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For the first time since the full-scale invasion of Ukraine more than three years ago, Russia announced plans to slightly reduce its military budget in 2025, revealing the limits of the Kremlin's ability to continue funding the war amid rising economic pressures, according to the New York Times.

According to the budget draft submitted to the Russian parliament yesterday (Monday), national defense expenditures will decrease to about $156 billion from over $163 billion this year, with a larger drop when accounting for expected inflation of 7%.

Russian Economic Challenges

This decline reflects the economic challenges facing Russia, including a drop in oil and gas revenues from $135 billion in 2024 to $100 billion this year due to Western sanctions and falling global oil prices.

President Vladimir Putin seeks to demonstrate Russia's ability to withstand Kyiv's resistance to achieve his goal of complete occupation of the Ukrainian regions he annexed in 2022.

In contrast, Ukraine hopes that Russia's limited progress and escalating economic pressures will convince Putin that continuing the fight is futile, but he has indicated in recent months his determination to continue the war until his broad conditions for peace are met, despite this contradicting the Russian economic reality.

$160 Billion Military Spending

Despite the slight slowdown, Russian military spending remains four times the levels of 2021, and at over $160 billion this year, it is the highest level since the collapse of the Soviet Union, which is three times Ukraine's budget, which is facing a budget crisis and needs $20 billion to cover its expenses next year.

Increased Economic Burdens

If Russia decides to expand military spending again, it will have to increase the economic burdens on its citizens by raising taxes further or borrowing domestically, which would hinder its efforts to finance the war without affecting the populace and preventing any opposition.

High oil prices, supported by the war, have helped increase military spending, but they have fallen over the past 15 months due to global recession fears, with Moscow selling its oil at a discount due to Western sanctions. As a result, oil and gas revenues are expected to drop from $135 billion in 2024 to $100 billion this year.

Domestically, Russia experienced economic growth of over 4% in 2023-2024 thanks to military-industrial spending, but the cost has been high inflation, prompting the central bank to raise interest rates to 21%, which remains high at 17%, stalling the economy and reducing growth to 1% this year.

Additional Taxes

To finance the growing deficit, the government is increasing value-added tax, gambling taxes, and small business taxes, while cutting other expenditures, including the development of occupied Ukrainian regions.