KSE Institute: Russia's war financing costs and risks rise as buffers shrink

October 1, 2026 at 07:52 PM2 min

This digest was compiled by AI from multiple sources — links to the originals are below.

Russia can still finance its war in Ukraine, but its room for maneuver is narrowing as fiscal buffers deplete and borrowing costs climb, according to a new KSE Institute study. The federal budget deficit reached RUB 5.8 trillion in January–August 2026, 48% higher than a year earlier and 20% above the revised full-year target. Liquid National Wealth Fund assets have fallen by around 60% since February 2022.

Key Facts

The federal budget deficit reached RUB 5.8 trillion in January–August 2026, 48% higher than the same period of 2025.
Liquid National Wealth Fund assets have fallen by around 60% compared with February 2022.
Domestic bond issuance resumed in September 2026 only at considerably higher costs.
Banks' reliance on Central Bank of Russia refinancing has increased markedly amid a structural liquidity deficit.
The KSE Institute study warns that reported bank capital adequacy and asset quality may obscure emerging stress due to regulatory forbearance and state support.

Budget and Reserve Pressures

Russia's financing model has shifted since 2022, with the wartime corporate credit boom largely exhausted and the burden moving back onto federal and regional budgets. The federal budget deficit reached RUB 5.8 trillion in January–August 2026, 48% higher than the same period of 2025 and already 20% above the revised full-year target. Liquid National Wealth Fund assets have fallen by around 60% compared with February 2022. Domestic borrowing remains the most important source of financing, but bond issuance resumed in September only at considerably higher costs.

Banking System Strain

The banking system is under growing pressure from government financing needs, a structural liquidity deficit, and the legacy of rapid wartime credit expansion. Banks are carrying larger corporate loan books while absorbing more government debt, and their reliance on Central Bank of Russia refinancing has increased markedly. Reported capital adequacy, profitability, and asset-quality indicators remain relatively strong, but the study warns they may obscure emerging stress because of regulatory forbearance, provisioning and valuation practices, and state support.

Financing Options and Risks

Russia still retains substantial capacity to extend war financing, but the measures required are becoming increasingly costly and potentially destabilizing. The least disruptive path is continued market-based domestic borrowing on more attractive terms, backed by additional Central Bank of Russia liquidity. Fiscal adjustment or more coercive measures could extend financing further, but at growing economic, financial, social, and political costs. A sharp decline in global energy prices or a loss of confidence in the financial system could quickly destabilize the current fragile equilibrium.