via Financial Times

Excerpt
Russian President Vladimir Putin conveys that he believes he has time to compel Ukraine’s western allies to accommodate his demands. However, the reality of Russia’s war economy is precarious, with concerns voiced by prominent figures like Sergei Chemezov of Rostec and central bank head Elvira Nabiullina regarding the impact of expensive credit on their operations. 

Russia is utilizing a mix of borrowing, inflation, and expropriation to fund the war, but this strategy is revealing inherent flaws as corporate debt surges and public finances remain concealed. A recent report indicates that corporate debt has increased by 71% since 2022, with state-controlled banks providing credit at below-market rates, essentially resulting in hidden money printing.

Putin is avoiding a significant budget deficit while managing high inflation through controlled interest rates. Yet, this approach risks creating a credit crisis as borrowing costs soar. The Kremlin must maintain stability to prevent a loss of legitimacy, which could occur if banks collapse or deposits lose value.

Ultimately, Putin does not have time on his side, as he faces a financial crisis. The West’s sanctions, which block access to $300 billion in reserves and disrupt oil trade, are crucial in limiting Russia’s resources. Intensifying these sanctions and transferring reserves to Ukraine would further strain Russia’s economy. The West must ensure that Putin understands that any relief from sanctions is not forthcoming, forcing him to choose between continuing the war and maintaining his power domestically.

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