#

Kremlin is Sitting on a Ticking Time Bomb As It Keeps Loaning Money to Itself For the War in Ukraine

Illustrative collage by Defense Express
Illustrative collage by Defense Express
3437

By issuing "toxic" credits to state defense enterprises to buy more weapons and military equipment, russia is heading toward a default

The actual costs russia incurs in its war against Ukraine by far exceed the official figures, placing an immense economic strain on the country. Additionally, the financial strategies implemented by the russian government to sustain the war effort have created a "strategic credit bubble," a precarious situation with potentially severe consequences for the russian economy.

Craig Kennedy, an economic analyst at Harvard University's Davis Center for russian and Eurasian Studies, conducted a detailed investigation into the russian war expenditures and discovered a scheme exploited by the Kremlin to finance domestic military-industrial complex, one that has been out of spotlight because analysts largely focus only on officially budgeted spendings.

Read more: ​The UK Defense Intelligence: russia Freezes Rates as Economic Pressure Mounts

Sweeping these clandestine credit machinations under the rug has allowed Moscow to claim that "russia can fight indefinitely." But Kennedy’s findings shed light on a hidden war debt that says otherwise. Defense Express recommends readers to explore the in-depth study in full while we highlight only the key points below.

Armored equipment manufacture at russian industrial premises / Defense Express / Kremlin is Sitting on a Ticking Time Bomb As It Keeps Loaning Money to Itself For the War in Ukraine
Armored equipment manufacture at russian industrial premises / Open-source illustrative photo

Back in 2022, as Putin’s blitzkrieg plan faltered, the russian government faced the need to finance a prolonged war without causing significant disruption to the daily lives of ordinary russians, so as not to shake their support for the war. To achieve this, russian banks were coerced into issuing loans to defense enterprises; the industries, in turn, were expected to use the funds to expand production and manufacture weapons.

This policy led to a sharp and abnormal 71% increase in corporate debt, starting around July 2022 and amounting to $415 billion or 19.4% of russia’s GDP — 6.5x times larger than incremental government borrowing. Kennedy’s report estimates that over 70% of these loans supported enterprises engaged in war-related activities, with 50–60% directly financing military enterprises. This translates to $207–249 billion, a figure comparable to all official russian war spending recorded in the state budget.

Defense Express / Kremlin is Sitting on a Ticking Time Bomb As It Keeps Loaning Money to Itself For the War in Ukraine
Infographics credit: Craig Kennedy for Navigating Russia

These loans were issued to uncreditworthy enterprises, often without collateral and under preferential terms, as dictated by the Kremlin. By 2024, this unsustainable practice had resulted in a systemic credit crisis. The Central Bank of russia was forced to hike discount rates aggressively and alert the government to the deteriorating financial health of russian banks, which lacked sufficient short-term liquidity and capital buffers. Meanwhile, military enterprises, unable to service their debts, contributed to a mounting wave of "toxic" loans.

Defense Express / Kremlin is Sitting on a Ticking Time Bomb As It Keeps Loaning Money to Itself For the War in Ukraine
Infographics credit: Craig Kennedy for Navigating Russia

The researcher notes that similar situations arose in russia on a smaller scale in 2016–2017 and 2019–2020, but the government resolved these crises by simply forgiving toxic loans. However, the current debt volume, equivalent to half the state budget for 2024, makes such measures far more difficult.

Moreover, high discount rates have closed the door on any loans to individuals and non-defense industries, crippling the "real economy," while preferential loans continue to flow to the military-industrial complex.

Defense Express / Kremlin is Sitting on a Ticking Time Bomb As It Keeps Loaning Money to Itself For the War in Ukraine
Infographics credit: Craig Kennedy for Navigating Russia

"It is now apparent that Moscow’s heavy reliance on off-budget bank financing to help fund the war is creating the preconditions for a systemic credit crisis. By driving up interest rates, it is creating financial distress among companies in the ‘real’ economy. And by imposing significant amounts of debt on war-related companies that are likely to default over time, it risks overwhelming banks with a wave of toxic debt," writes Craig Kennedy

Defense Express adds that the russian government has essentially created a self-financing loop for its military-industrial complex. Defense enterprises make living off state contracts with meager 2% profit margins, meaning they can only repay loans using state funds.

Effectively, the Kremlin has borrowed from itself and must repay these loans from its own resources. This is no ordinary credit bubble; it is a strategic credit bubble, one so vast that it has become a ticking time bomb for the russian economy with a tangible prospect of default.

Illustrative photo: Shahed-136/131 loitering munitions factory in russia / Defense Express / Kremlin is Sitting on a Ticking Time Bomb As It Keeps Loaning Money to Itself For the War in Ukraine
Illustrative photo: Shahed-136/131 loitering munitions factory in russia / Still frame of a russian video report

The main conclusion from this study: russia’s claims about the war having almost no effect on its economy are just a smokescreen. In reality, the Kremlin needs a pause in hostilities to stabilize its economy and ease sanctions.

As Kennedy summarized, the longer russia continues the war whilst relying on this financing scheme, "the greater the risk a disruptive credit event occurs that undermines its image of financial resilience and weakens its negotiating leverage."

Read more: How Many T-72 and T-90M Tanks UralVagonZavod Produced for the russian Army in 2024