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

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.Author of the article:You can save this article by registering for free here. Or sign-in if you have an account.(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. Subscribe now to read the latest news in your city and across Canada.Subscribe now to read the latest news in your city and across Canada.Create an account or sign in to continue with your reading experience.Create an account or sign in to continue with your reading experience.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. 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. Get the latest headlines, breaking news and columns.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Top Stories will soon be in your inbox.We encountered an issue signing you up. Please try againInterested in more newsletters? Browse here.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.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. 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.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. 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. Debt-servicing expenditures are set to increase by almost 40% this year and more than 20% next year, according to the budget law. 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. Russia was forced to more than double its bond sales target for the last quarter to 3.8 trillion rubles from 1.5 trillion, primarily in long-dated bonds with maturities over 10 years. At some auctions, fixed-rate OFZs were sold with a yield premium of up to 20 basis points over the secondary market, according to the Bank of Russia. In early November, the ministry returned to issuing floating-rate bonds to meet large borrowing volumes and, for the first time in history, placed sovereign bonds denominated in Chinese yuan. The list of risks facing the budget in coming years is long. It includes weaker-than-expected revenue due to lower oil prices, a stronger ruble and growth falling short of forecasts as the economy slows, as well as higher spending linked to military operations. A slowdown or pause in the Bank of Russia’s easing cycle is also possible, as policymakers remain uncertain whether inflation will move sustainably toward the 4% target next year. That would add further pressure, given that most of Russia’s debt is domestic, with roughly half tied to floating-rate bonds. The budget assumes a ruble rate of 92 per dollar and Urals oil at $59 in 2026 — levels that now appear highly optimistic, according to Sergey Konygin, chief economist at Sinara Bank. Revenue shortfalls could push the deficit to 5.2 trillion rubles, versus the Finance Ministry’s forecast of 3.6 trillion, he said. If the central bank keeps its key interest rate elevated for longer and oil and gas revenues decline, Russia faces a stark choice: raise taxes, cut other spending, or increase borrowing, Konygin added. While Russia’s debt burden may rise faster than the government plans, it’s still one of the lowest in the world, International Monetary Fund data shows. Debt-to-GDP ratio is expected to remain below 20% in the coming three years, while servicing costs of 9% of the budget and less than 2% of national income are regarded as comfortable thresholds by many economists. “There is still a lot of room to increase public debt,” said Alexander Dzhioev, strategist at Alfa-Capital. Still, “debt financing is a temporary but not a systemic solution,” he said. It doesn’t solve the long-term problem of filling the budget and leads to rising interest payments and reduced fiscal flexibility over time. A government order approved this week adopted a different tack, though. It endorsed a forecast showing debt-to-GDP exceeding 20% starting in 2027 and climbing to nearly 70% by 2042, while Russia’s reserve fund is projected to shrink to just 1% of GDP from the current 6%. While economists in Russia are divided on whether such a trajectory is financially sustainable, the more immediate challenge for the government is the rising cost of servicing its debt. However the war ultimately is brought to an end, high interest payments are already locked into future budgets and, unlike military outlays, they can’t be cut.Postmedia is committed to maintaining a lively but civil forum for discussion. Please keep comments relevant and respectful. Comments may take up to an hour to appear on the site. 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