Hungarian economist János Kornai coined the concept of ‘soft budget constraints’ (SBCs), a cornerstone of his analysis of socialist economies. The idea explains chronic inefficiency and persistent shortages as an inevitable outcome of SBCs.
Under soft budget constraints, managers of politically important enterprises, and even entire sectors, can take decisions carrying a high risk of insolvency while expecting to be bailed out if problems arise, even without any prior guarantee. In practice, this allows companies to shift losses onto other economic actors, including the state, consumers, suppliers, banks or employees.
SBCs emerge when creditors or governments cannot credibly commit to letting loss-making entities fail ex post.
Unlike hard budget constraints, sustained losses do not trigger closure, bankruptcy or ownership change. Instead, they are absorbed through recapitalisations, subsidies, debt write-offs and tax breaks.
SBCs persist for several structural reasons:
• political considerations often prevail, as authorities are unwilling to let strategically important employers or regions fail given the risks to jobs, social stability and security;
• systemic importance plays a role too, with banks and large corporates deemed ‘too big to fail’ expecting support to prevent broader disruption;
• ownership structures further reinforce the pattern: state-owned enterprises, municipal companies and state banks are especially prone, as the state acts both as shareholder and backstop.
SBCs entrench managerial complacency, weakening incentives to lift productivity, improve efficiency, cut costs or optimise staffing.
Сorporations operating under SBCs also tend to show poor capital discipline, backing projects that would not clear stricter financial thresholds and dragging down returns.
A recent example is Russian Railways’ RUB 193 billion purchase of two Moscow Towers skyscrapers in the Moscow City district, despite mounting losses. By the end of 2025, the company’s total debt was estimated at about RUB 4 trillion, with net debt at RUB 3.3 trillion. The government has since pushed the monopoly to sell assets, including the Moscow Towers, to ease its debt burden. The company has also put the Riga railway station building up for sale.
SBCs also delay restructuring. Bankruptcy is deferred, necessary reforms are postponed and inefficient firms continue to operate on the back of borrowing and subsidies.
At the macro level, SBCs lead to:
• persistent fiscal deficits and rising public debt, as bailouts and subsidies are funded either directly from the budget or through quasi-fiscal channels such as state banks and the Central Bank;
• distorted economic structure, with excess employment and inefficient sectors preserved, weighing on productivity and innovation;
• financial imbalances and weakened price signals, as risks are partly ‘socialised’ and insufficiently priced into rates and spreads.
Political economy models suggest SBCs can serve as a financially and politically expedient tool for channelling resources to favoured groups. Once the threat of non-intervention is not enforced, it hardens into a predictable system of transfers.
Despite the controversial Moscow Towers transactions, Russian Railways (RZD) chief executive Oleg Belozerov has been reappointed for another five-year term. Freight rail tariffs will rise by 10.4 % in 2026, while third-class sleeper fares will increase by 11.4 %. From March 1, the Federal Antimonopoly Service has also added a 1 % surcharge on freight tariffs to fund transport security.
These measures will support the monopoly’s finances, although under current management the gains may prove short-lived.
Since 2020, nuclear power’s share in Russia’s energy mix has stalled. Vladimir Putin recently cited a figure of 18.5 %, lower than six years ago. Rosatom’s share has not grown over that period.
Its chief executive, Alexey Likhachev, remains firmly embedded in the system, despite clear signs the corporation needs a strategic and managerial reset. A faster expansion of nuclear generation is widely seen as essential. Current state targets envisage a share of 23–25 % by 2040–2045, yet a more ambitious trajectory may be required if Russia is to keep pace with the emerging technological cycle and the global race in artificial intelligence.
Russia still has a large number of state-owned companies and monopolies that operate inefficiently, run up substantial losses and debt, while management aligned with entrenched interest groups remains firmly in place. These executives are structurally ill-suited to compete in an environment focused on cost discipline and efficiency gains. They operate under SBCs.
Such state-backed giants, reliant on continuous government support, effectively generate fiscal gaps that are plugged through higher taxes and charges on households and businesses. The result is a deterioration in the investment, business and consumer climate.
There are no economic miracles. However familiar or politically convenient loss-making management teams may be, the government must take a more hard-nosed approach to performance assessment and be prepared to act decisively on leadership.
Generating losses requires little skill. János Kornai demonstrated that SBCs ultimately push economic systems towards models where inefficient companies are kept afloat for years or even decades, despite needing deep restructuring, relaunch or, in some cases, bankruptcy
However committed policymakers may be to Russia’s economic interests, they should recognise that expanding the soft budget constraint ‘umbrella’, while creating an illusion of control in the short term, ultimately steers the system towards collapse. Inevitable, sooner or later.
ORIGINAL: NG/Soft Budget Constraints Weigh on Russia’s Economy
