Since its full-scale invasion of Ukraine in 2022, Russia's economy has shown a strange resilience. The initial shock of Western sanctions, predicted to cripple it, instead triggered a rapid reorganization by the Kremlin into a war machine. At the heart of this transformation lies a fundamental question: where is the money coming from?
The answer is a potent mix of "military Keynesianism," funded by targeted levies on key sectors, shrewd monetary policy, and the strategic depletion of national wealth. Russia's fiscal strategy has evolved from ad-hoc emergency measures to a more structural system designed to finance a protracted conflict.
1. Federal Taxes: From "Windfall" to "System"
In the war's initial phase, the Russian treasury coasted on a windfall from soaring energy prices. However, as price caps took hold and European markets were lost, the Kremlin needed more reliable revenue streams.
Phase one of its strategy was "temporary" taxation. In 2023, the government imposed an "excess profits tax" (a windfall tax) on large corporations, primarily commodity exporters and banks, raising some 300 billion rubles in a one-off payment. It also tweaked the formula for the Mineral Extraction Tax (MET), tying it more closely to global benchmarks like Brent crude rather than the discounted Urals price, thereby squeezing more revenue from oil firms.
The result was immediate. Non-oil-and-gas revenues grew significantly, even as energy income fluctuated. This supported a record 2024 federal budget of 36.6 trillion rubles (approx. $400 billion), of which nearly a third (some 10.8 trillion rubles) was officially earmarked for defense.
Recognizing the limits of temporary measures, the Kremlin is now enacting its largest tax overhaul since the early 2000s, set to take effect in 2025. The plan raises the corporate income tax from 20% to 25% and introduces a much steeper progressive personal income-tax system, with the top bracket jumping from 15% to 22%. This signals a major shift: from reliance on volatile energy receipts to more stable taxes drawn from the domestic economy. The aim is to create a predictable fiscal base for sustained high military spending, independent of energy markets.
2. The Regional Role: The Squeezed Middle
Unlike the federal government, Russia's regions and republics have very limited autonomy on tax policy. Their main revenue streams, such as shares of corporate and personal income tax, are controlled by Moscow.
During the conflict, rather than emerging as independent fiscal players, the regions have served as channels for federal policy and absorbers of fiscal stress. They have been tasked with providing sign-on bonuses for contract soldiers, supporting the families of fallen troops, and managing damaged infrastructure (especially in border regions).
As a result, instead of raising their own taxes (which could stoke local discontent), the regions have become even more dependent on fiscal transfers from the federal center. The federal government redistributes the money it squeezes from the energy and corporate sectors back to the regions through targeted subsidies and grants. This model reinforces central control but leaves regions financially vulnerable and entirely beholden to the Kremlin's priorities—of which defense is number one.
3. Monetary Policy: The Inflation Firewall
The role of the Central Bank of Russia (CBR), led by Elvira Nabiullina, has not been to *fund* the war directly, but to *manage its economic consequences*.
As massive state spending—on munitions, soldier salaries, and reconstruction—is injected into the economy, inflation inevitably follows. The labor market, already tight from mobilization and emigration, has become severely strained, pushing up wages and prices.
The CBR's response has been aggressively hawkish. In the second half of 2023, it hiked its key interest rate from 7.5% all the way to 16%, and has held it there. The purpose of this is to choke off credit, encourage saving over consumption, and try to anchor the ruble.
Simultaneously, the government re-imposed strict capital controls, forcing major exporters to convert most of their foreign-currency earnings into rubles. Together, these measures (monetary tightening and capital controls) create a high-pressure macroeconomic environment: the fiscal tap is wide open to support the military, while the monetary brake is slammed on to prevent the economy from overheating. This is devastating for private investment in non-military sectors, but it has successfully prevented hyperinflation and a currency collapse.
4. Other Fees: The Blurring Line
Beyond formal taxes, the Kremlin has increasingly resorted to informal levies and "voluntary" contributions. These measures blur the line between the state's finances and corporate coffers.
Most notable has been the pressure on large businesses—especially those less politically favored or seen as profiting excessively from the war—to "donate" to various "patriotic" projects or off-budget funds.
Furthermore, the government introduced flexible export duties tied to the ruble's exchange rate. When the ruble weakens, the export tariff on a wide range of goods, from grain to fertilizer, rises, allowing the state to capture a portion of the windfall profits from depreciation. These tools give the treasury flexibility to extract cash quickly as economic conditions change.
5. The Outlook: A Costly Wager
Thus far, Russia's military spending—now at roughly 6-7% of GDP and a third of the federal budget—has been largely financed. The model is sustainable in the short term, thanks to relatively high oil prices, a large (though depleting) National Wealth Fund (NWF), and a captive domestic bond market (OFZ) dominated by state-owned banks.
This sustainability, however, comes at a steep price. The Russian economy is undergoing a profound structural deformation. Labor and capital are being siphoned from productive civilian sectors (like tech and consumer goods) into the military-industrial complex. High interest rates are strangling non-defense growth. And reliance on the NWF means that savings intended for the future (in infrastructure and education) are being spent on present consumption.
The Kremlin's gamble is that it can achieve a decisive outcome on the battlefield before domestic political tolerance fractures or its fiscal buffers are exhausted. Russia's wartime finance machine, while currently functional, is purchasing present military output at the expense of its long-term economic health.