Is Russia’s war machine finally facing bankruptcy?
03 February 2025 6:00am GMT
Vladimir Putin is nervous. Almost three years into his war in Ukraine, the Russian president is increasingly concerned about the state of the economy.
The cost of borrowing has surged to painful levels, as interest rates of 21pc pile pressure on companies. The strain is such that Putin has reportedly been scolding officials over a drought in private investment.
Unsurprisingly, Russia’s oligarchs are squirming. Igor Sechin, the boss of Rosneft, and Oleg Deripaska, the billionaire aluminium magnate, are among those who have publicly criticised high interest rates.
Deripaska warned in 2023 that Russia could soon run out of money, and other senior officials are also beginning to ask themselves the same question.
The country’s wealth fund is being depleted, with the liquid portion of assets now down to just $38bn (£30bn), from roughly $100bn at the start of 2022.
And while Russia’s economic resilience has surprised many, signs of fragility are starting to emerge.
Prices are rising at an annual rate of 9.5pc in Russia. While this is far from the peak of 17.8pc seen in the immediate aftermath of the invasion three years ago, the factors driving up prices today are much more problematic.
The combination of massive war spending – equivalent to more than 6pc of its economy – and acute labour shortages suggests that squeezing inflation out of the system is going to prove difficult.
Russia’s central bank is also under pressure to slow down its aggressive campaign of rate hikes, with three words from Putin in December seemingly able to do the trick.
Governor Elvira Nabiullina kept borrowing costs on hold at its last meeting in December, the day after Putin called for a “balanced rate decision”. Analysts had expected the central bank to raise rates to 23pc.
Benjamin Hilgenstock, a senior economist at the Kyiv School of Economics (KSE), believes Russia is suffering a “slow death”.
While he does not believe Russia is at imminent risk of running out of cash, policymakers are increasingly resorting to what he describes as “unorthodox” measures to keep the economy afloat.
The value of Russia’s rainy day fund – otherwise known as the National Welfare Fund – stood at $117bn, or 6.6pc of GDP at the end of last year. However, the liquid portion declined to $38bn after a large chunk was used to fund day-to-day spending.
Its liquid assets – held mainly in Chinese yuan and gold – have dropped by 60pc since the start of the war, according to the KSE. Based on recent trends, this could run dry within two to three years.
The rest of the fund consists of shares in state-backed Sberbank and $40bn in illiquid assets that cannot be sold easily.
Hilgenstock highlights that as long as Russia controls its own currency, Putin will have enough money to continue his warmongering, even though it will be far from cost-free.
“Ultimately the war is paid for in roubles, so Putin can’t actually run out of money,” he says. “It just means the further along we get, the more painful it’s going to become to fund the war. But that doesn’t mean it’s impossible.”
Hilgenstock adds that Putin would need to start issuing more domestic debt: “There doesn’t seem a huge appetite to buy it, even at relatively high interest rates, but we’re talking about a country with a largely state-owned banking system, so you can basically force your banks to buy it.”
Russia’s central bank made it easier for lenders to tap extra liquidity at the end of last year that in theory could be used to buy more domestic bonds.
At the same time, an increasing number of loans in the economy are being offered at subsidised interest rates, which threatens to make Russia’s inflation problem worse.
Hilgenstock says: “You can ultimately print money for the war if you want to, right? But it’s a very bad idea.
“We’ve got rising inflation, and the central bank has to address that by increasing interest rates. But if a lot of the loans in the economy are at subsidised rates, then you have broken the monetary policy transmission mechanism, and your higher interest rates are not effectively fighting inflation.”