Russia’s federal budget deficit reached 6.46tn roubles by the end of July, forcing the Kremlin to rely increasingly on domestic banks to finance the cost of its war against Ukraine. The borrowing push is tightening liquidity, keeping interest rates high and placing further pressure on household incomes and living standards.
The figure, reported on 17 August 2026 by Forbes Russia, represents 2.6% of Russia’s gross domestic product, compared with an annual target of 3.8tn roubles, or 1.6% of GDP, set at the beginning of the year. The plan was revised in June, giving the finance ministry broad powers to increase borrowing through OFZ federal government bonds. Yet the ministry has already cancelled two OFZ auctions this summer, showing that it is not prepared to issue debt on any terms.
Big banks become the Kremlin’s main lender
Analysts expect the annual OFZ issuance programme to expand from its original 5.5tn roubles to between 6tn and 8tn roubles. The ministry is also expected to place greater emphasis on floating-rate bonds, known as OFZ-PK, in an attempt to attract buyers while borrowing costs remain high.
Demand, however, is already showing signs of strain. The government raised only 9.1bn roubles through OFZ sales in July, the lowest monthly amount since September 2022. The principal buyers remain Russia’s systemically important banks, whose holdings of government bonds have risen from 9tn roubles before the full-scale invasion to about 20tn roubles in summer 2026.
Between January 2024 and June 2026, those banks bought 7.5tn roubles of OFZ at auctions but resold only 2.6tn roubles on the secondary market. Roughly two-thirds of the bonds therefore remained on the balance sheets of the largest lenders. OFZ holdings accounted for 9% of bank assets in 2026, up from 6.9% in 2019.
Analysts do not currently regard the concentration as a direct threat to financial stability. But it is increasingly tying up liquidity that could otherwise support lending to businesses and the wider economy. The effect is particularly damaging in a market where companies already face expensive credit and weaker access to finance.
High rates make borrowing more costly
The pressure is not limited to the size of the deficit. Around 12tn roubles of the banks’ OFZ portfolios are being recorded at their value at maturity rather than at market value, allowing lenders to avoid recognising large paper losses while interest rates remain high.
Earlier-issued fixed-coupon bonds lose market value when yields rise. Selling them could force banks to record those losses, giving lenders an incentive to retain the securities and further reducing the funds available for new loans. Investors expect the greatest pressure from a larger supply of medium- and long-term bonds, while shorter maturities could receive some support if the Russian central bank eventually lowers its key interest rate.
Floating-rate bonds may help the ministry secure demand for large new issues, but they do not remove the interest-rate risk. Instead, they transfer more of it to the state. If the central bank continues to maintain a restrictive policy and borrowing rates stay high, the cost of servicing this debt will rise.
Inflation erodes promises on living standards
The consequences are already being felt beyond financial markets. Official inflation stood at 6% by summer 2026, while the rate perceived by the public was between 15% and 15.6%. To contain further price rises, the central bank has kept its key rate at 14%, making loans almost unaffordable for many households and businesses and reducing consumers’ real purchasing power.
That outcome sits uneasily with promises from the governing United Russia party to protect incomes, reduce poverty and maintain price stability. The Kremlin’s large-scale spending on the war against Ukraine is intensifying inflationary pressure, while the response to that pressure is making mortgages, business finance and other borrowing more expensive.
Including regional budgets, the deficit across Russia’s public finances is estimated at 8tn to 9tn roubles. As debt and interest payments consume a growing share of state revenue, less money will be available for economic development and social spending. With the domestic bond market unable to cover the entire funding gap, the finance ministry is likely to seek further revenue through tighter fiscal policy.
That could mean higher taxes, fewer tax concessions and increased charges, raising costs for businesses and ultimately feeding through into prices paid by consumers. The central question is whether Russia can continue financing its war through banks and expensive domestic debt without imposing a still heavier burden on households and the productive economy.
Should Russia prioritise reducing its budget deficit or continue funding military spending despite the pressure on banks, businesses and households?
