s Foreign Intelligence Service stated: “Formally, this is an OFZ placement, but in reality it is using the banking system as a channel to create new money.”
They also emphasized that “in fact, the Kremlin is increasingly financing the war through monetary issuance rather than market funds.” These figures highlight the severe financial difficulties confronting Russia’s economy amid its wartime spending.
The situation regarding Russia’s war financing points to mounting pressure on the economy, with potential long-term consequences for its stability. The use of forced OFZ purchases reflects the scarcity of resources and the inability to attract investments through conventional means, given the growing budget deficit. This could heighten risks to Russia’s financial system and undermine its capacity to sustain military operations in Ukraine.
The escalating financial demands of Russia's military operations have led to a staggering budget deficit that reached 5.73 trillion rubles. This growing fiscal crisis underscores the challenges faced by the government as it struggles to balance military expenditures with overall economic stability. As Moscow increases pressure on state banks to absorb more debt, the implications for the nation's financial health are becoming increasingly critical.