Russia's war economy faces breaking point as sanctions bite, cash reserves dwindle

The Washington Post reported the information.

Despite President Donald Trump's assertions that Russia maintains the upper hand in the war, economists warn that the Kremlin's economic position has never been more precarious. After nearly four years of war, Russia has exhausted most of the cash reserves and borrowed funds that initially fueled its military spending surge, and the situation is set to deteriorate further.

"A banking crisis is possible. … A nonpayments crisis is possible. I don't want to think about a continuation of the war or an escalation," said a Russian official who spoke on condition of anonymity.

The crisis is deepening as new U.S. Treasury sanctions imposed in October target Russia's two largest oil companies, Rosneft and Lukoil, forcing Moscow to accept steep discounts of more than $20 per barrel on its Urals crude. Oil and gas revenues—critical to funding the budget—are projected to plummet 49 percent in December compared to last year, according to Reuters, even as military expenditures have soared to $149 billion in the first three quarters of this year alone.

French President Emmanuel Macron told his German and British counterparts last week that the latest sanctions were weakening Russia's economy. "We must keep up this effort and maintain pressure," he said during a meeting in London.

Craig Kennedy, former vice chairman at Bank of America Merrill Lynch and now at Harvard's Davis Center for Russian and Eurasian Studies, described the situation bluntly: "The upstream oil industry is sliding into a crisis, and the most recent sanctions are going to accelerate that."

Russia's central bank has raised interest rates to record highs—topping 20 percent before falling to 16.5 percent—in an effort to combat rampant inflation triggered by massive government spending. While the higher rates have begun to curb price increases, they've also devastated corporate profits, stalled investment, and caused nonpayments to spike across the economy.

"Russia is right now in the worst situation since the war started," said Janis Kluge, an economist at the German Institute for International and Security Affairs. He noted that positive factors like high commodity prices and spending-driven growth have disappeared.

Alexandra Prokopenko, a former central bank adviser, offered a stark assessment during a recent videoconference. "The economy is frozen, and fundamentally it looks to me unsustainable," she said. "The closest analogy would be like a car idling in neutral with the engine overheating. … The car isn't moving forward or backward, but the longer it sits, the more damage accumulates under the hood."

Economists point to a particularly dangerous threat lurking within Russia's banking system. Defense sector lending now accounts for nearly a quarter of all corporate ruble loans, totaling over $202 billion. "It is a big black pool of poorly regulated, opaque debt, and it's sitting in the middle of the banking system," Kennedy said.

Russian business leaders have sounded alarms about hidden bad loans. Alexander Shokhin, head of the Russian Union of Industrialists and Entrepreneurs, publicly warned that many companies were in a "pre-default situation." Even a Kremlin-linked think tank projected that Russia could face a systemic banking crisis by October if problem loans continue rising and depositors begin mass withdrawals.

Russia's energy giants, once the crown jewels of its economy, are struggling. Gazprom posted a net loss of $12.9 billion last year after losing its primary European market. The state gas monopoly has burned through most of its cash reserves, which plummeted from $27 billion in early 2022 to just $6 billion to $8 billion today, while accumulating over $20 billion in additional debt.

Rosneft reported a 70 percent drop in net profit to $3.6 billion for the first three quarters of this year. Kennedy estimates that between 1.6 million and 2.8 million barrels per day of Russian oil could be stranded without buyers. "At the moment, a lot of unsold oil is being stored on the water in tankers," he said.

The economic pain is spreading to ordinary Russians. State bank Sberbank reported consumers are cutting spending on clothing by 8.7 percent, household goods by 8.8 percent, and health and beauty products by 5.9 percent compared to last year.

Workers across the country face furloughs, reduced hours, or unpaid wages. In Nizhny Tagil, copper mining workers complained in a video this month that they hadn't been paid in two months. Russia's statistical agency reported that unpaid wages nearly tripled year-over-year in October, reaching more than $27 million.

Last month, 300 workers constructing a nuclear reactor in the Ulyanovsk region went on strike over unpaid wages. "There's absolutely no way for people to pay their loans anymore. A lot of debt has piled up," a worker spokesman said in a video message.

In the Kuzbass coal mining region, 18 of 151 coal companies have shut down, with another 30 in critical condition, according to regional governor Ilya Seredyuk.

Despite the mounting hardships, few among Moscow's elite expect economic troubles to spark social unrest or influence Putin's strategic calculations. "The growth of economic problems won't lead to social or political problems. But next year will be the first difficult year of the military operation," said a Russian academic close to senior diplomats.