Russia’s war spending may be twice its military budget, risking economic collapse
Pravda Ukraine
The amount of Russia’s military spending that is funded through a shadow financing scheme could be equal to its official military budget and may be contributing to rising inflation risks in the country.
Source: Craig Kennedy, a former investment banker at Bank of America and Morgan Stanley, in his Navigating Russia newsletter
Details: Since February 2022, Russian banks have been required to issue preferential loans to military enterprises on terms dictated by the state. According to Kennedy, over 70% of corporate loans in Russia since 2022 have been granted to sectors involved in the war.
Kennedy reports that over the three years of the war, this scheme may have provided the aggressor with funds equal to its official military budget. At the same time, it has led to unprecedented corporate borrowing, reaching US$415 billion.
Quote: “This report estimates that US$210 to US$250 billion of this surge consists of compulsory, preferential bank loans extended to defence contractors – many with poor credit – to help pay for war-related goods and services.”
More details: At the start of the full-scale invasion, the off-budget financing scheme helped Russia maintain its military budget at a controllable level, misleading international experts into believing the country faced no financial issues in funding the war.
However, Kennedy says Russia’s current reliance on off-budget financing is creating problems, driving inflation and interest rate hikes.
Now the scheme risks triggering a systemic crisis due to disproportionately high interest rates, liquidity and reserve problems at banks, and a severely compromised monetary transmission mechanism.
Kennedy emphasises that the longer Moscow delays ending the war in Ukraine, the closer it will move towards corporate and banking collapses which the Russian government would be forced to cover. These difficulties could also lead to a fall in GDP.
Kennedy argues that Western resources can surpass Russia’s capacity to sustain a war of attrition against Ukraine. He calls for continued support for Ukraine and tougher sanctions, and rejects any notion of sanctions being lifted in exchange for a ceasefire.
Quote: “Moscow’s funding challenges only increase from here, especially if coalition countries enforce more fully the powerful energy sanction tools at their disposal.
Through continued resolve and a clear understanding of Moscow’s vulnerabilities, Ukraine and its allies can realise the full potential of their negotiating leverage, avoid making unnecessary concessions, and reduce the longer-term risks posed by Russian revanchism.”
Background: Sanctions against Russia, combined with widespread corruption, labour shortages, the costs of the war in Ukraine and the inefficiency of its defence industry, are undermining the Russian Federation’s ability to sustain both its defence sector and economic stability.
Support UP or become our patron!