Writing off regional debt to fund the war

Moscow is allowing Russian regions to write off up to 2/3 of their debt. While the official goal of the program is to enable more investment in housing, in reality it is fueling regional war spending.

Something strange happened in some of Russia’s regional budgets in recent weeks: War-related spending began to disappear from official listings. For instance, Tomsk Oblast’s budget saw a sudden drop in spending on “payments to citizens participating in the special military operation” from 1.1 billion rubles to 300 million rubles in mid-June.

At the same time, a new budget item appeared titled “Activities related to the special military operation at the expense of funds freed by writing off the regional budget debt…” This new budget line had an identifier nearly identical to that of the previously mentioned shrinking line, and it increased from zero to 800 million rubles within the same timeframe. Apparently, Tomsk Oblast shifted military spending from one line item to another. But why?

The reason for this change is the debt write-off program for regional governments. It was originally announced by Putin in his February 2024 address to the Federal Assembly and implemented by the federal government in late 2024. Under the program, regions can write off up to two-thirds of their debt if they invest the freed funds in “noble” purposes, such as housing, local public transport, infrastructure, and supporting local industries.

At least, that’s the official rhetoric. So far this year, a total of 105 billion rubles was approved for write-off in 36 regions, and another 55 billion is expected later in 2025. Overall, debt relief is expected to exceed one trillion rubles by 2029.

Of course, housing investment from regional budgets sounds great, but there is one important exception in the fine print of the program: According to Point 7 of the debt-write-off rules, budgets with fiscal capacity below 0.65 (an indicator calculated by the Finance Ministry) are permitted to use freed-up rubles for “expenditures related to the special military operation.” This exception allows poor regions to refinance their war expenditures from the federal budget. Of course, Russian officials rarely mention this when they speak about the program.

A total of 27 Russian regions and all six of the illegally annexed Ukrainian regions are eligible for debt relief for war spending. By late July, the debt relief program had freed up funds that allowed Tomsk Oblast to allocate 1.4 billion rubles for sign-on bonuses. Orenburg Oblast used the program to pay 3.2 billion rubles in sign-on bonuses, and the Republic of Mari El used 2.1 billion rubles for the same purpose. Regions are also using the program to fund regional compensation schemes for citizens injured or killed in the war.

Thus, the debt-write-off program is the answer to one of the biggest puzzles of Russia’s recruitment methods: How can poor and indebted regions afford enormous bonuses for contract soldiers when their revenue is shrinking because of the economic slowdown? How can Mari El allocate 10% of its budget to sign-on bonuses? It is now clear that these regions are not financing this spending themselves, at least not entirely. The federal government pays for it by writing off these regions’ debt.¹

As is often the case with Russian budget data, once you solve one riddle, a new one appears: In this case, the inconsistency is that Tomsk Oblast should not have been allowed to finance its war spending via the debt write-off program. The region is not among the 27 (+6) regions for which the exception applies. According to official documents from the Russian Finance Ministry, Tomsk had a fiscal capacity of 0.668 in 2024 and 0.675 in 2025. If anyone has an idea what is going on here, please let me know in the comments.

1. Technically, a debt write-off does not “free up” rubles for additional budget spending, but rather reduces the region’s debt to the federal government. The regions will still have a deficit in their annual budget. However, they can borrow new funds without their debt level rising as a result of the write-off.