Putin’s cash crunch

Peter Doran is an adjunct senior fellow at the Foundation for Defense of Democracies.
It seems the Kremlin’s finance wizards are running out of rabbits to pull out of the hat.
The Russian government revealed this when it released its revised national budget for 2025, showing the spiraling costs of Russian President Vladimir Putin’s war on Ukraine. 
Now it’s up to Europe and the U.S. to exploit this and increase the economic cost for Russia by plugging sanctions loopholes. By doing so, they can accelerate an end to the war, possibly in Ukraine’s favor, or at a minimum, incentivize Putin to negotiate a serious peace settlement.
The devil of Russia’s problem is hidden in the details of the published national budget.
A close examination of Putin’s spending plans for next year shows that the Kremlin intends to spend an eye-popping $145 billion on defense out of its roughly $436 billion government expenditure. Totaling over 6.3 percent of Russia’s GDP — keep in mind, NATO’s benchmark is 2 percent — this marks Moscow’s highest level of military spending since the Cold War. 
And the bad news for Putin: His technocrats have actually been disguising the full cost of his Ukraine invasion.
Scattered throughout the annual budget are additional pay-outs related to the war, including the wages Moscow pays workers in Ukraine’s illegally occupied regions; health care for wounded soldiers; debris removal; infrastructure repair and undisclosed “classified” expenditures. When these outlays are added up, the real burden on Russia’s economy comes closer to an astonishing 10 percent of GDP. 
The simple truth is the Russian government doesn’t take in enough money to cover these war-related costs. The Kremlin must run a deficit — and it already ran around $34 billion in the red last year.
This presents the West with an opportunity.
While deficit spending is manageable for most governments, Russia is no normal country. Because of Western sanctions, Moscow can’t balance its financial books through international borrowing, and has to pay outrageous interest rates— as high as 16 percent on a 10-year bond — to domestic lenders instead. It’s a crippling expense.
Even more perilous, Putin’s technocrats have been emptying Russia’s “rainy day” National Wealth Fund (NWF) of its remaining cash.
Under normal conditions, Russia’s NWF has two purposes — to store excess tax revenue during good times and to hedge against low oil prices when things go bad. But recently, the Kremlin has been draining the fund to pay for its war. In 2021, its liquidity totalled $117 billion, whereas it sits at just $55 billion today.
And should the NWF ever run dry, Moscow will be forced to choose from a menu of bad options to stoke the financial furnaces of its war machine. Such options include higher taxes on Russia’s elite and middle class, heavier borrowing, printing worthless rubles and possibly making cuts to the social subsidies and welfare payments that help keep its population docile.
Already, the country’s Ministry of Finance is pursuing these options to a degree — just short of prompting a major public backlash. If it has to resort to heavier borrowing, higher taxation, ruble-printing and benefit cuts, it courts risks for the regime’s stability.
Let’s consider the subsidies Moscow currently pays to keep its restive regions quiet. The payouts are critical in places like Chechnya, where warlord Ramzan Kadyrov runs the territory as a de facto client state within Russia. Without cash from Moscow, Kadyrov has warned: “We won’t be able to last three months — not even a month.”
This is a vulnerability that Europe and the U.S. should really exploit. And the quickest way to do so is to lower the G7’s “oil price cap” on Russian crude exports. 
First proposed by the EU, and marketed as a tool to curtail Moscow’s earnings, the G7’s “price cap” actually grants Russia a major sanctions loophole. As it stands, so long as it sells oil under the cap of $65 per barrel, the Kremlin can earn as much revenue as it likes without penalties.
For example, just last month, when the market price for Brent briefly fell below $70 per barrel, Russia barely had to discount some of its crude. And on account of these licit sales (and illicit ones via embargo runners), money has poured into Moscow’s coffers.
Each month, Moscow collects around $9 billion in tax revenue from these sales, including around $1 billion from the EU. And every billion the Kremlin makes from energy sales represents a billion it doesn’t need to withdraw from the NWF to balance its budget, bolster regime support and pay for its war against Ukraine.
It’s time to tighten the financial screws on Russia by lowering the oil “cap” down to $30 per barrel — near Russia’s true production costs — and for both Europe and the U.S. to be tougher in enforcing sanctions on illicit oil buyers in China, India and Turkey.
This should be a top priority when European leaders sit down with the next U.S. administration. Targeting Putin’s financial weakness in this way will help Ukraine prevail.