Russia's Capital Fund Is Being Drained After Three Years of War – and Signs of Fragility Are Starting to Show.
Russian President Vladimir Putin is nervous, increasingly concerned about the state of the economy after three years of war in Ukraine. Russia's economy is slowly dying, but it is not exerting the pressure needed to force Putin to abandon his deep commitment to the war.
This is according to an article in The Telegraph.
Borrowing costs in Russia have risen to horrific levels as interest rates of 21% put pressure on companies. The strain is such that Putin has criticised officials for the dry spell in private investment.
Rosneft CEO Igor Sechin and billionaire aluminum magnate Oleg Deripaska are among those who have publicly criticized high interest rates. Deripaska warned in 2023 that Russia could soon run out of money. Other Russian officials are beginning to ask themselves the same question.
The country's capital fund is dwindling. The liquid portion of assets has now shrunk to $38 billion from about $100 billion at the start of 2022.
As the article notes, while Russia's economic resilience has surprised many, signs of fragility are beginning to appear.
Thus, prices in Russia are growing by 9.5% per year. The factors driving prices up today are much more problematic than at the beginning of a full-scale war.
The combination of huge war costs – more than 6% of the economy – and an acute labor shortage means that it is difficult to squeeze inflation out of the system.
Russia's central bank is under pressure to slow its aggressive interest rate hike campaign, and Putin's three words in December seemed to do the trick. Central Bank Governor Elvira Nabiullina suspended borrowing spending a day after the president called for a “balanced rate decision.” Analysts had expected the bank to hike rates to 23%.
Russia suffers from 'slow death'
Benjamin Hilgenstock, a senior economist at the Kyiv School of Economics, believes Russia is suffering from a “slow death.” While he does not believe the country is in danger of running out of money, policymakers are increasingly resorting to what he describes as “unorthodox” measures to keep the economy afloat.
At the end of 2024, Russia's “Rainy Day Fund,” also known as the National Wealth Fund, was worth $117 billion, or 6.6% of GDP. However, the liquid portion had shrunk to $38 billion after much of it was used to finance day-to-day expenses.
The fund's liquid assets, mostly held in Chinese yuan and gold, have fallen 60% since the war began, according to the Kyiv School of Economics. Based on recent trends, the assets could run out within two to three years.
The rest of the funds are Sberbank shares and $40 billion in illiquid assets that cannot be easily sold.
Hilgenstock emphasizes that as long as Russia controls its currency, Putin will have enough money to continue fueling the war, even if it is far from free.
“At the end of the day, the war is paid for in rubles, so Putin can't run out of money. It just means that the further we go, the more painful it will be to finance the war. But that doesn't mean it's impossible,” the economist explained.
He added that the Russian president will need to start issuing more domestic debt.
“There doesn't seem to be much appetite to buy it even at relatively high interest rates, but we're talking about a country with a banking system that is predominantly state-owned, so you can essentially force your banks to buy it,” Hilgenstock said.
In late 2024, the Russian Central Bank made it easier for lenders to obtain additional liquidity, which could theoretically be used to buy more domestic bonds. At the same time, more loans in the economy are being offered at subsidized interest rates, which threatens to worsen Russia's inflation problem.
“After all, you can print money for war if you want, right? But that's a very bad idea,” Hilgenstock said.
“We have rising inflation, and the Central Bank must solve this by raising interest rates. But if many loans in the economy are provided at subsidized rates, then you have broken the transmission mechanism of monetary policy, and your higher interest rates are ineffective in combating inflation,” the expert explained.
Russia has a high risk of a banking crisis
Even the Central Bank has sounded the alarm, albeit in a more diplomatic way. Its latest interest rate decision warned that “the balance of inflation risks is still significantly tilted to the upside.”
Others are more forthright.
“The Russian economy is facing the threat of a large-scale surge in corporate bankruptcies,” according to researchers at the Center for Macroeconomic Analysis and Short-Term Forecasting, which advises the government.
They added that by the end of 2024, one in five companies had interest payments at a “risky” level of two-thirds of adjusted profit.
Capital Economics believes that Russia is now “at high risk of a banking crisis”.
“There are certainly reasons to worry. Bank lending is growing at 20% a year despite very high interest rates, particularly in corporate lending. Loan quality has deteriorated, with a high proportion of unsecured loans to individuals with low debt servicing capacity,” said Liam Peach of the economic consultancy.
He cited central bank data, saying 25% of outstanding corporate loans had maturities of one year or less. More than half of the new corporate loans issued by banks have floating rates, leaving them at risk of high and rising interest rates.
But others believe the charade could take years.
The investment fund will continue to finance Putin's war effort for the foreseeable future, according to Oxford Economics economist Tatyana Orlova:
“Three years ago, when the war started, people were saying, 'Oh, they're going to spend the entire fund very quickly and then it's basically the end.' But there's more fiscal resilience than people expected.”
Banks are getting a boost from the influx of deposits.
“I've been to Russia four times in the past year, and everyone I talk to in Moscow asks, 'Where should I put my savings to maximize my interest rate?'” Orlova said.
But she still thinks Russia is headed for a recession in 2025.
“Monetary policy is very tight, and fiscal policy will be tight, and that is actually suppressing growth,” the economist said.
Hilgenstock believes that a change in the US administration will not be enough to end the war in Ukraine on its own. He says tougher sanctions are needed to make Russia think.
Russia is currently China's largest oil supplier, and India is also buying up barrels at a discount to partially offset the supply shortfall to the West.
“If you effectively take some of Russia's oil off the market [instead of allowing it to be sold at a discount], I think Russia would very quickly find itself in a situation where macro stability is fundamentally undermined. But that's not the world we live in right now. The world we live in now is the slow death of the Russian economy. But that doesn't create the kind of pressure you need to get Putin to step away from his deep commitment to this war,” the economist explained.
As a result, British and European officials believe that Western support for Ukraine must be unwavering.
One European security source says: “One of the things that upsets me most about Ukraine, and that we are not as fully prepared as we should be, is that I can see Putin being in big trouble in two or three years if we hold our nerve.”
By the way, journalist Vitaly Portnikov has noted that due to US sanctions imposed in the final days of the Biden administration, Russia is losing its oil market in China and India, and with it the opportunity to wage an aggressive war.
Read also:
- Russian economy will be in trouble: British intelligence forecast
- Russian economy “tightens belts”: ISW reveals Kremlin secrets, what is really going on in RF
- Putin is concerned about the state of the Russian economy, and the elites are talking about the end of the war – Reuters
