BERLIN, June 25 (Reuters Breakingviews) – Vladimir Putin is under siege. Crimea, the region the Russian president seized and occupied in 2014, has become a metaphor for the financial travails of his government. The territory is choking after Ukrainian ​planes damaged its only bridge to Russia, while drones hit its access roads and infrastructure. Kyiv is threatening to turn the ‌peninsula into an island, opens new tab. Back in Moscow, rapidly increasing defence spending is smothering the central government’s budget. Putin still has the means to pursue his war on Ukraine — but can only do so by making his own country poorer.

The Russian government was planning to shrink the defence budget as a proportion of GDP, from nearly 8% in 2025 to a little ​over 6% this year, to the Stockholm International Peace Research Institute. Instead it has already increased military expenditure by 30% in the ​first quarter of the year compared to the same period of 2025, to 12% of output. Defence spending now amounts ⁠to nearly half the budget, notes, opens new tab Janis Kluge, a researcher at the German Institute for International and Security Affairs.

Officials in charge of economic policy — a rare ​island of rational policy makers in Putin’s orbit — have tried to warn him about the consequences of runaway military spending. Factories churning out military hardware are ​overheating, and Moscow must pay ever higher wages to the soldiers it tries to corral to fight in Ukraine. But the rest of the economy is slowing to a halt: official growth forecasts for this year have been downgraded, opens new tab from 1.5% to 0.4%. And in spite of his ministers’ warnings, Putin seems in denial by insisting that the slowdown is ​normal after the past years’ growth.

Higher oil revenue in the second quarter of the year will provide some breathing space, but Russia’s Urals crude oil ​prices are back to their end-February level and may remain there if an Iran-U.S. deal on the Hormuz strait persists. And a relatively strong currency, supported by the ‌central bank’s ⁠high interest rates, limits the amount of roubles the government gets from dollar-denominated oil taxes.

The Russian president announced an interest rate cut and the taming of inflation earlier this month, before the central bank had met. Bank of Russia Governor Elvira Nabiullina contradicted him last week by lowering, opens new tab rates only by a minimalist 0.25 percentage points, to 14.25%. She warned that the fight against inflation — now at 5.3% a year — is far from over, and mentioned the widening budget deficit ​as one of the main causes.

Ukrainian generals ​seem to be able to send ⁠drones on St. Petersburg, Moscow, and Russia’s oil infrastructure whenever they see fit. Putin is in a bind. He may be tempted at some point to do away with relatively sound budget rules and a strict monetary policy, ​and get rid of the officials that have stood firm in the last few years. That would be the ​best recipe to ⁠send the Russian economy into a fatal tailspin.

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