The card house built by Putin: when the economy of the Russian Federation begins to fall apart

Over the three years of the conflict, Putin has shown the world that he did not care for bloodshed. And if its purpose was to establish a friendly government in Kiev, it is still far from its achievement. However, there is also a less studied hypothesis that explains why the Russian president can finally sit at the negotiation table: Moscow may soon face the problem of warfare.

A common story about the fiscal situation in Moscow is that in Russia there is a small budget deficit and a low level of public debt (almost 20 percent of GDP), which provides reliable fiscal indicators. This analysis is true to most economies, but in the case of Russia there is one important coincidence.

Since Western sanctions limit Moscow's capabilities to enter international debt markets, the Kremlin has a limited space for maneuver to finance its small - but, nevertheless, the real budget deficit. When external debt was excluded from the equation, the initial "plan B" Moscow was to force Russian banks to buy a sovereign debt. This strategy worked well in 2022 and 2023, but cracks began to appear last year.

Faced with competitive pressure from the Kremlin, which requires to issue hundreds of billions of cheap loans to defense enterprises and at the same time buys huge volumes of sovereign bonds, domestic banks have found themselves in such a difficult situation that they now do not want to gain even more debts. At the end of last year, the Kremlin was forced to cancel several auctions to issue internal debt due to the lack of buyers.

Therefore, when internal borrowings are increasingly excluded from the equation, Moscow resorted to the "plan C": to use the reserves of the Russian Fund of the National Welfare (FND). On paper it looks like a smart strategy. The liquid part of these reserves, which amounted to almost 10 trillion rubles (approximately $ 110 billion) in the early 2022, initially looked sufficient to cover the budget deficit caused by war for several years.

However, even the greatest savings will eventually be exhausted, and in three years the conflict reserves of the FND have already decreased by about 60%. So, this year, this year seems difficult to financially. In January, the country budget deficit approximately 45% exceeded the target by 2025. If you look at this data from Moscow, they probably look anxious. If the budget expenditures remain at the January level until the end of the year, the FND reserves may disappear in three months.

And even if this does not happen - more likely - 2025, will probably be the last year when Moscow can completely cover its budget deficit at the expense of these accumulations. What is the question arises - what will happen if money is over to finance the budget deficit? In conditions where Russian banks suffocate from debt, a sovereign default may well provoke a full -scale financial crisis. If this happens, the Kremlin will not be easy to support its banking sector.

Since the reserves of the FND are exhausted, there will be no funds for recapitalization. The card house that the Russian economy has become, will quickly start to shake. From a financial point of view, Russia has little time. The Kremlin does not have a "D" plan for financing the budget deficit, which casts doubt on its ability to finance the war.

On this side, a fiscal break may well be the fact that Putin is really looking for in negotiations with the United States, or relief of sanctions (for example, weakening US restrictions on Russia's ability to place external debt), or a pause in conflict (which will allow Moscow to replenish his treasury by reducing the costs of defense).

Back in September 2024, Kirill Budanov, the head of military intelligence of Ukraine, predicted that Moscow, which was stuck in economic problems, would try to force the war on the war of 2025. Now these words can be provisted. The reason why Putin may be finally ready for negotiation seems surprisingly simple: he wants to avoid humiliating bankruptcy. The author expresses a personal opinion that may not coincide with the editorial position.