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Russian President Vladimir Putin is trying to impress Ukraine’s Western friends that the only way to end the war is to accommodate their demands, as the most important thing is that time is on his side. The apparent resilience of the Russian economy and suspicion in some quarters that Western sanctions have had an impact are at the heart of this information war.
The fact is that the financial support of the Russian war economy is increasing a House of cards – So far, senior management members are expressing their concerns in public. They include Sergei Chemezov, the chief executive of state defense, who has warned that expensive credit is killing him. Arms export businessand Elvira Nabiullina, Head of the Central Bank.
This couple knows better than most people in the West, who They are taken in numbers It indicates steady growth, low unemployment and rising wages. But any economy on a fully operational basis can produce such results: this is basic Keynesianism. The real test is how resources that are already employed – rather than idle – are being diverted from their former uses and to the needs of war.
A state has three methods to achieve this: borrowing, inflation, and asset extraction. The most effective and painless mixture should be chosen. Putin’s arrogance – both in the West and in his own public – is that he can finance this war without financial instability or significant material sacrifice. But this is an illusion. If Chemezov and Nabiullina’s frustrations are spilling into the public eye, this means that the illusion is fading.
A New report Russia analyst and former banker Craig Kennedy highlights the huge growth in Russian corporate debt. It has grown by 71 per cent since 2022 and stressed new households and government borrowing.
In privacy, this loan is actually a government creature. Putin has overseen Russia’s banking system, where banks must lend to state-designated companies on terms chosen and chosen. The result has been a flood of sub-market loans to favored economic actors.
Basically, Russia runs a massive money printing program that is exported so that it doesn’t show up on the public balance sheet. Kennedy estimates that the total budget allocation for total war is about 20 percent of Russia’s 2023 national product.
We can tell from the Kremlin’s actions that it sees two things as cheap: clearly weak public finances and inflation.
Despite growing war-related spending, the government avoids a large budget deficit. The central bank is free to increase interest rates, currently 21 percent. Not enough to beat inflation driven by government-sanctioned subsidized credit, but enough to keep price growth in check.
The bottom line is that Chemezov and Nabiulina’s problems are not rectifiable errors, but rather Putin’s choice to fool public finances and keep a (high) cap on inflation. Something else has to give, and something else includes more than 20 percent of businesses that can’t operate profitably while taking out loans.
Putin’s personal loan scheme, meanwhile, is piling up a credit crunch as the loans go bad. The state can take over the banks – if they don’t fail first. Given the experience of the Russians with suddenly worthless deposits, fear of a repeat could easily trigger self-fulfilling runs. This destroys the legitimacy of not only the banks but also the government.
Putin, in short, does not have time on his side. He is sitting on a financial time bomb of his own making. The key for Friends of Ukraine is to prevent the one thing that hinders it: more access to foreign funds.
The West has denied Moscow access to about $300 billion in reserves, sprained its oil trade and killed its ability to import a variety of goods. Together, these prevent Russia from using all of its foreign earnings to offset resource shortages at home. Strengthening the sanctions and finally transferring reserves to Ukraine as pre-payment compensation will strengthen these restrictions.
Putin’s obsession is the sudden collapse of power. That, as he was realizing, was the disaster that started war economics. Pulling back, increasing access to foreign resources through sanctions relief would be the goal in any diplomacy. The West must be convinced that this will not happen. That, and that alone, forces Putin to choose between an attack on Ukraine and those holding power at home.
