The Kremlin’s financial situation is worsening and could come to a head within months as oil revenues dwindle while President Vladimir Putin shows no intention of ending his war against Ukraine.
Russian officials have warned Putin with growing alarm that a financial crisis could hit by the summer, sources said Washington Post. They pointed to weak oil revenues, which plunged 50 percent in January from a year earlier, and a budget deficit that continues to grow, even after Putin raised taxes on consumers.
A Moscow business executive also said Post that the crisis could arrive in “three or four months” amid spiraling inflation, adding that restaurants have closed and thousands of workers are being laid off.
Economic tensions go back to Russia’s invasion of Ukraine four years ago. As sanctions took hold and Putin mobilized the economy for a protracted war, a tight labor market and high inflation forced the central bank to keep interest rates high. The recent easing has failed to prevent a decline in spending among many consumer groups.
As companies feel the pinch of high rates and weaker consumption, more workers are not being paid, are being laid off or are seeing their hours reduced. As a result, consumers are finding it difficult to service loans, raising concerns about a collapse in the financial sector.
“A banking crisis is possible,” said one Russian official Washington Post in December on condition of anonymity. “A default crisis is possible. I don’t want to think about a continuation of the war or an escalation.”
In June, Russian banks raised red flags about a potential debt crisis as high interest rates hurt borrowers’ ability to repay loans. Also that month, the head of the Union of Industrialists and Entrepreneurs of Russia warned that many companies were in a “pre-involved situation”.
The Center for Macroeconomic Analysis and Short-Term Forecasting, a state-backed Russian think tank, said in December that the country could face a banking crisis by October if lending problems worsen and depositors withdraw their funds, according to Post.
“The situation in the Russian economy has deteriorated considerably,” Dmitri Belousov, head of the think tank, wrote in a note seen by Financial Times. “The economy has entered the brink of stagflation for the first time since early 2023.”
Russia’s financial woes could worsen as Europe weighs further sanctions on so-called shadow tankers used to transport Moscow’s oil. This would be on top of recent US sanctions on Russian oil majors Rosneft and Lukoil.
The West’s tougher sanctions regime has forced Russia to offer bigger discounts on its crude exports, while the recent slump in global oil prices has already hit its biggest revenue generator.
Despite the worsening fiscal outlook, Moscow is still spending heavily on weapons and incentives to attract new recruits to the military. To cover the revenue shortfall, Russia has turned to its sovereign wealth fund, but that too is now running low.
Russia also suffered staggering losses on the battlefield, with an estimated 1.2 million dead or wounded since the start of the war. Last month, NATO Secretary General Mark Rutte said more than 30,000 Russian soldiers had died in December alone – an average of 1,000 a day – to gain only minimal territory.
At the same time, European officials have pointed out that Russia is losing out strategically, with Ukraine likely heading towards EU membership, NATO growing after adding new member states, and Europe significantly increasing defense spending.
“So people say that Russia wants to continue the war because it wants more territory – that’s rubbish,” Finnish President Alexander Stubb said at the World Economic Forum last month. “Russia must continue the war because this war is too big for Putin to fail. When you add to that, the Russian economy is collapsing, which means they won’t be able to pay their soldiers, which means zero growth, the end of reserves, interest rates and double-digit inflation. So Putin can’t afford to end this war. That’s my big concern.”
Indeed, while Russia has engaged in on-again, off-again talks to end the war, it continues to bomb Ukraine with missiles and drones, targeting its energy infrastructure.
Russian, Ukrainian and American officials just wrapped up two days of talks in Abu Dhabi with no reported progress. In comments published on Saturday, Ukrainian President Volodymyr Zelensky said the US wanted the war to end by June and planned a new round of negotiations.
“America proposed for the first time that the two negotiating teams — Ukraine and Russia — meet in the United States of America, probably in Miami, in a week’s time. We have confirmed our participation,” he said.
This story was originally featured on Fortune.com