Russia’s War Economy: A House Built on Borrowed Time
Vladimir Putin’s narrative has centered around a grand illusion: that Russia can sustain its war against Ukraine without financial instability or material sacrifice. This claim is part of a broader campaign to project strength and resilience to the West, suggesting that time is on Russia’s side. However, beneath the surface, the economic reality reveals a system teetering on the edge—a war economy propped up by unsustainable measures and an impending financial crisis.
The Myth of Economic Resilience
Western skepticism about the effectiveness of sanctions is fueled by surface-level indicators such as low unemployment, rising wages, and steady growth. But such metrics, in a wartime economy, are deceiving. Any economy under full mobilization can artificially inflate these numbers through basic Keynesian principles—redirecting existing resources rather than activating unused ones. The real question is how these resources are being shifted, and at what cost.
Russia’s war machine relies on three mechanisms to finance its ambitions: borrowing, inflation, and expropriation. Putin’s conceit lies in his insistence that these measures can be implemented without destabilizing the country. But cracks are showing. Public concerns from key figures like Sergei Chemezov, CEO of Rostec, and Elvira Nabiullina, head of Russia’s central bank, signal growing internal discontent. Their frustrations point to a deeper, systemic problem: the illusion of financial stability is beginning to crumble.
Russia’s Hidden Debt Crisis
A recent analysis by Craig Kennedy, a Russia expert and former banker, highlights an alarming surge in corporate debt. Since 2022, Russian corporate borrowing has skyrocketed by 71%, dwarfing household and government debt. Ostensibly private, this debt is tightly controlled by the state, which has commandeered the banking sector. Banks are mandated to provide loans to government-designated companies at preferential rates, effectively turning the financial system into a hidden arm of the Kremlin’s war effort.
This strategy amounts to massive money printing, cleverly disguised to avoid appearing on the government’s balance sheet. Kennedy estimates that the scale of this hidden credit expansion equals roughly 20% of Russia’s GDP—a staggering figure that rivals the country’s direct war expenditures. While this approach keeps public finances superficially stable, it creates a precarious credit bubble that is bound to burst.
The Cost of Concealing Instability
The Kremlin’s war economy hinges on maintaining two appearances: manageable public finances and controlled inflation. To achieve this, the government keeps budget deficits in check, despite escalating war-related expenses. Meanwhile, the central bank has raised interest rates to 21%—a measure that stabilizes inflation but exacerbates borrowing costs for businesses. This delicate balancing act has pushed companies reliant on credit into financial distress.
The high-interest environment, coupled with state-mandated loans, is driving businesses into a no-win scenario. Firms like Chemezov’s Rostec struggle to operate profitably, and the broader economy risks collapse under the weight of bad loans. As these debts become unserviceable, the banking sector faces potential insolvency. Should banks falter, the state might step in with bailouts, but this risks triggering a broader crisis of public confidence—one that could lead to runs on banks and a collapse of trust in government institutions.
A Ticking Financial Time Bomb
Putin’s economic strategy is not built for the long haul. His reliance on coercive state controls and hidden debt mechanisms has created a financial time bomb. The west’s sanctions play a crucial role in tightening the noose, restricting Moscow’s access to foreign reserves, hindering its oil trade, and limiting critical imports. Together, these measures prevent Russia from using its foreign earnings to alleviate domestic resource constraints, leaving the country increasingly vulnerable.
For Ukraine’s allies, the key is to deny Putin the one thing that could stabilize his economy: access to external funds. Intensifying sanctions, targeting loopholes, and transferring frozen Russian reserves to Ukraine as a form of reparations would amplify the pressure. Such moves would deepen the Kremlin’s resource shortages, forcing Putin to confront an unpalatable choice: continue his war of aggression or risk losing his grip on power at home.
The Road Ahead
Putin’s ultimate fear is the sudden collapse of power, a prospect that grows more likely as his war economy falters. His efforts to maintain the facade of stability are unsustainable, and the cracks are becoming harder to hide. The West must remain steadfast, resisting any diplomatic overtures that offer Russia financial relief. Only by holding firm can Ukraine’s allies force Putin to reconcile his ambitions abroad with the fragility of his regime at home.
The illusion of economic resilience has carried Putin this far, but it cannot carry him indefinitely. The house of cards is beginning to wobble, and time is no longer his ally—it is his adversary.
https://www.ft.com/content/61adaed4-ac9a-4891-afb6-b3ad648c58ad