Smith has one year left on his Watford contract and if he was to sign a new deal it will have to be on reduced terms.
Russo told BBC Three Counties Radio: "The problem we have with Tommy is that he is one of the highest wage earners at the club."
He added: "That level of commitment would be financially outside the financial model we have introduced for this club to ensure stability.
"I've always said this business has to stand up on its own two feet. I'm not prepared to go to banks and institutions to borrow money and we have got to realise what we are at Watford FC."
Smith has recently turned down a £1.8m move to Sheff Utd.