Russian fiscal space: in-depth analysis of Russian public debt, constraints to medium-term sustainability and macroeconomic consequences

The strong rebound of the Russian economy in 2023 and the first half of 2024 is to a substantial extent owed to sizable fiscal support, both in the form of military expenditure and other, such as the subsidised mortgage scheme. Russia’s continued ability to finance its war effort and fiscal stimuli is critical for its short- to medium-term macroeconomic performance.

On the surface, standard metrics, such as debt-to-GDP, fiscal deficit, and National Wealth Fund levels, suggest a benign fiscal picture overall. However, some analysts have pointed to idiosyncratic elements of the Russian economy that make the debt constraint more binding than usually thought. Among them are limited access to international money markets, less investor trust and constraints on taking on domestic debt due to macroeconomic trade-offs, e.g. with respect to inflation, as well as considerations of political economy.

The purpose of this project is to re-evaluate the currently widely accepted view of ample Russian fiscal space in the short- to medium-term and shed light on the factors that could make the fiscal picture more challenging than normally assumed. This includes a discussion of other avenues for public financing, such as debt monetisation, in the Russian case with respect to their ease of implementation and potential ramifications. The research question is of central importance to the assessment of short- to medium-term growth prospects for the Russian economy. There is until now limited literature available on this topic in the context of the Russian war economy. The resulting publication, that may be published as an ECFIN Discussion Paper, would therefore be of great use to future work by the Russia desk of DG ECFIN’s unit D.4, which is tasked with monitoring and forecasting the Russian economy.

The report will  incorporate both analytical and quantitative analyses where the quantitative work should serve to substantiate and corroborate the analysis. The study includes two parts:

1. Part I is to explain and elaborate on Russian fiscal policy, public debt, and its idiosyncrasies – both current and historic. This is not be limited to topics and phenomena directly linked to fiscal policy, but also related topics such as central bank independence and inflation.
2. Part II should follow up on this by discussing the Russian fiscal space in the short- to medium-term and its sustainability from the perspective of macroeconomics and (where adequate) political economy.