Russia Will Be Paying for Its War on Ukraine Long After It Ends

p8kfhpf49ynyhcjcsodux1gw_media_dl_1.png Finance Ministry, Bloomberg

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(Bloomberg) — Russia will be paying for its invasion of Ukraine for years to come even if the fighting ended tomorrow, as the government plugs a widening gap in the military budget with increasingly costly borrowing. 

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As US President Donald Trump pushes for a deal to end the war, the future bill for Moscow keeps growing. In one of the final bond auctions of the year, the government on Wednesday issued 108.9 billion rubles ($1.36 billion) in debt known as OFZ, taking the total for 2025 so far to 7.9 trillion rubles, sharply surpassing the previous record set in 2020 during the Covid-19 pandemic. 

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Back then, the central bank’s key rate was as low as 4.25%, while it reached a record 21% a year ago. Even after the Bank of Russia began cutting borrowing costs in June, to 16.5% now, money has remained extremely expensive for households, businesses and the state. 

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Moscow had little choice but to ramp up bond sales after more than half of its rainy-day reserves were depleted and the budget deficit widened amid a 30%-60% surge in military spending and slumping commodity revenues including from oil and gas.

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Russia’s military spending climbed to 7.3% of gross domestic product this year, with 2.2 percentage points of the outlay unrelated to the war in Ukraine, Defense Minister Andrey Belousov said Wednesday at a meeting with President Vladimir Putin. Based on the Economy Ministry’s GDP estimate for this year, total defense outlays exceed the original budget target, reaching about 15.8 trillion rubles including roughly 11 trillion rubles spent on the invasion. 

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While budget outlays on defense over the next three years are forecast to remain nearly flat, debt-servicing costs will keep climbing and outpace the cumulative increase in the military budget since the start of the war in 2022, Bloomberg calculations show.

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Debt-servicing costs now account for twice the share of total spending they did before the war and, in nominal terms, already exceed budget allocations for healthcare and education. Starting next year, they’ll surpass combined government spending on health and education, climbing to the fourth-largest item in the budget alongside national security. 

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If debt costs rise ahead of the budget plan, the government will have to cut back elsewhere to avoid widening the deficit, said Natalya Milchakova, lead analyst at Freedom Finance Global. Social spending will have to be protected “in any weather,” but funding for national projects and economic-support programs may be at risk, she said. 

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Debt-servicing expenditures are set to increase by almost 40% this year and more than 20% next year, according to the budget law. 

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That’s being driven both by rising debt levels and the increasing share of floating-rate bonds and new high-yield bond issues in the debt structure, said Andrei Melaschenko, an analyst at Renaissance Capital. The government was “too optimistic” about expected economic growth and revenue this year, he said, and shortfalls in both oil-and-gas and non-energy income now have to be covered with borrowing.