Recent coverage of the Russian economy continues to obsess over energy revenues. Amid a snowballing energy shock larger than any in modern history and Ukraine’s striking success in hammering Russia’s Baltic exports with long-range strikes, many assume that Brent prices trending above $ 110 are a clear boon for the budget. According to Bloomberg, officials have backed off deeper budget cuts. This decision conveniently coincides with reports that the Kremlin quietly asked big business to help fund the war — a request it has since flatly denied.
Opting to spend more while 40% of crude oil export capacity sits offline, Asia’s natural gas demand faces crushing pressure from nuclear restarts, and oil demand destruction reaches historic proportions is quite the flex. It also reveals where policy priorities truly lie, especially as Ukraine has recently seized the military initiative.
In typically incoherent fashion, Duma Speaker Vyacheslav Volodin is demanding the impossible from MinStroy and the construction sector. He wants them to solve the labor shortage without relying on migrant workers, citing data that migrants make up just 13−15% of the sector’s workforce. Whether or not that figure is accurate (which seems unlikely), it highlights a useful wrinkle in discussions about the benefits of higher energy revenues.
Officially, the planned VAT tax hike is expected to add about 1% to inflation for the year, pushing it closer to the Bank of Russia’s 4.5−5.5% target. Inflation is currently tracking just shy of 6% on an annualized basis. That relatively contained figure is only believable because of a sharp slowdown in economic activity that resembled a recession in the early months of this year.
If the Kremlin decides to hold spending levels steady or pursue only a watered-down version of sequestration, that additional spending will fuel further inflation. Since 2024, the Russian economy has already exhausted whatever slack capacity or ability to expand productive potential it had in 2023. Finance Minister Anton Siluanov is still reportedly reviewing discretionary spending with an eye toward 10% cuts — a near-annual ritual for him. But if he backs off those cuts thanks to fresh oil revenues, he’ll face a different problem: a strengthening ruble. While a stronger ruble might ease inflation by making imports cheaper, it would hurt a wide range of domestic businesses, squeezing earnings, triggering layoffs, and complicating efforts to manage the flood of Chinese goods through tariffs and other indirect measures.
Volodin’s call to avoid migrant labor is, in simple terms, a classic expression of Kremlin «cakeism» — the expectation of miracle outcomes without real trade-offs. Officials are expected to deliver impossible results, downplay economic difficulties for as long as possible, and then reframe the pain as a healthy «cooling» or necessary correction to wartime imbalances.
Demand for investment goods — the machinery, materials, and equipment needed to build factories and modernize facilities — has now fallen below 2019 levels. That downward trend will only accelerate if the ruble continues to strengthen. For Russian businesses, the biggest cost pressures are no longer imports but labor, energy, utilities, and other domestically regulated inputs heavily distorted by the war.
The notion that Ukrainian strikes on Russian oil export infrastructure are somehow self-defeating because they raise global oil prices misses three key points. First, the reduction in export capacity increases the cost for Russian producers to move crude to market, significantly squeezing their margins and offsetting much of the benefit from higher headline prices (especially now that Gulf events have eliminated discounts on Russian crude). Second, redirecting exports is far from frictionless and places heavy strain on existing infrastructure. Before COVID, Rosneft already struggled to stretch pipeline capacity when shifting volumes from Europe to China, running into quality control issues and complications related to sulfur content. Third, renewed strikes on refineries compound these constraints by damaging Russia’s ability to produce the fuel it needs domestically and putting more crude production at risk. If enough refining capacity is taken offline, crude output will eventually have to fall if producers can’t export it. Since the budget taxes revenues at the point of extraction, physical bottlenecks will eventually threaten budget revenues regardless of oil prices.
In light of the budget debate, consider this dynamic in an economy already tipping into recession: Small businesses account for roughly 20% (or slightly more) of GDP — more than oil and gas, which typically contribute about 16%. That same 20% underpins as much as 40% of total employment. Opora Rossii’s latest small business sentiment survey delivered stark results: 95% of respondents said conditions had worsened, over 75% reported greater complications, and 45% either lost money or made no profit in 2025. On top of this, Mishustin’s recent effort to lower the threshold for certain taxes is pushing more of these businesses into the shadows.
Now imagine the impact on them if there is any fiscal pullback. And imagine the impact if there isn’t — if higher-than-expected government spending drives inflation even higher in the second half of the year amid a sustained commodity price shock.
There is a somewhat deluded belief that major exporters of energy or commodities are somehow immune to the damaging effects of rapid price increases simply because they «have enough at home.» This view underplays the deep interconnectedness of value chains, refining, fertilizer production, and much else. It also ignores that the GDP impact of a price shock is often greater in commodity-heavy economies like Russia. Domestic consumers must still compete with foreign buyers on price, and if the government intervenes by banning or restricting exports, it robs companies of profits while — as Volodin’s theatrics demonstrate — the regime continues policies that raise the cost of living even as it pretends to care about it.
Money is not the real constraint facing the Russian state in its war on Ukraine or its support for Iran. The true constraints are inflation and the ability to mobilize physical resources — manpower, goods, weapons, and ammunition. Nothing in the last three weeks has changed that brutal calculus for those in Moscow. Russia has always struggled with inflation during commodity price booms. In the current environment, that pressure will only drive interest rates higher or decimate domestic businesses that need a weaker ruble to survive.
