Russia’s growing reliance on domestic borrowing to finance its war against Ukraine is placing increasing pressure on government finances. In an article published by bne IntelliNews on 1 October 2026, Yuliia Pavytska, Head of the Sanctions Hub of Excellence at the KSE Institute, examines how rising debt servicing costs, limited access to international capital markets and growing financial constraints are affecting Russia’s ability to sustain military spending.
According to the article, Russia’s debt servicing costs are projected to reach 9.1% of federal tax revenue in 2026, compared with 3.8% in 2021. Although Russia’s government debt remains relatively low at approximately 18.3% of GDP, the increasing cost of borrowing presents a significant challenge for the country’s wartime economy.
Russia’s Growing Dependence on Domestic Borrowing
Russia has increasingly relied on domestic government bonds to finance its widening federal budget deficit. International sanctions and restricted access to foreign capital markets have made domestic banks particularly important purchasers of Russian government debt.
According to KSE Institute figures cited by bne IntelliNews, domestic borrowing accounted for approximately 85% of Russia’s deficit financing since the beginning of 2025.
However, the government’s ability to raise additional funds is becoming more constrained. Russian banks face growing liquidity pressures, while investors demand higher returns to purchase government bonds.
Following weak demand during the summer, Russia’s Finance Ministry resumed substantial borrowing in September by offering more attractive terms to investors.
Pavytska explained that these conditions increase the government’s future financing burden:
“In other words, they were forced to accept less favourable borrowing terms that will cost them more.”
The growing dependence on expensive domestic financing illustrates how Russia’s relatively low public debt does not necessarily translate into sustainable borrowing conditions.
Rising Debt Costs and Russia’s War Economy
The increasing cost of government borrowing creates additional pressure on Russia’s federal budget.
As more revenue is allocated to interest payments, the government faces difficult choices between military expenditure, civilian spending and additional borrowing.
Russia’s financial position is further complicated by shrinking fiscal reserves and the banking sector’s growing exposure to government debt.
A September 2026 KSE Institute study on Russia’s war-financing capacity highlights how the government increasingly depends on domestic borrowing, Treasury resources and central bank liquidity support.
The study concludes that Russia retains substantial capacity to finance the war, but maintaining this financing is becoming more expensive and potentially destabilising.
Pavytska also identifies higher taxation as a possible response if existing financing options become insufficient.
Such measures could transfer a greater share of the war’s economic costs to Russian households and businesses.
Sanctions and the Sustainability of Russia’s War Financing
The financial pressures described by Pavytska demonstrate how sanctions, borrowing costs and domestic fiscal policy interact in shaping Russia’s economic outlook.
Restrictions on international financing have narrowed the government’s borrowing options, while elevated domestic interest rates increase the cost of issuing additional debt.
Nevertheless, growing financial pressure does not necessarily indicate an imminent inability to finance military operations.
The KSE Institute’s assessment emphasises that Russia can continue funding the war, although its fiscal flexibility is increasingly limited.
The distinction between maintaining existing military expenditure and substantially expanding military capabilities is particularly important.
Pavytska’s analysis suggests that Russia may be able to sustain its current military commitments while facing increasing constraints on additional spending.
These developments underline the importance of monitoring government borrowing, banking sector liquidity, energy revenues and fiscal reserves when assessing the longer-term economic impact of sanctions.
Read the original article: Russia’s debt service bill climbs to 9% of tax revenue as the war runs on borrowed money — bne IntelliNews.
Further Reading: Russia’s Economy and Sanctions
For additional research on Russia’s fiscal position, financial vulnerabilities and the economic consequences of sanctions, explore the resources available through the Sanctions on Russia research portal. The Sanctions Timeline provides an overview of Western sanctions and Russian countermeasures, while the Evidence Base brings together research publications examining sanctions effectiveness and Russia’s economic adjustment.
For related expert commentary, read Torbjörn Becker: War Financing Is Not Economic Strength, which examines the structural pressures affecting Russia’s wartime economy. Additional expert interviews and international media coverage are available through Media Highlights.
For a broader assessment of Russia’s economic outlook, read Russia’s Economy Reaches a Critical Stage, New Report Finds, published by the FREE Network. The article examines findings from Endgame: The State of the Russian Economy, a joint report by the Stockholm Institute of Transition Economics (SITE) and the Kiel Institute for the World Economy. It explores Russia’s shrinking fiscal reserves, slowing economic growth, mounting financial pressures and growing dependence on China, providing additional context for understanding the long-term sustainability of Russia’s war economy.
