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The most important thing that Russian President Vladimir Putin is trying to convince Ukraine's Western friends is that time is on his side, so the only way to end the war is to satisfy his wishes. The apparent resilience of the Russian economy, and the resulting doubts in some corners about the impact of Western sanctions, form an essential part of this information war.
The fact is that the financial foundations of Russia's war economy increasingly look like capitalism House of cards – So much so that senior members of the ruling elite are publicly expressing their concerns. Among them is Sergei Chemezov, CEO of state defense giant Rostec, who has warned that expensive credit is killing his company. Arms export businessElvira Nabiullina, President of the Central Bank.
He knows this pair better than many people in the West They are absorbed by numbers This indicates steady growth, low unemployment and high wages. But any economy based on full mobilization can achieve such results: this is basic Keynesian doctrine. The real test is how the resources actually used – rather than idle resources – are diverted away from their previous uses to wartime needs.
The state has three ways to achieve this: borrowing, inflation, and expropriation. He should choose the most effective and painless combination. Putin's arrogance – towards the West and its people – was summed up in his ability to finance this war without financial instability or major material sacrifices. But this is an illusion. If Chemezov and Nabiulina's frustrations spread to public opinion, the illusion is fading.
A New report Russia analyst and former banker Craig Kennedy's book highlights the massive growth in Russian corporate debt. They have risen by 71 percent since 2022, reducing new household and government borrowing.
This lending is, in theory, private, but in reality it is state-created. Putin has taken control of the Russian banking system, with banks being required to lend to companies designated by the government on selected preferential terms. The result was a flood of below-market credit to economic favourites.
In essence, Russia is engaged in printing massive money, outsourcing it so that it does not appear on the public balance sheet. Kennedy estimates the total at about 20% of Russia's national output for 2023, which is comparable to the cumulative budget allocations for a full-scale war.
We can tell from the Kremlin's actions that it sees two things as anathema: apparent weakness in public finances and runaway inflation.
The government is avoiding a large budget deficit, despite rising war-related spending. The central bank remains free to raise interest rates, which currently stand at 21 percent. This is not enough to overcome inflation driven by state-backed credit, but it is enough to keep price growth within limits.
The upshot is that the problems facing Chemezov and Nabiullina are not a mistake that can be fixed, but rather are rooted in Putin's choice to curry favor with public finances and control inflation. Something else must be provided, and this something else includes companies that cannot operate profitably when borrowing costs exceed 20 percent.
Meanwhile, Putin's privatized credit program is storing up a credit crunch as loans deteriorate. The state might bail out the banks – if they don't collapse first. Given the Russians' experience of dealing with deposits that suddenly became worthless, fears of a recurrence of these deposits could easily lead to mass flight operations. This would destroy not only the legitimacy of the banks, but also the legitimacy of the government.
In short, Putin 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 deprive him of the one thing that can defuse the crisis: increased access to foreign funds.
The West has prevented Moscow from accessing some $300 billion in reserves, hampered its oil trade and damaged its ability to import a range of goods. All of these things together prevent Russia from spending all its foreign revenues to ease resource constraints at home. Intensifying sanctions, and finally transferring reserves to Ukraine as a down payment on reparations, would exacerbate these restrictions.
Putin's obsession is the sudden collapse of power. This, he must realise, is the danger raised by war economics. Making them abate, by increasing access to external resources through easing sanctions, would be his goal in any diplomacy. The West must convince him that this will not happen. This alone would force Putin to choose between his attack on Ukraine and his grip on power at home.
