The collapse of the Russian petrostate marks the onset of the Kremlin's war state
Russia does not want peace because, instead of oil and gas, it is starting to feed on blood and taxes.
Russia’s finance minister has admitted that gas and oil are no longer key sources of budget revenue. Currently, the budget is fueled by a war economy geared toward conquering Ukraine and rising taxes. This may be one reason why Russians do not want peace.
The Russian economy’s dependence on war may explain why peace talks with Ukraine are stalled. Recently, the Kremlin used unconfirmed reports of a Ukrainian attack on Vladimir Putin’s residence as a pretext to break off talks with Kyiv and harden its stance in peace negotiations with Washington.
“Russia is a big gas station masquerading as a country,” said the late Senator John McCain. He was referring to the Russian economy’s dependence on gas and oil sales. However, Russia is now shifting to a different cycle of wasteful spending for the invasion of Ukraine.
Russian Finance Minister Anton Siluanov admitted on Rossiya 24 television that the oil and gas sector’s share in the economy will decline in the medium and long term. “The easiest extraction conditions are behind us. Extraction from hard-to-reach deposits is becoming increasingly expensive,” he added.
Siluanov also admitted that “the share of oil and gas revenues in Russia’s federal budget has almost doubled over the past few years, from around 50 percent to around 23 percent this year.” He added, “Next year, the decline in oil and gas revenues will continue, and we expect it to be 1 percentage point lower than this year.” This means a decline to 22 percent.
According to Minister Siluanov, the main reasons for the decline are the falling price of crude oil and the strengthening of the ruble. Brent crude oil is expected to decline in value for the third consecutive year in 2025, this time by around 20 percent.
Economists project that Brent crude oil prices will be in the $50-$55 per barrel range in 2026. Meanwhile, the Russian government projected a price of $58.70 per barrel for the cheaper Russian Urals in 2025. This price is approximately $15 cheaper than Brent crude, which currently costs around $40 per barrel. Consequently, the budget is receiving less oil revenue than expected.
In addition to declining oil prices and currency appreciation, Russia’s budgetary problems are exacerbated by numerous Western sanctions that restrict the price and volume of Russian hydrocarbon sales, as well as Ukraine’s attacks on oil infrastructure.
Russia’s revenues from gas and oil sales decreased by 34 percent in November 2025 compared to the same period last year. Data for December 2025 are not yet available.
This means that the Russian petrostate—a country dependent on gas and oil sales—is shifting to a new source of revenue, though the Russian finance minister does not mention this explicitly.
This means that the Kremlin’s economic stimulus, as suggested by Minister Siluanov, is, in reality, a war economy. The state spends billions on armaments, which fuels the defense sector and its beneficiaries’ consumption. Part of this money returns to the budget through taxes.
Furthermore, Russia’s high inflation, which harms ordinary citizens, means more money in the Kremlin’s coffers in nominal terms. Wages rise, increasing income tax revenues.
In summary, the Russian budget is increasingly dependent on the war economy. The Russian petrostate is beginning to collapse due to insurmountable problems, as the Finance Minister himself admits.
Rising extraction costs from increasingly difficult deposits, coupled with falling oil prices, will make production increasingly unprofitable. Sanctions limiting access to Western technologies will undermine the long-term future of hydrocarbon production in Russia.
Preliminary economic data show that Russia’s deficit reached 4.276 trillion rubles, or 2 percent of gross domestic product (GDP), in the first 11 months of 2025. GDP growth in the country is expected to reach one percent this year.
A potential end to Russia’s invasion of Ukraine would leave Russia without development prospects, and the current economic indicators are the result of a stalled war economy.
Russia has refused to negotiate peace with Ukraine and has announced strikes on selected targets on the Dnieper River. Ukraine fears airstrikes.
Siluanov suggests that the reason for the increase in Russian budget revenues unrelated to oil and gas is investment in high technology. However, the truth is different.
Revenues from outside the oil and gas sector will increase by 11 percent in 2025, reaching 24.87 trillion rubles, primarily due to a 5.6 percent increase in VAT revenues. The VAT rate has increased from 20 to 22 percent.
It is worth noting that Russia increased the corporate tax rate (CIT) from 20 to 25 percent. This allows the government to recover a portion of its defense spending from companies that fulfill government contracts and have growing revenues, including those due to inflation.
Russia has also introduced a progressive income tax, ranging from 13 to 22 percent, depending on income. This allows for the collection of higher taxes from those benefiting from the aggression in Ukraine.
Thus, the Kremlin’s economic stimulus, as suggested by Minister Siluanov, is, in reality, a war economy. The state spends billions on armaments, fueling the defense sector and its beneficiaries’ consumption. Part of this money returns to the budget through taxes.
Furthermore, high inflation in Russia is harmful to ordinary citizens but means more money in the Kremlin’s coffers in nominal terms. Wages rise, which increases income tax revenues.
In summary, the Russian budget is increasingly dependent on the war economy, and the Russian petrostate is beginning to collapse due to insurmountable problems, as even the Finance Minister admits.
Rising extraction costs from increasingly difficult deposits, coupled with falling oil prices, will make production increasingly unprofitable. Sanctions limiting access to Western technologies will undermine the long-term future of hydrocarbon production in Russia.
Preliminary economic data show that Russia’s deficit reached 4.276 trillion rubles, or 2 percent of gross domestic product (GDP), in the first 11 months of 2025. GDP growth in the country is expected to reach one percent this year.
The potential end of Russia’s invasion of Ukraine will leave Russia without development prospects. Current economic indicators are the result of a stalled war economy.
Russia has refused to negotiate peace with Ukraine and has announced strikes on selected targets on the Dnieper River. Ukraine fears airstrikes.