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The most important thing Russian President Vladimir Putin is trying to impress on Ukraine’s Western friends is that he has time on his side, so the only way to end the war is to comply with his wishes. The apparent resilience of the Russian economy and the resulting skepticism in some quarters that Western sanctions have had an effect is central to this information war.
The reality is that the financial basis of the Russian war economy looks more and more like house of cards — so much so that senior members of the ruling elite publicly express concern. Among them is Sergey Chemezov, CEO of the state-owned defense giant Rostec, who warned that expensive loans are killing his arms export businessand Elvira Nabiullina, head of the central bank.
This couple knows better than many people in the west, who are covered by numbers which indicates steady growth, low unemployment and rising wages. But any economy based on full mobilization can produce such outcomes: this is basic Keynesianism. The real test is how already used resources – instead of unused ones – are transferred from their previous uses to the needs of war.
The state has three ways to achieve this: borrowing, inflation and expropriation. He must choose the most effective and painless mixture. Putin’s conceit—both to the West and to his own public—was that he could finance this war without financial instability or significant material casualties. But this is an illusion. If Chemez and Nabiulla’s frustrations are spilling out into the public, it means that the illusion is flickering.
AND new report by Russian analyst and former banker Craig Kennedy highlights the huge growth of Russian corporate debt. It has grown by 71 percent since 2022 and overshadows new household and government borrowing.
Ostensibly private, this lending is in reality a creation of the state. Putin ordered the Russian banking system, and banks are required to make loans to companies designated by the government on selected, preferential terms. The result was a flood of loans below the market rate for privileged economic actors.
In essence, Russia is engaged in massive money printing, outsourced to keep it off the public balance sheet. Kennedy estimates the total at about 20 percent of Russia’s national output in 2023, which is comparable to the cumulative budget allocations for an all-out war.
We can conclude from the actions of the Kremlin that it perceives two things as anathema: visibly weak public finances and incredible inflation.
The government is avoiding a significant budget deficit, despite increasing war-related spending. The central bank remains free to increase interest rates, currently at 21 percent. Not enough to lower inflation fueled by government-mandated subsidized loans, but enough to keep price growth within limits.
The result is that Chemezov’s and Nabiulla’s problems are not a fixable mistake, but inherent to Putin’s choice to pander to public finances and maintain a (high) inflation rate. Something else has to give, and that something else includes companies that cannot operate profitably when borrowing costs exceed 20 percent.
Putin’s privatized credit scheme, meanwhile, is creating a credit crunch as loans default. The state could save the banks — if they don’t fail first. Given the Russians’ experience with suddenly worthless deposits, fear of repetition could easily trigger self-fulfilling runs. This would destroy not only the legitimacy of the banks, but also the government.
Putin, in short, does not have time on his side. He is sitting on a financial time bomb of his own making. The key for Ukraine’s friends is to deny him the one thing that would soften him up: greater access to external funds.
The West has blocked Moscow’s access to some $300 billion in supplies, jammed the keys to its oil trade and crippled its ability to import a range of goods. Combined, this prevents Russia from spending all of its foreign earnings to ease resource constraints at home. The tightening of sanctions and the eventual transfer of reserves to Ukraine as an advance for reparations would reinforce these restrictions.
Putin’s obsession is the sudden fall of power. This, as he surely realizes, is the risk that his war economy has run. Getting him to back down, by increasing access to external resources through sanctions relief, will be his goal in any diplomacy. The West must convince him that this will not happen. That, and that alone, will force Putin to choose between attacking Ukraine and keeping power at home.