The Kremlin Is Racking Up Record Debt Amid the War — How Much Will the New Borrowing Cost?
18 August 04:17
The yield on Russia’s 10-year government bonds rose to 16.07% per annum on August 17, increasing by 0.18 percentage points in a single trading session. This is according to the latest data from Trading Economics, as reported by "Komersant Ukrainian"
At the same time, the RGBI Russian government bond index fell for the third consecutive trading day, dropping to 113.27 points. This level marked the lowest in nearly a month, according to The Moscow Times.
A decline in OFZ prices means an increase in their yields. Investors are willing to lend to the Russian government only if they receive a higher premium, as they anticipate high inflation, a continued budget deficit, and significant new borrowing.
What a 16% yield actually means
A 16% yield does not mean that Russia has suddenly started paying that rate on its entire accumulated national debt. Payments on previously issued fixed-coupon bonds remain unchanged.
However, each new issuance of OFZs and the refinancing of old obligations becomes more expensive for the Russian budget. To raise funds, the Russian Ministry of Finance has to offer investors a yield close to market rates.
According to Trading Economics, yields on Russian bonds are as follows:
- 10-year bonds — 16.07%;
- 20-year bonds — 16.27%;
- 7-year bonds — 15.90%;
- five-year bonds — 15.67%;
- three-year bonds — 15.14%.
Thus, high borrowing costs may be locked into Russia’s budget for many years.
The deficit has already exceeded the full-year target
According to preliminary data from the Russian Ministry of Finance, the federal budget deficit for January–July 2026 reached 6.455 trillion rubles. Expenditures totaled 28.567 trillion rubles, while revenues amounted to 22.112 trillion rubles.
According to Interfax, the official target projected an annual deficit of 3.786 trillion rubles. Thus, in just seven months, the actual budget shortfall has already exceeded the full-year target by approximately 2.67 trillion rubles, or 70%.
Federal budget expenditures increased by 14.5% compared to the same period last year. Revenues rose by only 8.8%, while oil and gas revenues fell by 16.8%.
The Russian Ministry of Finance attributes part of the deficit to advance funding of government contracts. However, even in July, the budget deficit increased by approximately 724 billion rubles compared to the figure for the first half of the year.
The fuel crisis has hit the bond market
The fuel crisis has created new pressure on the Russian debt market. According to Reuters, at least ten Russian regions have once again imposed restrictions on the sale of gasoline and diesel fuel.
Following new drone strikes on Russian oil refineries, Moscow was forced to restrict exports, relax fuel quality standards, and increase imports of petroleum products.
Since early August, gasoline sales volumes on the St. Petersburg Commodity and Raw Materials Exchange have fallen by an average of 20%. Russia has even begun importing gasoline from India.
Rising fuel prices are already affecting logistics. According to Reuters, Russian transportation companies’ costs have risen by 4.5–5.5%, and on some routes, freight rates have jumped even more sharply.
This creates the risk of a new surge in inflation, as higher shipping costs are gradually being factored into the prices of food, industrial goods, and services.
The Central Bank of the Russian Federation is in no hurry to lower its key rate
The Russian Central Bank’s key rate currently stands at 14%. The yield on 10-year bonds exceeds it by more than two percentage points.
In its July decision, the Bank of Russia directly linked the need for a slower rate cut to rising fuel prices and expansionary fiscal policy. The regulator expects inflation to reach 6–7% by the end of 2026.
For the Russian Ministry of Finance, this presents a difficult situation. Lowering the rate could make government borrowing cheaper, but rising inflation is forcing the Central Bank to maintain a tight monetary policy.
Military spending will have to be financed through borrowing
Russia’s 2026 budget allocated approximately 12.9 trillion rubles for defense. However, according to an estimate cited by The Moscow Times, actual war expenditures could reach 17–18 trillion rubles.
The Russian government plans to cover at least part of the additional funding needs by issuing new bonds. In June, the Russian parliament even authorized the government to increase spending and borrowing without a lengthy public budget review process.
The more bonds enter the market, the higher the yields buyers may demand. This creates a vicious cycle: the war increases the deficit, the deficit forces the government to take on more debt, and large-scale borrowing makes servicing that debt more expensive.
Payments on government debt are taking up an increasing share of funds
Budget documents previously analyzed by Reuters projected a 22.5% increase in Russia’s public debt service costs by 2026.
Interest payments could account for about 8.8% of all federal spending. By comparison, in 2021, this figure stood at 4.4%.
This is money that cannot simultaneously be directed toward the regions, healthcare, education, infrastructure, or support for the civilian economy.
Is Russia Facing an Imminent Default?
A yield of 16% does not yet mean an inevitable default. Russia’s public debt remains relatively small relative to the size of its economy, and Russian banks are the main buyers of ruble-denominated bonds.
According to a forecast cited by Reuters, the ratio of public debt to GDP is projected to be around 18.6% in 2026. This is significantly lower than the figures for many Western countries.
The main threat to the Kremlin lies not in immediate bankruptcy, but in the cumulative effect. Declining oil and gas revenues, the fuel crisis, high military spending, the budget deficit, and expensive borrowing are gradually narrowing the Russian government’s financial leeway.
The longer OFZ yields remain near 16%, the larger a portion of Russia’s future budgets will have to be spent not on economic development, but on paying interest on the debt accumulated to finance the war.
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