It seems like a funny question to ask given Russian government debt to GDP isn\u2019t that large. Craig Kennedy<\/a> argues that taking into account forced bank lending means that (contingent) government liabilities are much larger than conventionally-defined public liabilities (report here<\/a>). The summary:<\/p>\n Moscow has been stealthily pursuing a dual-track strategy to fund its mounting war costs. One track consists of Russia\u2019s highly scrutinized defense budget, which analysts have routinely deemed \u201csurprisingly resilient.\u201d The second track\u2014largely overlooked until now\u2014consists of a low-profile, off-budget financing scheme that appears to make up a major portion of Russia\u2019s overall war expenditures. Under legislation enacted in February 2022, the state has taken control of war-related lending at Russia\u2019s major banks. It is directing them to extend preferential loans\u2014on terms set by the state\u2014to a wide range of businesses providing goods and services for the war. Since mid-2022, this state-directed war-funding scheme has helped drive a large part of Russia\u2019s anomalous \u20bd36.6 trn ($446 bln) surge in overall corporate borrowing.<\/p>\n Initially, this off-budget war-funding scheme proved advantageous to Moscow by helping limit defense spending in the budget to levels that are easily managed. That misled budget-watchers into concluding\u2014incorrectly as it turns out\u2014that Moscow faces no serious risks to its ability to sustain funding for its war on Ukraine. More recently, however, Moscow\u2019s heavy reliance on state-directed preferential lending has begun to cause serious, adverse consequences at home. It has become the main driver of Russia\u2019s 10% inflation and has sent the Central Bank\u2019s key rate to a record 21%.<\/p>\n More broadly, Russia\u2019s off-budget war debt is significantly elevating systemic credit risk, both for the near- and medium-term. High interest rates are driving up corporate distress levels in the \u201creal\u201d economy and raising fears of widespread bankruptcies. The Central Bank has voiced concern over \u201caggressive\u201d lending and inadequate capital buffers in the banking industry. What\u2019s more, the state has now saddled the banks with large amounts of problematic, corporate war loans. Many could turn toxic once the shooting stops and defense contracts get cancelled. Worse still, relaxed oversight rules on defense-related loans mean bank regulators might not see these problems arising until it\u2019s too late.<\/p>\n By late 2024, the Kremlin had been briefed on these rising risks and warned that change is needed. This poses a dilemma for Putin: continue relying on off-budget debt, and you further increase the risk of cascading credit events that undermine Russia\u2019s image of \u201csurprising resilience\u201d and weaken its negotiating leverage. The alternatives: a major increase in the budget deficit\u2014with the bad optics that entails\u2014or a sharp reduction in spending on the war. This may explain Putin\u2019s recent complaint to his generals that they can\u2019t \u201ckeep pumping up spending to infinity.\u201d<\/p>\n These new developments are likely to affect Moscow\u2019s war calculus in two ways:<\/p>\n Given Russia\u2019s financial challenges, maintaining these constraints on Russia\u2019s cashflows insures Ukraine and its allies retain substantial leverage. If kept in place past a ceasefire, they could be instrumental in securing a final, comprehensive peace settlement\u2014including reparations.<\/p>\n<\/blockquote>\n \u00a0<\/p>\n Kennedy presents this picture of corporate borrowing to buttress his argument. See the entire report here<\/a>.<\/p>\n Source:<\/strong> Kennedy\u00a0 (2025)<\/a>.<\/em><\/p>\n \u00a0<\/p>\n<\/p><\/div>\n\n
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