Russia’s defence spending to raise inflation, fiscal risks

The 2025 draft budget recently outlined by Russia’s finance ministry shows that, rather than falling next year as initially planned, defence spending will rise by more than 20% to hit 6.2% of GDP. While personal income and corporate tax hikes will help to fund some of this, the overall fiscal stance looks set to remain far too loose. Alongside binding supply-side constraints this will keep inflation strong and with sovereign bond yields at their highest levels in decades the government’s debt servicing costs will continue to rise.