In the last week, the Bank of Russia has delivered a blow to those hoping for further rate cuts and an investment boom. According to the Bank, demand grew in Q3 without a comparable expansion on the supply side, pushing the economy back toward the “overheating” that Nabiullina has been wrestling with since 2023. The news comes as MinEkonomiki forecasts that annual industrial production will decline by 0.2%, down from its previous forecast of 0.6% growth—what would be the first annual contraction in five years. The Bank of Russia’s official GDP forecast now sits at 0.5−1% growth, with the lower bound cut toward 0%. That should be a massive red flag.
If the economy is approaching overheated levels while industrial production is no longer growing, the state’s massive role in allocating resources makes the link between the composition of state spending, the size of budget deficits, and inflation increasingly mechanical. The regime has never truly avoided the distributional consequences of the war, but it is now poised to make the pain explicit for most households. Before accounting for inflation, the 2027 budget will cut social outlays by 15%, and MinFin’s planning assumptions will hold spending at those lower levels through 2030. The underlying principle of this new three-year budget cycle is to keep spending at 2026 levels—squeezing everything that is not the military to keep the war funded, while directing a growing share of revenues toward debt service at the high rates at which the state borrows. The social-spending cuts will weigh on consumption next year, on top of the pressure they place on those dependent on those benefits.
These cuts reflect a broad consensus that the private sector will not provide additional investment. According to the Russian Union of Industrialists and Entrepreneurs, companies are slowly bleeding working capital because of high interest rates, which will eventually lead to declining investment, then declining orders, then cuts to working hours, wage arrears, and ultimately layoffs. Even the Duma is apparently considering cutting its staff by 15%. Under these conditions, it logically follows that if MinFin holds spending constant at 2026 levels but must reduce social spending and capital investment, it is indirectly reducing some of the tax revenue it can collect. This is a cycle that cannot end as long as military spending continues to drive inflation this high in an economy whose production is not expanding and whose productivity is not growing. There will inevitably be more cuts absent significant inflation relief—or something the regime fears more: a large volume of layoffs.
In these conditions, MinFin’s plan to move frozen funded-pension assets into a long-term savings program managed by VEB is suspect. On paper, no one loses anything. These transfers amount to 6.6 trillion rubles, nearly 3 trillion rubles of which come from the Social Fund but are managed by VEB, with the remainder held by 24 non-state pension funds. By design, these savings programs convert pension assets into deposits with the Bank of Russia—providing additional guarantees—but the program is run by VEB, which, legally speaking, is not accountable to the Bank of Russia because it is not a commercial bank.
MinFin is trying to save a few kopeks by moving administrative costs off the Social Fund’s balance sheet, while giving Igor Shuvalov, VEB’s chair, a new pool of money to support lending for “technological” projects. It is a way of creating capital for lending to regime priorities out of nothing, while offering enough protection to affected pensioners to make the arrangement politically palatable. The transfer includes only the funded components of pension plans accumulated from 2002 to 2013 by people born in 1967 or later; 6.6 trillion rubles is significant, but not earth-shattering. Still, it reflects officialdom’s desperate search for money under rocks to keep rents flowing through the system. Whoever receives this funding will likely be “productive” in the strictest sense, but probably without the broader catalytic effects that private-sector-led innovation has shown it can bring to Russia’s civilian economy.
Rents clearly still exist in copious quantities for those able to access state resources. But maintaining those rents depends on future growth—growth that is being squeezed from every direction. If your business does not serve the military-industrial complex, you are increasingly uncertain about its viability, the stability of orders, the costs you can absorb, and the pricing power you retain. The viability of businesses writ large is hostage to the scale of deficit spending MinFin is willing to sustain in order to generate orders and circulate cash. But the larger those deficits, the worse inflation becomes—and the harder it becomes to access working capital.
Adding to the stress ahead, the Democratic Party’s overwhelming victory in the US midterms is having the worst possible effect on the Kremlin’s market expectations. On the one hand, Democratic majorities in the House and Senate are likely to constrain the Trump administration’s funding for further military action in the Middle East, or at least impose greater impediments on its freedom of action; oil prices have fallen back below $ 100 a barrel. On the other hand, those same majorities are likely to pressure the White House to maintain support for Ukraine and to support strikes on Russian refineries—strikes that have already intensified. Global diesel and gasoline markets remain significantly tighter than crude oil markets, but Russia’s budget moves with the price of crude oil, not fuel.
In this light, it is unsurprising that Finance Minister Anton Siluanov acquiesced to Igor Shuvalov’s long-standing request for a new pool of state money to lend and invest. It is the closest thing to money for nothing available amid all this pressure. It seems likely that much of that money will also end up being for nothing, given the productivity of the defense sector and many “technological” projects.
