As tensions escalate in the ongoing War in Ukraine, Russian President Vladimir Putin’s time is ticking away. The façade of Russia’s economic stability is crumbling, challenging Putin’s ability to sustain the war without significant consequences. Despite his attempts to manipulate information and project an image of invincibility, cracks in the financial foundation of Russia’s war economy are becoming more apparent. Here are the key factors contributing to this unraveling:
- Russian Corporate Debt: Russia’s corporate debt has surged by a staggering 71% since 2022, eclipsing new household and government borrowing. This surge is not merely a product of private lending but a manipulation of state-controlled banks compelled to offer loans to government-approved entities at preferential terms, resulting in a flood of below-market-rate credit.
- Financial Instability and Inflation: Putin’s fear of visible public finance weakness and runaway inflation has led to the aversion of significant budget deficits and the provision for the central bank to raise interest rates. Although the current interest rate of 21% is inadequate to curb inflation fueled by state-subsidized credit, it serves to keep price growth in check.
- Credit Crisis and Economic Fallout: Putin’s strategy of deluging the economy with privatized credit is laying the groundwork for a credit crisis, with an increasing number of loans turning toxic. Inadequate profitability due to borrowing costs exceeding 20% spells doom for many businesses, leading to potential bank collapses and a possible crisis in the financial sector. Such a turn of events could erode the government’s legitimacy.
- External Funding Restrictions: The deliberate blockage of Moscow’s access to around $300 billion in reserves and hinderance in oil trade and imports of essential goods by the West have constrained Russia’s ability to alleviate resource shortages domestically. By escalating these sanctions and transferring reserves to Ukraine as reparations, the West can magnify these constraints, further exacerbating Russia’s economic woes.
In conclusion, Putin’s reckless gamble in waging war is slowly unraveling, with his economic house of cards on the verge of collapse. By continuing to restrict Russia’s external financial resources, the West can effectively combat Putin’s aggression and weaken his grip on power. This is the pivotal moment for Ukraine’s allies to stand firm and compel Putin to confront the stark choice between his military endeavors and his hold on authority. The time to act is now before the financial time bomb detonates, reshaping the geopolitical landscape.
