Moscow’s Finance Ministry is aggressively increasing its borrowing to cover growing budget deficits and protect against an uncertain economic future as military spending surges and oil and gas revenues decline.

In the first half of 2025, the ministry has​ borrowed more than 2.7 trillion rubles (about $35⁣ billion), or ‌56% of its annual⁣ borrowing plan. This week, it raised 195 billion rubles⁣ (around $2.5 billion)‍ through two new⁢ issues of government bonds,known as OFZs,reaching its second-quarter fundraising target of 1.3 trillion rubles (roughly $16.9 billion).

Russia is paying high ⁢yields-15.2% on six-year ‍bonds⁤ and 15.5% ‌on 11-year debt-amid high interest rates ⁤intended to curb inflation. The Finance⁢ Ministry has prioritized fixed-rate bonds to avoid future increases in debt ‍servicing costs, even tho they lock in high rates regardless of​ changes in monetary policy.

Deputy Finance Minister Vladimir ​kolychev said ​the ‍ministry prefers to limit the use of‍ floating-rate debt unless absolutely ‌necessary. ⁣When demand is‍ low, the ministry issues floaters, or bonds with variable interest rates tied to the key‌ rate, but it has ⁤grown wary of their increasing share in the⁤ debt portfolio.

Recently, conditions have⁢ become more‍ favorable⁢ for borrowing. Hopes for peace‌ in Ukraine, spurred by a phone call between Presidents Vladimir Putin and⁤ Donald Trump on Feb. 12, drew risk-seeking investors back‌ into the Russian bond market. This momentum continued into March, as expectations of declining ‌inflation and potential interest rate cuts boosted demand.

Analysts at Gazprombank said the Finance Ministry is capitalizing on this window of prospect ⁤by front-loading its borrowing to build a fiscal buffer in case markets ⁣turn against it later this⁢ year.

Still,⁤ risks are ⁣rising. In ⁤May, the government approved an⁢ additional 826 billion rubles (about $10.7 billion) in spending,‌ funded by expected windfalls ‍in non-oil and gas ⁢revenues. However, economic growth is slowing and inflation is cooling faster than expected, raising concerns that those revenues may not materialize.

Economic Growth Minister Maxim Reshetnikov said the 2025 budget⁢ assumes inflation at 7.6%, but the forecast will be revised⁣ downward in August.

Analysts at MMI warn that government expenditures could exceed ‌targets‍ by 1.7 to 2.7 trillion rubles⁣ (about $22.1 to $35.1 billion), pushing the deficit 2 to 3 trillion rubles ($26 to $39 billion) beyond ‍current projections. The official deficit has already tripled to 3.8 trillion ⁤rubles (around $49.4 billion), reaching 3.4 trillion (about $44.2 ‌billion) ‌by the end of May.

The outlook for oil ⁢and gas revenues-traditionally the backbone of Russia’s ‍budget-has also darkened.⁤ The Finance Ministry has slashed its forecast by 2.6 ⁤trillion rubles (roughly $33.8 billion), citing lower global oil prices and a stronger ruble. If revenues fall below the baseline level,the government plans to use 447 billion rubles (about $5.8 billion) from ⁢the National wealth Fund⁤ to⁤ fill the gap.

The fund’s liquid reserves currently stand at 2.8 ⁢trillion ‍rubles (around $36.4⁢ billion), and officials appear intent on conserving them provided that possible.

According to Bloomberg Economics‘ Russia and CEE Economist Alexander​ Isakov, under Russia’s fiscal rule, shortfalls in ⁢oil and gas revenues caused⁤ by a stronger ruble should be covered through additional borrowing rather than tapping the wealth ⁢fund. Isakov said that every one-ruble ⁢thankfulness in the⁤ average annual dollar​ exchange ​rate adds ⁢about 100 billion rubles (roughly $1.3 billion) to the government’s ⁢borrowing‌ needs, but adherence to the rule‌ has been flexible.

The economic Development Ministry projects an average exchange rate of 94.3 rubles to the dollar this year, ‌rising⁣ to 98.7 by December.​ However, a ‍Central Bank survey ⁤of more than 30‍ analysts suggests a stronger ruble, averaging 91.5 ⁢per dollar-implying‍ even deeper ⁣potential revenue losses for the government.