Stalled Domestic Borrowing Poses Threat to Budget Financing; Energy Windfall Fades as Oil Prices Moderate

KSE Institute has published the July edition of its Russia Chartbook, “Stalled Domestic Borrowing Poses Threat to Budget Financing; Energy Windfall Fades as Oil Prices Moderate.” The latest data show that Russia’s ability to finance its budget deficit is increasingly constrained. At the same time, oil export earnings fell sharply in June as Russian export prices declined.

OFZ issuance fell to its lowest level since January 2026 in June, driven by repeated auction cancellations and postponements. Fearing the need to borrow on excessively costly terms, the Ministry of Finance has suspended OFZ auctions for now. The last such suspension occurred in 2020, at the height of the pandemic.

This reflects severe instability in Russia’s domestic financial market. Ten-year government bond yields have surged to their highest levels, while the Russian stock market has fallen to its lowest point since the beginning of the full-scale invasion. Federal domestic debt has doubled since February 2022, reaching 32.7 trillion rubles, or roughly 15% of GDP, as of June 2026. Russia’s problem, however, is one of cash flows rather than the overall debt stock.

A small surplus in June narrowed the cumulative federal budget deficit to 5.7 trillion rubles in January-June. However, this does not signal a fundamental fiscal improvement. The surplus was largely driven by a spike in non-oil and gas revenues, which rose by 33% compared to May and by the same amount compared to the January-April 2026 average. Spending in June, meanwhile, was 20% below the Q1 average.

The underlying structural fiscal challenges remain. Expenditures in January-June were still 16% higher year-over-year, while oil and gas revenues were 23% lower. Higher damper payments and a stronger ruble than assumed in the budget plan have continued to weigh on oil and gas revenues. The Ministry of Finance recently raised its annual deficit target by 1 trillion rubles, reflecting a clear inability to consolidate the budget.

With OFZ issuance falling short of financing needs, the government has been forced to rely heavily on its Treasury accounts. In January-May, net OFZ issuance and National Wealth Fund withdrawals fell 3.4 trillion rubles, or $43 billion, short of the budget deficit. Between December and June, the average cash balance in Treasury accounts declined by 3.6 trillion rubles. Without meaningful fiscal improvements, Russia will need to increase domestic borrowing and its use of the NWF. 

Russia’s oil export earnings fell sharply to $15.8 billion in June, 23% below the March-May average. The decline was primarily driven by a drop in the Russian oil export price from $89.1 per barrel in May to $65.3 in June. At the same time, the discount on Russian oil widened slightly from a revised $18.2 to $19.9 per barrel.

Despite the decline in earnings, total Russian oil export volumes rose to 7.7 million barrels per day, the highest level since March 2024. Ukrainian drone strikes on refineries forced a shift from petroleum product exports to crude oil. Crude exports increased from 5.2 million barrels per day in May to 5.8 million in June, while petroleum product exports declined from 2.2 million to 1.9 million barrels per day.

Together, these shifts in export volumes and lower prices weighed on Russia’s oil export earnings in June and early July. However, renewed escalation in the Middle East is pushing global oil prices higher again and will provide another boost to Russia’s oil export revenues.