Debts that suffocate Russia: why the Kremlin is unprofitable to delay the war in Ukraine
Banks have issued preferential loans to defense enterprises - as a result, according to its calculations, the costs of Moscow for military expenditures exceed budget expenditures from 2022 almost 2 times !!!!!!! ------------------------ Resume in this report considers Russia's strategy to finance the war against Ukraine. He evaluates Russia's ability to maintain increased costs during the war and determines vulnerable places that Ukraine and its allies can use.
It has three key conclusions: 1) the Russian state adheres to a bilateral strategy to cover its more than military expenditures, supplementing carefully proven defense budget expenditures by financing under the extrabudgetary financing scheme, which has a similar scale, but was largely ignored.
This flow of extrabudgetary financing is allowed in accordance with the new law, quietly adopted on February 25, 2022, which gives the state the right to force Russian banks to grant preferential loans related to war enterprises under the conditions established by the state. Since mid -2022, Russia has undergone anomalous corporate debt by 71%, which is estimated at $ 415 billion, or 19. 4% of GDP. (See Figure 1).
This additional corporate credit surge is significant as comparable to the key budget indicators (see Figure 2). It significantly exceeds both total oil and gas revenues and budget expenditures for defense for the same period and is 6. 5 times higher than additional state borrowing. According to the analysis of sectoral lending data, more than 70% of the growth of corporate lending came into sectors related to war -related activities (see Figure 3).
Not all loans to these sectors are required to finance goods and services for war. However, given the analysis in this report, it is estimated that from 50% to 60% of the surge of corporate lending during the war (from $ 207 to $ 249 billion) went to financing the business related to war under the government -funded government funding scheme . These are loans that the state forced banks to give preferential enterprises to the war on preferential terms.
On this scale, the flow of extrabudgetary financing of Russia is approximately equal to the total expenditures flowing through the federal defense budget. Between 2010 and 2022, the Kremlin used a similar extrabudgetary financing scheme - albeit on a smaller scale - for a clear purpose to secretly supplement the financing of its expensive re -equipment, while publicly demonstrating the support of budgetary discipline.
The current scheme achieves a similar goal, allowing official budget expenditures to remain stable, creating a deceptive impression of Russia's resilience to finance war. In short, Russia's total expenditures for war are much higher than official budget expenditures. The state invisibly finances about half of these expenses outside the budget through significant debts, forcing banks to provide loans on "non -market" (non -profit) conditions for enterprises that supply goods and services for war.
2), unlike the defense budget, which was maintained at a stable level, the extrabudgetary scheme of funding for Russia's defense has become much more problematic to maintain during the second half of 2024; It increased so much that it causes inflation by increasing interest rates for borrowers from the "real" economy much above 21% and creating the preconditions for the systemic credit crisis.
In the second half of 2024, the Central Bank of Russia (CBR) began to determine the state scheme of preferential corporate lending as a significant threat to Russia's economic stability. Being the main source of monetary expansion, it caused an increase in inflation in Russia.
What is even worse, since this lending is strategic rather than commercial in nature, Central Bank notes that it was largely "insensitive" to raising interest rates, blunting the main CBR tool to combat inflation (see Figure 4). So, in order to cool the overall borrowing, the CBR says that it was forced to intensify much more aggressive than it would be necessary otherwise.
High costs of borrowing cause financial difficulties among healthy companies in a "real" economy, which encourages the Central Committee of the Russian Federation to express anxiety about "the risk of excessive debt of large companies". These risky companies probably include Gazprom, which took significant loans in the domestic markets at 22% and above to cover the losses from the collapse of their main business - European exports.
The CBR also expressed concern about the condition of large banks that worked in a significantly softened regulatory policy after increasing sanctions in early 2022. According to the CBR, some banks took advantage of softened policies to "aggressively" to lend without maintaining sufficient "short -term liquidity" and corresponding "capital buffers".
In addition, bank credit risk has probably increased significantly due to a large amount of lending to enterprises with a weak credit history, which can be difficult to serve their loans, especially after reducing defense costs. This creates the prospect of a systematically destabilizing association of toxic debt that extends to corporate loan markets.
In November 2024, the Central Bank of the Russian Federation announced the long -awaited schedule of strengthening of banking regulatory policy, which indicates how problematic the bank credit portfolios became, and in December suddenly postponed its plans for strengthening. The out -of -budgetary financing schemes of Russia became toxic twice - in 2016–17 and again in 2019-20. Both times the state had to take large sums of hopeless debts.
Given the scale of today's extra -budgetary lending scheme, potential financial assistance can be extremely burdensome for the state - in general it will be half of the total Russian federal budget for 2024. This can limit public finances over a long period, including its ability to finance the future of re -equipment, provided, of course, that Russia will not receive a significant weakening of sanctions.
In general, it has now become apparent that Moscow's strong dependence on extrabudgetary banking financing for financing war creates preconditions for a systemic credit crisis. By raising interest rates, it creates financial difficulties for companies in a "real" economy. And, imposing a considerable amount of debt on the company related to the war, which will probably receive a default over time, it risks to collapse banks with a wave of toxic debt.
Not surprisingly, since the end of October, the CBR has publicly urged the government to collapse its preferential funding scheme. But this would undermine the ability of the state to maintain the current level of financing of war without a significant increase in official defense expenditures. 3) At the end of 2024, the Kremlin realized the systemic credit risks associated with the extrabudgetary defense financing scheme.
This has created a dilemma that will probably be burdened with Moscow's military calculation: the longer it rests on this scheme, the greater the risk of a devastating credit event that undermines its image of financial stability and weakens its impact on negotiations. The emerging financial dilemma offers Ukraine and its allies unexpected levers of influence on negotiations. There are two key measures that well -informed negotiation participants can take to use Moscow's financial vulnerability.
On October 28, Vladimir Putin convened a meeting of high -ranking officials, including the head of the CBR, to discuss problems around the "structure and dynamics of" Russian "corporate debt portfolio". Since then, he has publicly demonstrated increased sensitivity to the level of defense costs and the use of preferential lending to the state to achieve "strategic tasks". In addition, there is a negative flow of news about more financial difficulties in both corporate and consumer sectors.
Unlike the risk of slow inflation, the risk of credit events, such as the salvation of companies and banks, is seismic: it can materialize suddenly, unpredictable and with considerable devastating force, especially if it becomes contagious. Moscow is unlikely to worry that a major credit event can destabilize the government. Or even prevent him from maintaining increased war costs.
Probably, it can still give up a significant increase in taxes and increase government borrowings, although she clearly prefers not to do so. Moscow is more concerned about the deterioration of the credit environment in Russia can lead to events that dispel a widespread misconception that is skillfully moved by Moscow, that Russia's military finances are stable and do not threaten significant risks. This wrong perception gives Moscow valuable levers of influence on future negotiations.
Moscow's practice to manipulate the concept of defense costs for political gain is not something new; This was widely practiced in Soviet times as part of the wider reflexive control campaign. Now Moscow stands in front of a dilemma: the longer it delayed the ceasefire, the greater the risk that credit events will be uncontrollable and weaken Moscow's levers on negotiations. This is a serious concern to take into account the Moscow ceasefire.
In particular, it could stimulate Moscow in two ways: i. Determine the priority of relief of income sanctions as ceasefire conditions; This would provide such additional resources for the restructuring of large -scale, toxic corporate military debt, as well as re -equipment financing. II.
Promote the stops of fire faster than later to reduce the risk that the credit event will weaken its negotiating lever; If, however, Moscow believes that a much greater weakening of sanctions can be achieved by continuing hostilities, it may be ready to go to such risk. Ukraine and its allies can use Moscow's financial dilemma by resorting to two events: i.
Smart, confidence that Western resources can exceed Russian resources in the war for exhaustion, reinforcing this message with an updated financing and weapon package, as well as increased use of sanctions - continuing to intensify energy sanctions on January 10, 2025. Moscow is well aware that it simply cannot overcome the decisive deployment of Western resources.
That is why it makes so much effort to convince Western opinion in the opposite, hoping to cause despair and fatigue that will lead to unnecessary concessions. The updated demonstration of the determination of the West will weaken Moscow's confidence in its ability to provide an advantage in negotiations by bluff and deception. Prospects to compare with the predominant Western resources in expanded conflict will only increase Moscow's concern about its new financial vulnerability.
This will make her look quietly at the confrontation calculation, as we have seen it many times earlier. II. It is decisive and categorically noted that the softening of sanctions is not considered at all during any ceasefire negotiations and will be considered only as part of a comprehensive peaceful settlement, including reparations, which is discussed and approved by Ukraine.
Given the restored determination of the West, one thing that could force Moscow to continue the fighting, it was if she believed that it could get additional weakening of sanctions while continuing the fight. The categorical abolition of the softening of sanctions from any ceasefire negotiations-and the conviction of Moscow, which is not subject to discussion-this will weaken Moscow's incentive to continue the fighting.
It is also tantamount to call it, that Moscow's finances remain strong and sanctions are ineffective. In addition, the preservation of sanctions-with strict observance-will also limit Moscow's ability to re-arry after ceasefire, leaving Ukraine and its allies with powerful negotiation levers in any possible comprehensive settlement. Moscow's problems with funding will only intensify, especially if coalition countries more fully apply powerful energy sanctions.