Russian Government Bonds Plummet as War Spending Surges

Russia's government bond market experienced a sharp selloff, with the RGBI index falling 1.59% on Monday to its lowest level since February, marking the worst decline in several years. Long-term federal loan bond (OFZ) yields reached a one-year high of 15.5%, reflecting the high cost of government borrowing over 10-15 year horizons. The equity market has also declined for 15 consecutive weeks, updating lows not seen since 2023.

Analysts attributed the bond market decline to multiple economic pressures, including plans to sharply increase military spending by 4-5 trillion rubles this year—nearly 40% above the initial budget plan—alongside persistent high inflation concerns. The Central Bank's cautious approach to monetary policy compounded investor anxiety; on Friday, it cut the key rate by only 0.25 percentage points to 14.25% and warned it would review the pace of cuts due to fuel shortages and "budget risks." Central Bank head Elvira Nabiullina acknowledged that "budget risks are already being realized." The State Duma had recently passed legislation allowing the government to increase spending and debt beyond limits set in the budget law.

The fiscal picture has deteriorated significantly. By late May, the federal budget deficit had already exceeded the full-year plan at 6 trillion rubles, double the previous year's level at the same point. The government originally budgeted 4.4 trillion rubles in new borrowing for 2026 and planned to reduce the deficit from 5.8 trillion to 3.8 trillion rubles. To finance additional military expenditure, the Finance Ministry intends to cut civilian spending and raise an additional 2-3 trillion rubles in debt.

The war's economic toll is increasingly visible in financial markets. State debt has doubled since the war began, reaching 32 trillion rubles, with interest payments now consuming 9% of the 2026 budget, or 4 trillion rubles. Despite the Central Bank's reduction of the key rate from a record 21%, bond yields remain around 15%—double the levels of 2017-19. Bloomberg Economics projects that by the end of the decade, debt servicing could consume 15% of GDP, representing an unsustainable long-term fiscal burden.