As discussion starts about Russia’s 2026 federal budget, it is worth taking a look at the state of regional finances and where they are trending as Russia is headed either towards a prolonged war or an uneasy peace. Apart from this, read some notes on internet outages, fertility figures, utilities and the municipal reform.

Regional finances in late 2025

The Russian government adopted the main parameters of the 2026 federal budget, containing a VAT hike, higher tax burden for small enterprises, as well as a minor (and temporary) drop in direct military expenditures. The details of the budget will no doubt be further discussed as its first and second readings are completed in the State Duma. I would like to focus instead on the state of regional finances. Regional budgets will be drawn up and adopted after the federal budget when it becomes more or less clear how much money the federal center is going to transfer to regions next year and what policy priorities regions are supposed to follow. However, some trends are clearly visible already.

In late 2024 and the first half of 2025, regional budgets, as a whole, started experiencing financial shortages. The aggregate data provided by the Financial Ministry (see below) differs somewhat from the data in the Electronic Budget portal due to accounting differences, but the trend is visible: this year regional finances have been much tighter than in any of the three previous years of the war, and while regional budgets, on the whole, run surpluses at mid-year (often until the very last month of the year when they face the heftiest expenditures), in 2025 they were in the red already at the end of July.

Some regions, of course, stand out negatively: the Kemerovo Region, dependent on coal mining, is suffering from the second consecutive year of the sector’s ongoing crisis and it will not realize more than 10 percent of its planned revenues. The Rostov Region suffers from draught. But overall, the reason simply is that while the federal government has seized on a whole series of new resources to pay for its war in Ukraine – from extra taxes and dividends to regularized tax hikes – the structure of regional incomes is more or less the same as it was three years ago.  At the same time, while regions do not have to spend directly on warfare, they have faced a range of extra costs associated with it, for which they received little to no compensation from the federal center, at a time when their own revenues have suffered due in part to the economic processes triggered by the war.

In 2024 Novaya Gazeta estimated that regions spent more than 800 billion rubles on war-related expenditures (including social aid, civilian defense, recruitment bonuses and others) that year, which was almost twice as much as originally planned.  Moreover, this is without Moscow, whose budget amounts to about a fifth of the whole, and without taking into account a substantial amount of spending that cannot be easily disentangled from the rest (e.g. aid to “other” categories of citizens or payments to support construction projects in the occupied territories, which are usually executed through specially created non-commercial organizations). This extremely conservative estimate would suggest that regions on average spend at least 4 percent of their budget on war-related tasks.

In the first half of 2025, regional expenditures grew by 14.9% year on year, significantly above inflation, while regional incomes grew by a mere 2.1%, significantly below. Most regional budgets for 2025 were planned with deficits, but these plans did not anticipate the shortfall that many regions then experienced – visible also from recent budget amendments. Of the three most important income sources for regional budgets, only personal income tax receipts grew this year (and there are major differences between regions; corporate income tax receipts were significantly lower (7.8% in nominal terms according to the Electronic Budget portal; see the Finance Ministry’s aggregate numbers below for comparison), while transfers from the federal budget have been dropping for several years in a row. As next year the federal budget halts the growth of war-related expenditures, under the current (and likely unchanging) circumstances the only drivers of growth, it is unlikely that corporate income tax receipts will meaningfully recover.

The federal government has partially compensated regions for these losses through its debt forgiveness program, however, this will only provide around one trillion rubles over three years, according to the plans (in reality, 165.9 billion were written off over the past year), and comes with strings attached. Only the poorest regions are able to use the funds thus liberated to pay for war-related expenditures. While on aggregate, regions had a balance of 2.9 trillion rubles on their accounts at the end of 2024, the lion’s share of this belongs to Moscow, while most regions have very little or virtually no reserves. It is no wonder that a growing number are taking out loans from the market, even though it is exactly this behavior that the federal Finance Ministry has tried to discourage over the past decade and that it is once again trying to establish firmer control over regional debt.

Just as war-related expenditures have become an untouchable item in the federal budget over the past year, some regional expenditures are very difficult or impossible to cut back: regions spend roughly two-thirds of their budgets on health care, education, housing and social services. Some other items, such as public transit or law enforcement bonuses, are becoming increasingly expensive due to the wartime labor market crunch, but are difficult to cut due to their essentiality. Capital investments – which the federal government wants regions to co-finance – are the easiest targets to cut, in spite of grandiose urban and industrial development plans in the Arctic and the Far East.

A lot of these systems are already underfunded (as it regularly becomes obvious from e.g. school building collapses). Some (e.g. health or social services) would experience extreme strain with the return of hundreds of thousands of war veterans to the country, but under the current circumstances most regions cannot invest in them proactively. Spending on housing and utilities, for example, grew by a little over 9 percent this year, barely above inflation, in spite of the fact that the worsening state of public utility networks has ostensibly made this a policy priority. Regions however seem to be putting these investments off, perhaps in anticipation of their turn in the federal debt forgiveness program. Health care expenditures grew by a mere 10 percent, with regions no doubt anticipating some kind of federal injection if and when this becomes a large enough problem. This however is questionable based on past experiences during the COVID pandemic or military mobilization, when regions were largely left to their own devices (or expected to loop in local employers). And in any case, to improve their negotiating position, governors are incentivized, among others, via the federal key performance indicator system, to spend on priorities such as improving fertility figures or patriotic education.

Based on these earlier experiences, it is very likely that the federal center will expect regions to take political and operational responsibility for managing sudden crisis, with governors then passing the bucket on to employers or citizens shoring up the state in their own capacity. And now it looks like they will be hit by an economic crisis caused by the war or a societal shock triggered by an eventual ceasefire or peace deal at a time of already dire fiscal situation, unlike in 2020 when COVID hit or 2022-23 when they were able to rely on the gains of the short-lived post-COVID economic conjuncture and the war-induced demand.

Also-happeneds

• Heavily filtered internet: Since May and especially since Ukraine’s successful “Operation Spiderweb” in June, which relied on Russian cell phone networks, almost all Russian regions have started experiencing regular outages of mobile internet service, ostensibly as a security measure, albeit in several regions authorities have also tried to talk it up as a means of improving people’s moods and enhancing social interactions. The operational decision to block access to mobile internet networks may be taken at the regional level, but, given the high number of such shutdowns over the past five months, the nudge to do so certainly came from the federal government. It also seems unlikely that these shutdowns are effective in preventing drone attacks, as it is becoming increasingly obvious from recent strikes that have taken down up to 38 percent of Russia’s oil refining capacity. However, they do fit into ongoing government efforts to tighten control over the content and services, to which Russians have access, and the purpose of the shutdowns seems to be testing how disruptive they are to local economies and how citizens react to them. As in many similar cases, policies seem to be piloted in some regions first and rolled out across the country later: internet shutdowns started in regions holding Victory Day marches on May 9, under the pretext of protecting these events, and were then rolled out across the country; in early September the governor of Chuvashia ordered the setting up of an “anti-bot” system in the region, allowing users to access some services during outages, before federal authorities presented a federally approved allow-list of mostly government-controlled sites; and in mid-September Kamchatka’s authorities announced a full five-day internet shutdown, allegedly to repair cables linking the Russian mainland with Sakhalin.
• Dodgy birth figures: Due to the recent inclusion of fertility rates in the list of key performance indicators (KPIs) that the Kremlin uses to evaluate the work of governors, several regions started highlighting record high numbers of births in certain maternity clinics over the summer. The news outlet NeMoskva, which published a collection of these, highlighted that in some cases the trick is easy to see: e.g. in Ryazan the temporary closure of one of two clinics led to an uptick in births in the other. In other cases regional authorities were careful to highlight numbers from a specific clinic or district, while keeping hush on wider regional statistics. Fertility figures across Russia have become more difficult to come by: since the beginning of this year Rosstat has withheld demographic figures that used to be openly available, part of a creeping withdrawal of public access to statistics. However, according to total fertility rate (TFR) numbers that Rosstat has published, between January and August only 15 (of 83) regions have recorded any increase in their fertility rate, and in a third of these regions the difference was insignificant. It is unlikely that the federal government will be fooled by the celebratory announcements of regional authorities, however, given the very limited means at the disposal of regional governments to influence fertility rates at a time of war, demographic slump and growing economic instability, the hope in regional headquarters certainly seems to be that loud signaling will be considered good enough for the Kremlin, and that the chief executive will not bore himself with actual statistics.
• Freezing in Sakha: Several districts of the Republic of Sakha – a vast, sparsely populated region in Eastern Siberia – reportedly struggled with the start of the heating season in mid-September as utility providers underestimated fuel and repair costs and the region’s budget faced a ballooning deficit in 2025, even as heating tariffs rose by 13 percent. Due to a lack of funds on the republic’s accounts, Sberbank had to step in and provide a 4-billion-ruble loan to ZhKKh RS Yakutia, the company servicing the more remote, Northern parts of the region, which was in debt to several energy companies. Sardana Avksentieva, a former mayor of Yakutsk, now a deputy of the State Duma, asked the prosecutor general’s office to start a probe into the matter to ensure that heating is provided in the region. At the end of the month, however, locals were still reporting heating outages. Problems with utilities are increasingly common across Russia due to the breakdown of old (often Soviet-era) utility networks, which neither utility companies nor regional budgets have funds to comprehensively repair, and often even the responsibility for repairs is a matter of contention. High interest rates and inflation seem to have exacerbated the issue as both scheduled repairs and fuel cost more than initially planned.
• How the municipal reform is going: In several Siberian regions the Kremlin’s municipal public administration reform has continued being contentious. In the Sakha Republic regional authorities seem to have abandoned the idea of carrying out the federal reform. In Khakassia the ruling United Russia, in spite of its parliamentary supermajority, failed to override the veto of the region’s communist governor, Valentin Konovalov, against the scrapping of village councils. In the Altai Republic opponents of the reform have been consistently trying to hold protests against it, and used public hearings with local deputies to express their disagreement. The regional authorities have not only banned these gatherings but also conducted searches – a form of intimidation – in the home of Aruna Arna, a leading local activist who was labeled an “extremist” by the federal government, effectively limiting her activities. The reform, which took years to hammer out and led not only to localized protests but also differences within the Kremlin’s curators of domestic policy, remains a sensitive issue as in several regions it would significantly limit residents’ access to government services. Judging by his performance at a meeting with the heads of federal party leaders, Putin himself is eager to push political responsibility for the reform that he himself signed in March, on to regional authorities.