When Russias own statistics agency admits that 11% of all bank debt is ‘non-performing’ – ie nobody is paying the money back to the banks they borrowed that is a banking crisis – a fully blown emergency crisis of huge proportions. If the UK reported 3-5%, some say even as little as 2%, there would be IMF intervention and emergency bailouts. The economy would be in danger of a major and worrying upheaval. Thats how bad it is in terms of scale.
Russia however is never going to let a full blown crisis develop because it can’t be seen to have that happen and because the public must not and do not know how serious the situation is. By cutting the internet and mobile banking services, restricting cash withdrawals and generally available information, Russians really should have no idea how bad things actually are, though some of the more astute and those running businesses have started to put two and two together. They also know what the cause is: the war in Ukraine.
Back in the late 1980’s and early 1990’s Japan invested in a number of major technologies and corporate expansions that turned out to be major mistakes. Several large companies failed and more were heading down the same path. The Government decided it could not let the banking sector collapse because of the number of catastrophic unpaid debts, so it bailed the companies out by rescheduling their debts repeatedly – for years. These failed companies carried on making uncompetitive product and money that should have been used for investment was used to prop up failure. The result was Japan entered a realm Russia has now rediscovered – ‘stagflation’. For almost 20 years Japan remained locked in a low growth inflationary spiral that saw its GDP stagnate as other countries – notably at the time South Korea, soared away into the distance. Japan just kept on falling behind failing to create wealth. And they didn’t have a war to finance.
Russia is now in the same place. The government cannot have a banking collapse even though it’s right here in front of them. So the decision is to support the banks through any number of manipulative measures and make sure the companies that owe money they will never pay back are kept going. This is where the problem lies. Japan financed major companies to stop them going under by re-scheduling their debts as many times as was needed, prolonging the crisis. Russia is paying the bills of armaments companies who have no ability to pay back the debt the state made them borrow, so the state keeps them running manufacturing weapons that don’t contribute anything to a shrinking GDP. They don’t create wealth. But state funds pay and that recycles back into the banks and staves off a full blown crash.
Of course this all falls apart if several factors now approaching just happen to arrive one after the other or even all at once.
The public and the country in general are becoming aware that the war is the problem. The governments inflation figures ate purely imaginary and everyone can see for themselves they don’t make sense. They are unable to sustain their lifestyles and food is now reaching 40% of a Russian family income. That’s exceptionally high in a developed economy. They cannot all pay their car loans, their mortgages and their credit cards. Small businesses which were exceptionally important in Russia are either closing down or going into the ‘dark’ economy. Major industries are reporting huge losses and revenue loss, profits vanishing (and tax payments with them). Layoffs are growing despite the chronic labour shortage in specific arms related industries that require specialised workers. Production is actually falling. Russia is in recession.
The government is running a deficit that is already around $80 billion when it was only supposed to be $24 billion for the whole of 2026. The available gold reserves have been sold off. VAT rises have proven to be difficult to collect when business has no money.
The worst aspect however? The oil and gas industry is in free fall. We know from Russian documents obtained by Ukraine that one small oil company shuttered 400 oil wells. I’ve seen private estimates saying this is as high as 1,800. Today it was revealed that Ukraine has successfully cut down the Central Russia Oil Refinery Network. All of the refineries, their pumping stations and pipelines are stopped. They have nowhere to ship the oil, nowhere to refine the oil, no means to pump the oil and no means to export it. It’s so severe that fuel shortages in some regions may be inevitable.
Oil income represented 40% of state expenditure. The war is costing 40% of state expenditure. With plummeting oil revenues and forecast military expenditure not changing in 2026, that means the state must cut back on other expenditures or raise taxes or both – which is what’s happening. Declining tax revenues despite tax increases is another major issue.
This is why to the Russians, the granting of the €90 billion loan to Ukraine was a disaster. It placed Ukraine in a position where it could outbuild and out-buy Russia right at the point where the Russian economy was sagging under the weight of the war.
Ukraines GDP has risen steeply since its huge declines in 2022/23 and it has financial backing from the EU and Europe+ nations that Russia is never going to have. Ukraine’s GDP is one tenth of Russia’s but its rising – Russias is falling. Ukraine only has about one third of Russias population but a rising per capital income, again Russias is falling.
Perhaps more than anything Russias population is starting to grasp the reality of its situation. Putins unpopularity has markedly decreased in state polling. So much so that telephone interviews are being abandoned and instead polling agencies will visit homes in person. This is likely to be far more intimidating and get the result the government wants but it’s hardly the point is it? You may as well just make the numbers up.
When the military bloggers and the news papers – even state TV and the Duma are willing to ask questions and state facts that the war is a problem that needs to be brought to an end, you have an issue. It’s not going away. It will reach a point if it’s ignored that Russia will erupt in revolution, and let’s face it they’ve had a few. When things are perceived as no longer bearable Russians do eventually act.
What Putin has to do is manage the way to peace – if he believes in it (I doubt he does)- without losing face. The only problem is that Ukraine is now starting to feel it can win by breaking Russia and most observers including me, agree. Russia doesn’t have all the time in the world. Neither does Ukraine, but it has a lot longer than Russia does. And Russians have started to work out thats a fact they can’t hide from. The longer they do, the more damage Ukraine will do, the less they will ever gain from a peace deal, a deal the vast majority of Ukrainians think they will never keep anyway. Most think it will have to a battlefield victory. Russia has ceased to capable of one, Ukraine however may be able to pull it off in time.
And what if the economy simply cannot sustain any more? The plates cannot all be kept spinning? The army will quickly dissolve and it will all have been for nothing. The arms industry will collapse, unemployment soar, armed troops with their own agenda will wander the west of Russia, banks will have no money and security will collapse. Who knows what will happen after that.
Russians have nothing to believe in. Either they do something about it or they acquiesce in a long dark economic night with little daylight at the end, a lost war and a darker and more despotic future. Not much of choice is it? This is where Putin has led them.
The Analyst
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The Military Analyst 