KSE Institute presents a new study, “Assessing Russia’s War-Financing Capacity,” examining Russia’s ability to sustain war financing as the federal budget deficit widens, fiscal buffers are depleted, and pressures on the financial system increase. The report assesses Russia’s financing needs, the remaining capacity of its principal financing channels — the National Wealth Fund (NWF), Treasury cash, and domestic borrowing — as well as the banking system’s ability to support the war economy and government borrowing.

Russia has, so far, been able to finance its war against Ukraine without triggering acute fiscal or financial instability. But doing so is becoming increasingly difficult and costly as key financing channels become less dependable. Russia’s ability to pay for the war is not immediately threatened, but its room for maneuver is limited. An adverse shock, such as a drop in global energy prices or an erosion of confidence in the financial system, could quickly destabilize the current fragile equilibrium.

Russia’s approach to financing the war has shifted significantly since 2022 as the availability and attractiveness of different channels have changed. During the first years of the full-scale war, the government relied on a combination of NWF withdrawals and domestic borrowing, while shifting part of the war’s costs off budget through an exceptional expansion of corporate credit. But the wartime credit boom has largely run its course and the financing burden has increasingly been shifted back onto federal and regional budgets, enabled by domestic borrowing and substantial Central Bank of Russia (CBR) liquidity provision. Two months of disruptions to bond issuance—which resumed in September at considerably higher costs for the government—brought wider attention to the long-standing challenges posed by the war, and the growing threat of fiscal dominance.

Traditional budget-financing channels remain available, but each is becoming increasingly constrained. The federal budget deficit reached RUB 5.8 trillion in January–August 2026, 48% higher than in the same period of 2025 and already 20% above the revised full-year target. At the same time, liquid NWF assets have fallen by around 60% compared with February 2022. Domestic borrowing therefore remains the most important source of financing, but borrowing costs are high and banks’ capacity to absorb continued large-scale government debt issuance is becoming an increasingly important constraint.

The banking system is also facing mounting pressure from elevated government financing needs, a structural liquidity deficit, and the legacy of rapid wartime credit expansion. Banks are carrying a substantially larger corporate loan book while also being called upon to absorb government debt, and their reliance on CBR refinancing has increased markedly. Reported capital adequacy, profitability, and asset-quality indicators remain relatively strong, but they are backward-looking and likely obscure emerging stress due to regulatory forbearance, provisioning and valuation practices, and state support. A deterioration in the banking system could therefore ultimately create additional costs for the state.

Russia retains substantial capacity to extend war financing, but doing so will require increasingly costly and potentially destabilizing measures. The least disruptive path is to sustain market-based domestic borrowing through more attractive government bond terms and additional CBR liquidity provision. The September resumption of large-scale domestic borrowing extends the financing horizon, but the unusually favorable terms and substantial CBR liquidity support required for the particularly large September 2 placement underscore the growing cost of this channel. Fiscal adjustment or more coercive measures could allow Russia to sustain large deficits for considerably longer, but at growing economic, financial, social, and political costs. Continued disruption in global energy markets may delay the emergence of financing constraints, but it does not resolve Russia’s underlying structural problems.

The authors argue that Ukraine’s allies should seek to increase Russia’s financing needs, constrain the resources available to meet them, and raise the economic and financial costs of war financing. Priorities include reducing energy revenues, preventing foreign participation in the sovereign debt market, and targeting banks that play a disproportionate role in absorbing government debt. Sanctions should also exploit vulnerabilities in bank balance sheets and increase the macroeconomic costs of CBR liquidity support, while Russian reserves must remain immobilized and the liquidation of sovereign gold constrained. Remaining foreign banks should also be required to exit Russia. Finally, additional measures should seek to facilitate legitimate private capital outflows and challenge confidence in the stability of Russia’s increasingly strained and interdependent state-financing system.