By Sylvia Demarest, Substack, 9/21/25

Introduction: A Short History of Western Colonialism, including in the Middle East

The discovery of the Americas in 1492 ignited what has been called “The Age of Discovery” and the creation of colonial empires across the world. Almost every European country established colonies in the Americas, Africa, and East Asia. These colonies were used to supply resources, raw materials and markets for home-based production. This resulted in the extraction of enormous wealth which flowed back to Europe. Many books have been written about this blood-soaked period of human history.

The most significant colonial empire was the British Empire. Britian used its navy to “rule the waves” for 275 years while small groups of British nationals controlled enormous populations in East Asia and elsewhere. The East Asia Company, at its peak, controlled 50% of global trade and was said to be worth $7 trillion in today’s dollars. How did the Brits manage this empire? By using both violence and strategies that kept the subject population too divided to organize effective opposition. What we call “the west” still depends on extracting wealth from the rest of the world. This means colonial thinking and the technique of divide and conquer continues to drive foreign policy.

How does this apply to today’s Middle East? Again, a short history is required. The Ottoman Empire existed from 1300 to 1923. It was centered on the Anatolia plateau, what is now Turkey, and included parts of Europe, the Middle East and North Africa. At its peak, the empire was noted for its advancement of artistic expression, literary works, and architectural milestones. It oversaw flourishing trade routes until it encountered rivalry from the East and Europe which gave rise to factions within the empire. One important aspect of the empire was its religious tolerance, which was not in the best interests of the western colonial empires that wanted to break up the Ottoman Empire.

The dissolution of the Ottoman Empire after WW1 resulting in the creation of several countries that exist today: Algeria, Tunisia, Libya, Egypt, Sudan, several countries in the Balkans in southeastern Europe, Turkey, Cypris, Saudia Arabia, Iraq, Syria, Lebanon, the Palestinian Mandate, and later, Israel.

The partition of the Ottoman Empire set the stage for today’s controversies in the Middle East. The agreements establishing the partition include The Sykes-Picot Agreement (1916), the Balfor Declaration (November 1917) and the Treaty of Sevres (1920), eventually replaced by the Treaty of Lausanne in 1923. Under these, sometimes secret agreements, the Ottoman Empire was partitioned and the British, and the French, gained control over Iraq, Saudi Arabia, Lebanon, Syria, and Palestine. The Balfour Declaration was incorporated into the British Mandate for Palestine, and the Brits helped to facilitate Jewish immigration into the area–ultimately resulting in the emergence of Israel in 1948.

At the time, the Brits were aware that Iran had oil but did not appreciate how much oil was in Iraq, or that there were enormous deposits of oil in what became Saudi Arabia in 1932. Oil was discovered in Saudi Arabia by expat, Max Steineke, Chief geologist at Casoc and Aramco in 1936.

The big issue, from the very beginning, was how to deal with and control, Arab nationalism. The British worked against the more moderate forms of Arab nationalism by forming alliances with Wahhabi elements represented by the House of Saud and providing them with military and financial support during their conflicts with the Ottoman Empire. Wahhabism emerged on the Arabian Peninsula in the 18^th century founded by Mohammad ibn Abd al-Wahhab. The aim of Wahhabism was to reform Islam by denouncing practices seen as idolatrous. The British, seeking to weaken the Ottoman empire, aligned with Wahhabism going all the way back to 1744 because it was seen as a tool to advance British interests. In 1806 the Arabian tribal leader ʿAbd al-ʿAziz ibn Saʿūd seized Mecca. In 1932 of the state ofSaudi Arabia was founded as a modern Islamic state.

The point to be made is that the colonial powers, especially the British and the French but ultimately including the United States, played a major role in the rise of reactionary Arab regimes, which depended on the continued support of colonial and imperialist powers for their survival. The rise of reactionary Arab regimes split Islam by empowering the most radical form of Sunni Islamist fundamentalism, and by disempowering the more moderate forms of Islam, including Sunni Islam. This tactic successfully fractured Arab unity and, to this day, has prevented the consolidation of the Arab population into a world power.

Saudi Arabia, alone, has spent billions supporting the spread of Wahhabism through the construction of mosques around the world and by training and funding Wahhabi Iman to run them. This has resulted in the radicalization of an entire generation of Arabs, unbelievable carnage in the Middle East, and the creation of the image of Islam as a backward violent religion. This represents another successful use of the strategy of “divide and conquer” to control resources, and to protect both Israel and the reactionary Arab regimes.

The empowerment of Wahhabism ultimately led to al Qaeda, ISIS, Au Nusra and dozens of other Sunni Islamist gangs, all of whom have been supported by the Brits, the US, and an alliance of reactionary Arab regimes. The ultimate beneficiary has been western colonialism and Israel. The atrocities committed by these Sunni Islamists led to the “War on Terror”, the Patriot Act, the fall of secular governments in the Middle East, the rise of the Likud party and settler radicalism in Israel, along with our current panopticon of 24-hour total surveillance. The “War on Terror” and the label of “terrorist” or “terrorism” enabled the violation of civil rights at home, US wars for the security of Israel, and atrocities across the Middle East. Once a group or individual is labeled a “terrorist” all human rights are lost, and they can be killed. The labeling of Palestinian organizations, including Hamas as a terrorist group, has been used as an excuse to for the occupation of the West Bank and Gaza. More recently to flatten Gaza, make Gaza unlivable, and murder thousands of Palestinian civilians. An alternative interpretation under international law would be that Hamas is exercising Palestine’s legitimate right to resist the illegal Israeli occupation and theft of Palestinian land. The terrorist designation is by design, and it reinforces decades of propaganda focusing on “Israel’s right to defend herself” and “Israel’s right to exist”, while ignoring the fact that under international law, Palestine also has a right to exist, and Palestinians also have the right to defend themselves.

This centuries old pattern in the Middle East seems to be changing. This essay will discuss how and why.

The Yinon Plan, Clean Break, A New Pearl Harbor, and the dream of Greater Israel

In 1982 an article was published in a Hebrew journal by Oded Yinon, a former advisor to Areil Sharon and a journalist for the Jerusalem Post entitled “A Strategy for Israel in the 1980’s”. This article advocated accelerating the strategy of sectarian division of Islam discussed above. It called for the breakup and fragmentation of the Arab states into small, weak, ethnically and religiously defined states to enhance the security of Israel.

The “Yinon plan’ is claimed to have influenced the drafting of “Clean Break: A New Strategy for Securing the Realm” issued on 1996. The plan called for Israel to renew itself economically by leaving behind it’s socialist foundations and focusing on neoliberalism. It also called for Israel to adopt “preemption” as a military strategy, and to “broaden Israel’s base of support in the US Congress”.

In 2000 a group of neoconservatives surrounding George W. Bush described the need for a “new Pearl Harbor”. Soon after 911 occurred and the wars of the administration of George W. Bush began to take out 7 Middle Eastern countries in 5 years. The countries named were Iraq, Libya, Syria, Lebanon, Somalia, Sudan, and finishing off with Iran. The result has been what Richard Perle described as the beginning of waging “total war”. Over the last 24 years, Zionists and neoconservatives have overthrown several of the countries mentioned, destabilizing the Middle East, but failed to destroy Iran and had to, at least partially, withdraw from Iraq. Presently, Lebanon and Syria are under assault, and Israel is engaged in ethnically cleansing the West Bank and making Gaza unlivable. The UN has now characterized the Israeli attack on Gaza as a genocide.

Support for Zionism and for Israel is falling in the United States. US global military and economic hegemony is in decline. This implies the time frame for Israel to achieve her objectives in the Middle East, including creating a Greater Israel, is narrowing.

Greater Israel and its impact

On September 15, 2025, Prime Minister Benjamin Netanyahu proclaimed that Israel had to become an autarky, a modern Sparta. In August he gave an interview with i24NEWS, anddeclared his commitment to the vision of a “Greater Israel,” encompassing not only the West Bank but also parts of Jordan, Syria, Lebanon, Egypt, Saudi Arabia, Iraq, and Kuwait. The idea goes all the way back to Theodor Herzl and the founding of Zionism in 1896. The establishment of Greater Israel is required if Israel is to become self-sufficient. Here is a map of Greater Israel:

As you can see, Greater Israel includes the following:

–Egypt–the Sinai and everything up to the Nile including substantial resources along the Red Sea. Egypt has a peace treaty with Israel and is the recipient of a large amount of US aid. Egypt has yet to respond.

—All of Jordon. Jordon has been silent.

—All of Syria. Syria has been systematically destabilized. Jolani, the Jihadist who had a $10 million bounty on his head, has allowed Israel free rein to bomb and occupy Syrian territory.

—All of Lebanon including the water resources of the Litani River, the gas resources off the coast, Beirut, the mountains–everything.

—A good part of Saudi Arabia including much of the oil and other resources.

—Northern Iraq including the oil and other resources.

—All of Kuwait including the oil and other resources.

—Part of Turkey.

—Although not shown on the map, there are indications that the Zionists also want Cypris.

Putting aside for a moment whether a Greater Israel is realistic, we must assume that the conquest of Greater Isreal would resemble the conquest of Palestine. If so, terror techniques would be used to expel most of the population in each country, and the property and resources would be confiscated without any compensation. After all, Zionists owned only 7% of Palestine–the rest was seized without compensation. Israel is now attempting to depopulate and confiscate 109 square miles of Gaza, constituting prime Mediterranean property, and off-shore gas resources, again with US support and without compensation.

Obviously, Israel cannot achieve Greater Israel without US help. The US would have to pay for the wars, do the fighting, and the shed the blood and treasure to conquer the targeted countries. Can Israel manipulate the US into creating Greater Israel, as for the wars after 911? Does the US have the financial and military capacity to fight even one more war for Israel or have US militarism and Zionism finally gone too far?

The Israeli strike on the Hamas negotiating team in Doha marks the end of an era

Israel has been conducting “decapitation strikes” with impunity for decades. Here are just a few recent strikes:

—On October 17^th and 18^th, 2024 thousands of handheld pagers and hundreds of Walkie-talkies, assumed to be used by Hezbollah, suddenly exploded. This represented the use of ordinary commerce to achieve a targeted decapitation. At least 12 people were killed and over 3,000 were injured. Leon Panetta condemned the pager strike as “an act of terrorism.” Which is clearly true.

—On September 27, 2024, Israel killed Hassan Nasrallah, secretary general of Hezbollah, along with many others, as they were meeting under a residential building. The operation involved dropping more than 80 bombs on a residential neighborhood of Beirut, Lebanon. Nasrallah was killed for tying the Hezbollah cause to the Gaza war and seeking to include Gaza in a cease fire. Nasrallah is credited with ending the 18-year Israeli occupation of Lebanon in 2000.

—In the predawn hours of June 13, 2025, even as President Trump was advocating continued dialogue with Iran to resolve the nuclear issue, and another negotiation session had been scheduled, Israel launched a preemptive decapitation strike designed to take out Iranian civilian and military leadership. The strike included a massive attack of perhaps 200 fighter jets dropping 330 precision munitions on over 100 targets. The decapitation strike failed. The result was the 12-day war.

—On August 28, 2025 Israel conducted a decapitation strike that took out the entire Houthi civilian cabinet including the prime minister and 10 senior ministers.

—On September 9, 2025, as a Hamas team was gathering to discuss “the Witkoff Gaza proposal” in Doha, Qatar, Israel attempted a decapitation strike to take out the entire Hamas team. The team survived but again, like with Iran, the Hamas team was meeting in response to a peace proposal being pushed by President Donald Trump. Six people were killed including a Qatar security official. Qatar was not pleased.

Alastair Crooke calls the Doha strike “the end to an entire era–and a ‘new reality’ for Qatar”. This observation could extend to the entire Middle East if not the entire Islamic world.

Crooke points out that for decades Qatar had supported An-Nusra jihadists in Syria, against Iran (divide and conquer), while selling gas and maintaining US military bases and a strategic partnership with Washington. Doha was a mediator with a relationship with the jihadists while acting as a facilitator for Mossad. Now the idea that anywhere in the Middle East is a safe zone from Israeli strikes, or that the US would be a reliable defender, is over.

Israeli channel 11 reported that President Trump approved the attack and applauded any killing of Hamas members. This was yet another US/Israeli sneak attack–one that finally got through to the Arab countries that there are no forbidden territories; no rules of law; no Vienna Convention, and that the US and Israel would act as they pleased in the Middle East.

The unconditional US support “…for Israel’s genocide and ethnic cleansing; the failure to make any serious effort to prepare a political path for a settlement on Ukraine; the reliance instead on making war, whilst proclaiming peace – all these represent the essence of the Trump approach: An exercise of escalatory dominance, both at home and abroad.”

The impact of a US “Israel first” policy is fracturing Trump’s MAGA base as the reaction to the assassination of Charlie Kirk clearly shows. Worse, US policy has negatively impacted US soft power and diplomatic trustworthiness across the world, yet, for some reason, the Trump Administration cannot break free from Zionist domination. Meanwhile, Israel is increasingly out of control, carrying out a second Nakba (ethnic cleaning and genocide) in Gaza and the West Bank. At the same timees, Jewish society itself in Israel is trapped in repression and denial –as it was in 1948 when the reality of the founding of Israel was denied. Israeli filmmaker Neta Shoshani’s controversial documentary about the 1948 war has been banned in Israel because it tried to tell the truth about this history.

Here’s her statement:

“I suddenly realized that in the past two horrible years the whole matter of the Israeli ethos has been totally shattered”:

“I grasped that an ethos has a great deal of power, that it contains society within certain boundaries. And even if those boundaries are breached – and they were certainly breached as early as 1948 – there was still something in society’s moral codes that at least caused it to feel ashamed. So, for decades that ethos safeguarded [Israeli] society and the army, compelling them to preserve certain limits”.

“And when that ethos falls apart, it’s really scary. From this perspective, the film was difficult to watch from the get-go, but after the last two years it’s become unbearable” …

“If 1948 Was a War of Independence, the current war could be the one that ends Israel”.

What does all this mean for the Middle East?

Several of the nations in the Middle East have been aligned with the US; Saudi Arabia, Qatar, UAE, Bahran, and Kuwait. These nations believed that the purchase of US weapons, even with back doors giving the US control, and hosting US military bases would ensure their national security. The Doha attack blew that assumption to smithereens. The US consented to the attack, and the realization finally hit these countries that all the years of cooperating with US/UK/Israel, even as they worked to divide Islam and weaken the Arab world, had been for naught. Plus, the back doors embedded in US weapons meant they could not be used against either the US or Israel. These countries were defenseless, and vulnerable.

The reaction was instantaneous. Qatar organized an Arab-Islamic summit after the Doha attack seeking a collective response to Israel. This follows decades of the systematic destruction of Iraq, Libya, the destabilization of Syria, the ethnic cleansing of the West Bank, the destruction and genocide of the population of Gaza, the destabilization of Lebanon including the US demand that Lebanon disarm Hezbollah.

Leaders from the 57-member Organization of Islamic Cooperation (OIC) and the 22-member Arab League attended along with Iran’s President Masoud Pezeshkian, Pakistan Prime Minister Shehbaz Sharif, and Malaysian Prime Minister Anwar Ibrahim. On September 13^th, Iran’s security chief Ali Larijani issued what he called a “warning to Islamic governments” and said they must “form a ‘joint operations room’ against the madness” of Israel instead of resorting to mere statements. The result is unclear, but these nations are talking and the US and Israel are not part of the discussion.

The reaction did not end there. On September 18^th Turkey revealed that Israel had sold Greece an air defense system that could further destabilize the Island. It was also reported that Israel thought it was time for Turkey to be forced to leave Cyprus. These events are happening while Israeli’s are buying land and building communities in Cyprus. Turkey is a member of NATO, but this fact could be meaningless in a conflict with Israel.

But the big news is the Saudi Pakistani mutual defense pact which extends the Pakistani nuclear shield over Saudi Arabia. It is truly the US’s Suez moment. The pact represents a NATO type alliance where an attack on one country is an attack on both countries. The symbolism is beyond question. Saudi Arabia could be called the “poster child” of US client states. If the Saudi’s no longer trust US security guarantees, why should anyone else.

There are now two nuclear power blocs in the Middle East–the US/Israeli block and the Pakistani/Saudi Arabia block. More importantly, Pakistan has vowed to nuke Israel should Israel use nuclear weapons.

For Pakistan it addresses a critical flaw, access to energy. From Thomas Kieth: “Pakistan now enjoys an unprecedented warfighting depth: Chinese arms and ammunition on one side, Saudi oil and money on the other. It is an industrial-scale supply chain that neutralizes the constraints India has historically counted on. For Saudi Arabia, the pact is equally revealing. Riyadh has watched the limitations of U.S. security guarantees with growing unease. The recent incident in which Israeli missiles crossed Saudi airspace to strike Qatar without interception exposed the cracks in U.S. air defense systems stationed in the region.”

India has yet to respond and tensions with China and Pakistan still needs to be addressed. Still the pact has created a new strategic corridor where China supplies the arms, Saudi Arabia supplies the energy, and Pakistan provides the pivot.

The US was not informed of this pact until it was announced. For Saudi Arabia, the pact provides a defense against a decapitation strike and the takeover of Saudi assets by Israel as part of creating Greater Israel. By providing a nuclear umbrella over at least part of the Middle East, Pakistan has also defanged Israel’s nuclear threat.

The Saudi/Pakistani pact could result in other client states exploring options leading to the collapse of the US global alliance system. The implications for the petrodollar and US global economic and military dominance should also not be ignored.

The question now is what will happen to Iran. The “snap back” sanctions provisions were adopted by the EU, but their legality has been questioned by Russia, China, and the global south. Apparently, they did not intend to obey the sanctions. Reports say that Israel will initiate another war with Iran before the end of the year.

Conclusion

For the US, the realization may be dawning that it is too late to arrest China’s dominance of the eastern Pacific–or to breakup and loot Russia–that the US should instead pivot to securing the homeland including the entire western hemisphere. The result of this shift is still to be determined. The US now has a flotilla of battle ships threating Venezuela and blowing up small boats. Does this mean the US intends try and seize Venezuelan oil reserves? This would imply the US is trading one series of absurd wars for another. What is needed instead is diplomacy and working to create peaceful exchanges and commerce.

The kind of thrashing around we have witnessed for the last 35 years is not the way a superpower should behave. The dissolution of the Soviet Union should have ended US militarism but instead resulted in the quest for global hegemony and a frantic search for another enemy. Years of domination by militarism, neoliberalism, and the corruption of money has created a catastrophe.

The “brilliant minds” behind US foreign and domestic policy have made an enormous mess both domestically and with foreign policy. Our present circumstance represents a bi-partisan failure of the entire political class over at least 2 generations. A reckoning is coming. This contour of this mess has been discussed in previous Substack’s. The fix has also been discussed; it involves the American people coming together in a new populist movement to reform the system, focused on economic fairness. As for the reckoning–what, how and when is unknown, but it is coming.

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YouTube link here.

By Ben Aris, Intellinews, 9/25/25

Russia’s Ministry of Finance (MinFin) presented the 2026-2028 budget on September 24 that keeps spending flat and introduces a number of new taxes to fund a ballooning budget deficit and cuts military spending for the first time in three and half years of war.

Not all the details were released, but most of the main parameters have been made public and the draft is scheduled to be submitted to the State Duma by September 30.

The MinFin said its draft federal budget for 2026–2028 will remain “balanced and sustainable,” while prioritising defence, security and social support for families of participants in the war in Ukraine, TASS reported on September 24.

“The draft budget preserves conditions for growth in real wages and household incomes,” the ministry said in a statement, adding that allocations for housing and family support would increase alongside defence expenditure.

The budget will be closely scrutinised after US President Donald Trump claimed he has studied the Russian economic situation and discovered it was very “BAD”, calling it a “paper tiger”, as part of an abrupt U-turn on Ukraine during the United Nations General Assembly (UNGA) in New York this week.

The main change in the new budget is sharp changes in the GDP growth outlook: 2.5% in 2025 instead of 1%; and 1.3% instead of 2.4% in 2026. This brings the Ministry of Economy’s estimates closer to the Bank of Russia’s current forecast for growth of 1-2% in 2025 and 0.5-1.5% in 2026.

After three and half years of war, the Russian government is under growing pressure to fund its “Special military operation” (SVO) and its economic problems are getting worse. However, as bne IntelliNews reported in a recent deep dive into Ukraine and Russia’s budgets side-by-side, the Kremlin can fund its entire war effort using only internal resources – largely the issue of the Russian Finance Ministry’s OFZ treasury bills tapping the RUB20 trillion of liquidity in the banking sector.

Ukraine is, however, entirely dependent on external funding from its allies: it is short some $8bn-$19bn (depending on if there is a ceasefire) for 2025 and the unfunded gap in next year’s budget was just increased to $65bn by the International Monetary Fund (IMF), all of which will have to come from European partners this year, after the US sent no money to Ukraine since US President Donald Trump took office.

Russia’s MinFin is trying to spread the load with a mix of modest drawdowns from its rainy day National Welfare Fund (NWF), cutting spending, issuing more OFZ bonds and this year increasing VAT rates by 200bp that comes into effect on January 1, and the introduction of progressive income taxes for the first time in Putin’s 25 years of rule that came into effect this year.

Taken together, while this will be a painful year for Russia’s budget, the Kremlin is still well able to fund a continuation of the war for at least two more years based on its domestic funding resources, and probably much longer.

Revenues: Prime Minister Mikhail Mishustin announced two key figures at the government meeting. According to him, federal budget revenues in 2026 will amount to RUB40.283 trillion, while expenditures will amount to RUB44.869 trillion. (chart)

This means that, adjusted for inflation, expenditures will remain virtually unchanged compared to 2025 (RUB41.469 trillion) and will be only 2% higher than last year’s 2026 plans, The Bell reports, which is unsurprising, as inflation was also higher than planned.

“Revenues will decline not only in real but also in nominal terms—both compared to this year’s planned figures and to the government’s 2026 plans adopted a year ago. The decline in revenues is due to deteriorating macroeconomic indicators,” The Bell said in a comment.

Russia’s economy has been slowing sharply thanks to the CBR’s unorthodox plan to artificially cool the economy to bring down inflation. The outlook for this year is for about 1% growth after two years of 4.3%, according to the CBR’s Main Directions of the Single State Monetary Policy mid-term outlook report released on September 3. However, growth will start to pick up again in 2026, according to the regulator’s basic scenario.

First military spending cuts: For the first time since the war started in 2022, Russia’s defence spending in 2026 will be reduced, according to data cited by Reuters, from RUB13.5 trillion to RUB12.6 trillion ($153.7bn, 5.8% of GDP). Moreover, it will be slightly lower than the 2026 plans set when the previous budget was approved a year ago (RUB12.8 trillion).

“Given that inflation has exceeded the plans, the actual reduction in defence spending will be even greater,” says The Bell. “However, expenditures under the adjacent budget line item “National Security and Law Enforcement” will increase from RUB3.56 trillion in 2025 to RUB4.065 trillion in 2026.”

Taken together there is still a slight decline: total defence and security spending will fall in nominal terms by 2.32% and more significantly in real terms by 6.68% from RUB17 trillion to RUB16.7 trillion ($203.3bn, 7.2% of GDP) due to inflation outpacing the security increase.

The rationale for the cut in defence, or at least the halt in its steady increases, is not clear. Some argue that now the Russian economy is fully militarised the need for continued heavy investment is falling away. Others say that steady progress on the battlefield has also taken the pressure off the need for more heavy spending. And at the same time, MinFin itself has been pushing for less military spending, simply to reduce the distortions to an overheating economy that will cause long-term damage that could undermine the campaign.

Deficit: the budget deficit has ballooned sharply on the back of unfettered military spending and falling revenues. The forecast has already been tripled from 0.5% set at the start of the year to 1.7%, or RUB3.8 trillion ($46.2bn), in the summer. (chart)

However, over the first eight months of this year it had already swelled to 1.9% of GDP, or RUB4.2 trillion ($51.1bn) blowing through the new official target….

By Darya Korsunskaya, Reuters, 9/18/25

Summary

-Russia wants to balance the budget while maintaining reserves

-VAT hike is under discussion, no decision yet

-Putin pledged no major tax changes before 2030

-Earlier VAT hike spurred inflation

MOSCOW, Sept 17 (Reuters) – The Russian government is considering raising the rate of value-added tax to keep the budget deficit in check and maintain reserves, four sources told Reuters, despite public assurances from President Vladimir Putin that there will be no tax rises.

The draft budget is expected to be submitted to parliament on September 29. Its key components are agreed with Putin beforehand and are unlikely to be significantly altered during the formal parliamentary debate.

Russia, in the fourth year of its war in Ukraine, has raised personal income and corporate taxes this year, but the government still had to triple its federal budget deficit estimate to 1.7% of gross domestic product (GDP) in May.

It is now set to exceed that target, according to an unnamed official quoted by state media this month. The 0.9% of GDP deficit for 2026 included in a budget law last year also looks likely to be exceeded.

INCREASE COULD HALVE THE PROJECTED BUDGET DEFICIT

Four sources close to the government confirmed a report this week by The Bell, a media outlet based outside Russia, that the government is discussing lifting the value-added tax (VAT) rate to 22% from 20% to curb the deficit.

The report did not specify a possible timeline for a decision but one of the sources told Reuters it was being considered for the 2026 budget as long as the budget rule which sets aside windfall oil revenues remains in place.

“How can the deficit be reduced while adhering to the budget rule? Only by raising taxes, because there’s hardly anything left to cut, either military spending or social spending,” one source said.

VAT accounted for 37% of federal budget revenues in 2024 and the possible increase could halve the projected 2026 deficit, according to Reuters calculations.

Russia’s economy has continued to grow despite tightening Western sanctions over the war in Ukraine. But GDP is expected to slow to around 1% from 4.3% last year and inflation remains above 8% in a country where much of the workforce and 40% of revenues now go to defence and security.

Government spending is the key driver of economic growth in Russia, and with Putin expressing displeasure at the economic slowdown and the need to continue financing the war of attrition in Ukraine, spending cuts are unlikely.

NO FINAL DECISION YET

Finance Minister Anton Siluanov has insisted that the budget rule, under which energy revenues collected above Russia’s target oil price, currently $60 per barrel, are directed to the fiscal reserve fund, will remain in place.

After Russia sent troops into Ukraine in 2022, Western nations prohibited insurers and maritime service providers from facilitating Russian oil exports unless they were below $60 a barrel. India boosted its Russian oil imports sharply but now faces pressure from U.S. President Donald Trump to halt them.

The Russian fund, which is separate to the country’s central bank reserves, currently has about 4 trillion roubles in liquid assets, which can also be used to cover the deficit. This year the government plans to tap the fund for 447 billion roubles.

Putin, who in 2024 pledged no major changes to the tax system before 2030 following the tax hikes, which were introduced in 2025, has asked the government on September 5 to increase revenues through higher productivity, not taxes.

The source who said there was little room for cuts in the federal budget, argued that military spending could not be cut and minor cuts in the social sphere would not help much.

“It is like shearing a piglet—lots of squealing, not much use. If we could cut 1–2 trillion roubles, sure, but you can’t cut amounts like that, they just aren’t there. You can trim a few million, maybe hundreds,” the source said.

GROWING CONCERN ABOUT THE BUDGET

A two percentage point 2019 VAT hike contributed 0.6 percentage points to inflation that year, according to the central bank, which has pledged to halve inflation to return it to its 4% target.

However, central bank governor Elvira Nabiullina cautiously backed a tax increase, saying after the September 12 board meeting that it was better to raise extra revenue than to widen the deficit.

She linked the size of the deficit to the central bank’s ability to cut rates further from the current 17%, a level economists see as too high to revive growth.

Putin has said that Russia’s low level of debt allows it to borrow more and that new debt should not be feared, but rates even for the government are around 13%, with interest expenses expected to reach 2% of GDP in 2025.

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Russia unveils ‘muscular’ budget changes to counter sanctions, oil price falls

By Gleb Bryanski and Darya Korsunskaya, Reuters, 9/18/25

Summary

-Finance Ministry unveils measure to ensure reserve replenishment

-Measure to be included in the 2026 draft budget

-Ministry says the measure will boost resilience to sanctions

-Draft budget to be submitted to parliament on September 29

MOSCOW, Sept 18 (Reuters) – The Russian Finance Ministry announced a new measure on Thursday that it said was aimed at shielding the state budget from oil price fluctuations and Western sanctions targeting Russian energy exports.

Under the new initiative, set to be implemented next year, the government will lower the cut-off price for oil above which oil revenues go into the fiscal reserve fund to try to ensure that the fund is sufficiently replenished.

“To make our finances more resilient, we are proposing a reduction in dependence on various constraints, whether price-related or volume-related, in the budget’s reliance on oil and gas revenues,” Finance Minister Anton Siluanov said at a public forum.

RUSSIA’S OIL AND GAS SALES ARE EXPECTED TO FALL SHARPLY

The measure comes as Russia’s state oil and gas sales in September are set to fall, opens new tab by around 23% from a year earlier on lower prices and a stronger rouble, according to Reuters’ calculations.

The draft budget is expected to be submitted to parliament on September 29. Sources told Reuters that the government was considering raising the rate of value-added tax to keep the budget deficit in check and maintain reserves.

The Kremlin declined to comment on the VAT hike, with spokesman Dmitry Peskov saying that the government was handling the draft. Key budget figures are traditionally agreed with President Vladimir Putin before the budget is made public.

Putin, who met key cabinet members this week to discuss the budget, expressed displeasure at the slow pace of economic growth, which is expected to slow to about 1% from 4.3% last year.

MEASURE WILL STRENGTHEN RUSSIA’S BUDGET, SAYS SILUANOV

Siluanov has been seeking to restore the oil price mechanism, known as the “budget rule”, which was abandoned after the start of the war in Ukraine, although Russian media reported that he had pushed for a bigger reduction in the cut-off price.

Under the rule, the taxes resulting from when the price exceeds the agreed cut-off price go to the fiscal reserve fund, while the rest of the income is used to cover budget expenses. When the price falls below the cut-off level, the reserves are used to cover the resulting shortfall.

If the rule, first introduced by Siluanov’s predecessor Alexei Kudrin in 2004, is not in place, the budget can become more vulnerable when the oil price is going down.

Siluanov said the new measure would help to bring the share of energy revenues in the state budget down to 22% from about 25% in the first eight months of 2025, making the budget more “muscular”.

The fiscal reserves created under the budget rule carried Russia through several downturns and helped it withstand Western sanctions.

Siluanov said the cut-off price would be lowered by $1 every year to bring it to $55 per barrel in 2030. The cut-off price is currently at $60 per barrel.

The fiscal reserve fund, which can be used to cover the budget deficit, currently has about 4 trillion roubles ($48.25 billion) in it. The government this year plans to tap the fund for 447 billion roubles ($5.39 billion) to cover part of the budget deficit, which is expected to exceed 1.7% of GDP.

The 2026 draft budget set the average price of Urals crude at $59 per barrel, Siluanov said, implying that the fiscal reserves would not be replenished at the same cut-off price.

Speaking alongside central bank Governor Elvira Nabiullina, Siluanov paraphrased a quote attributed to Tsar Alexander III, that the army and the navy are Russia’s best allies, adding that sustainable finances were a third.

Nabiullina said a more balanced budget would enable the central bank to lower its key rate to an average of 12%–13% next year from the current 17%, a level economists and business leaders see as needed to spur faster growth.

($1 = 82.9000 roubles)

By Ben Aris, Intellinews, 9/16/25

“A crisis is drawing ever closer. It will break in Ukraine, but it won’t begin on the frontlines, where the country’s battle-weary brigades continue to impose a brutal cost on the Russian invader. The coming crisis is brewing in the West, where the US pullback and European hesitation now threaten a financial disaster,” Timothy Ash, the senior sovereign strategist at BlueBay Asset Management in London wrote in a note for Center for European Policy Analysis (CEPA) on September 16.

As bne IntelliNews reported, Ukraine faces the risk of falling off a financial cliff this year. The problem is that the government is short $8bn-$19bn to cover the projected deficit this year. The Finance Ministry has been warning for over a year that it needs more help from its Western allies to pay for the war. It is running a deficit of about $50bn a year and the projected unfunded short fall for 2026 is $37.5bn, but the International Monetary Fund (IMF) team in Kyiv this week for funding talks, said that it thinks Kyiv needs an additional $10bn-$20bn next year: Ukraine spent $97bn in 2025, but is on track to spend $120bn in 2026.

Where will this money come from? Raising it from Ukraine’s allies has become next to impossible now that the US has essentially withdrawn all support for Ukraine. As bne IntelliNews reported, Europe can’t afford to take over the burden of supporting Ukraine entirely on its own, as most EU countries are either in recession or approaching a crisis. The rising debt amongst the G7 countries has already caused a bond market storm and France’s government collapsed last week under the weight of an intractable 5.7% of GDP budget deficit. And both the UK and France are close to debt crises of their own that may end in a Greek-style IMF bailout. Coming up with an additional $58bn next year for Ukraine from EU coffers is no longer possible.

“IMF messaging suggests that its prior conclusions that Ukraine’s gross budget and balance of payments financing needs over the four-year duration of the program were just $150bn were way too optimistic,” says Ash. “The financing currently available is inadequate to meet Ukraine’s impending needs. A swift change of course is needed if a financial cataclysm is to be averted.”

Europe has committed just under $170bn to Ukraine since the start of the war – more than the US, which has spent just under $100bn, according to Ukrainian President Volodymyr Zelenskiy. On paper it is more. US President Donald Trump claimed earlier this year the US has committed over $350bn, but after Bankova checked the numbers the official allocations by Congress amounted to $196bn, but at least $100bn of that never arrived, Zelenskiy said in March. And since he took office, the Trump administration has sent next to nothing.

“Underpinning the Fund’s macro and financing framework was the assumption that the war would begin to wind down this year, and hence, Ukraine’s financing needs would also significantly reduce,” says Ash.

No end to the war in sight

That is clearly not going to happen. The ceasefire talks that kicked off in Riyadh on February 18 have gone nowhere after Russian President Vladimir Putin made impossible claims and Trump has flip flopped on the shape of the possible peace deal. As bne IntelliNews opined, there are two sets of talks going one: the Trump administration has threatened Russia with extreme secondary sanctions but at the same time kept the door open to sanctions relief and business deals to tap Russia’s mineral riches.

Since the full-scale invasion, Ukraine has been running budget deficits equivalent to $3bn-$4bn a month, most of which has been covered by IMF and Western financing. Assuming that the war would essentially end in 2025, the Fund had presumed the budget deficit and financing needs would more or less halve in 2026, and then fall to a fraction of this in 2027. “It was a heroic assumption, and it was wrong,” says Ash.

This problem has been apparent for a while, yet the IMF has yet to recalibrate its model that sets the agenda for the size of its funding programme.

It is becoming increasingly obvious that the Kremlin has no interest in peace talks, as it continues to make steady, albeit slow, progress on the battlefield. At the same time, after three years of heavy investment, its military production is now producing more materiel than it needs so that the process of restocking has begun as Russia starts to rebuild its military capacity. The peace talk efforts came to a definite end last week when presidential spokesman Dmitry Peskov officially put ceasefire talks on hold on September 12.

The expectations are now moving towards a long war, which implies much higher long-run financing needs, says Ash. On September 11, EU foreign affairs chief Kaja Kallas said that she expected the war to continue for at least another two years. Others have speculated that Putin will simply continue until Ukraine collapses completely or Zelenskiy capitulates, however long that takes. Time is on his side.

A lot of attention has been paid to Russia’s economic problems, which are getting worse, but with inflation falling much faster than expected – the core macro problem – thanks to CBR governor Elvia Nabiullina’s unorthodox plan to artificially cool the economy, growth will slow this year before it starts to recover next year, according to the CBR’s latest outlook.

The Kremlin is also short of money. This year’s budget deficit is ballooning, but the government has already started a discussion on raising VAT and it also has some RUB20 trillion in banking sector liquidity to tap to cover a deficit of up to RUB5 trillion now expected for this year. In short, the Kremlin has access to enough money to keep the war up for several more years.

IMF’s blinkered approach

The IMF has acknowledged that its previous estimate was wrong. It now says that an anticipated additional $10bn-$20bn will be needed by its Extended Fund Facility (EFF) by the end of 2027. Ukraine’s Finance Ministry put the number at $37bn. “Both could prove significant underestimates,” says Ash.

Ash argues that both the government and IMF take a “blinkered” approach to estimating Ukraine’s financing needs. They focus only on budget and balance of payments requirements. That excludes the broader, but essential, military support. Using the data from the Kiel Institute of the World Economy, Ash estimates that the annual cost of the war to the West of supporting Ukraine has been nearer to $100bn annually— more than double IMF estimates.

Finding new IMF funding for Ukraine will have to clear several hurdles. It will need to get reassurance that it can be financed to get a sign off from shareholders.

“In other words, that the numbers add up. Even to meet the IMF’s narrow focus on budget financing needs, the West will have to come up with $20bn-$37bn in new funding, just to take the country to the end of the program in March 2027,” says Ash, and that means calculating on spending $100bn for at least another three years.

The Biden administration used to cover about 40% of Ukraine’s financing needs, but with the Trump administration now out of the game, this very considerable annual funding requirement will fall squarely on Europe.

“Europe cannot and will not pick up this bill,” says Ash. “The harsh political, social, and economic reality across the continent means there is no realistic possibility of Ukraine receiving such a long-term financing commitment. Europe is struggling with rising budget deficits, subdued growth, competing demands for defence and social needs, and a populist tide demanding spending at home. The situation is now serious.”

Ash speculates that the IMF shareholders might nix any proposal to even increase funding by another $20bn in the short-term, which would quickly precipitate a crisis. And would immediately raise doubts about Ukraine’s ability to continue its defence against Russian attacks.

“Europe needs a plan B, but in truth, that’s really now actually Plan A. For more than three years, Europe has ignored the very obvious solution to its problem,” says Ash.

CBR money

Ash, and many others, have been advocating for several years to seize the $300bn of frozen Central Bank of Russia (CBR) assets and use them to pay for the war. The idea came up again most recently at a meeting of EU foreign ministers in Copenhagen on September 1, but was ultimately rejected. European Commission President Ursula von der Leyen also brought it up during her EU State of the Union address (video, transcript) on September 10, but said the idea was now off the table.

The problem is that the money is frozen, but technically it still belongs to the Bank of Russia. Confiscating it – taking ownership and spending it – as opposed to just freezing it, would undermine confidence in both the euro and the European banking system, say critics – something that central bankers in Europe are not prepared to do. In the meantime, von der Leyen has suggested that the money can be used more “creatively” and invested into some sort of “victory bonds” to generate more revenues. The profits from the assets have already been used to underpin a $50bn G7 loan for Ukraine, the Extraordinary Revenue Acceleration (ERA) scheme, but that loan is already nearly fully distributed.

While the EU leaders are very unhappy about seizing the CBR’s money, faced with the prospect of a Russian military victory in Ukraine, the pressure to grab those funds will clearly build steadily.

“All roads lead back to the issue of freezing, seizing, and using the $330bn in Central Bank of Russia CBR) assets in Western jurisdictions,” says Ash. “This money would amply finance Ukraine’s defence needs for a long war and send a powerful signal that Ukraine can ride out Putin’s long-war scenario and his own failing economy. This would increase the Kremlin’s risk in continuing its war of aggression, and quite possibly force it to the negotiating table.”

“Opponents of the need to seize Russia’s CBR assets have an armory of excuses, although none is very persuasive. Such arguments are, anyway, less effective the worse Ukraine’s financing dilemma becomes,” Ash argues, highlighting the dilemma that Europe is now facing. “And while these critics aim to explain what they think won’t work, there are no suggestions about what will.”

A crisis is coming

A crisis is drawing nearer. Relying on European taxpayer support is no longer sustainable. The political fallout from the drain on Europe’s economies and the ballooning deficits and debt is already visible, fuelling a popular backlash and the rise of the far-right parties in Europe. Germany’s AfD (Alternative für Deutschland) just tripled its share of the vote in a German regional election this weekend, taking 15% of the vote in North Rhine-Westphalia, German Chancellor Friedrich Merz’s home state. The AfD are now leading in the national polls. Similar things are happening in the rest of the EU.

“And yet the alternative of Ukrainian bankruptcy and defeat is a terrifying spectre for the continent,” says Ash. “If that happens, Europe would be faced by many, many millions of Ukrainians moving West, further straining its social, economic, and political fabric. The consequences get worse the more closely they are examined.”

Ash goes on to paint a grim picture of what Europe would look like if Ukraine loses: Europe’s two largest military industrial complexes would fall into the Kremlin’s hands; European defence spending would need to immediately rise to the 5% of GDP; budget deficits and borrowing needs would soar; interest rates across Europe would rise; and real GDP growth would slow.

“The opponents of seizing CBR assets, particularly Belgium, Euroclear, and the European Central Bank (ECB), need to detail their exact plan for the defence of Europe if Russia’s billions are left unused,” says Ash. For now, all we can see is blank faces — they have no plan.”

The flaw with this argument is that it assumes the only solution is to fund Ukraine to continue the war in the equally vain hope that the Russian economy will eventually collapse or that Trump will get back into the game and impose such tough sanctions on Russia, Putin will be forced to the negotiating table – an equally unlikely scenario.

In the short-term the only immediately available scenario that will end the war is that Zelenskiy accepts the terms that the Kremlin has laid out at the various rounds of talks this year along the lines of the failed 2022 Istanbul peace deal. It is effectively the Finlandisation of Ukraine where it gives up 20% of its territory, returns to neutrality, and promises never to join Nato. There are some tough choices ahead, and none of the alternatives are particularly palatable.