Russia's Hidden War Debt Creates a Looming Credit Crisis

By late 2024, the Kremlin had become aware of the systemic credit risks unleashed by its off-budget defense funding scheme. This has created a dilemma that is likely to weigh on Moscow’s war calculus: the longer it relies on this scheme, the greater the risk a disruptive credit event occurs that undermines its image of financial resilience and weakens its negotiating leverage,

Kennedy argues

Moscow now faces a dilemma: the longer it puts off a ceasefire, the greater the risk that credit events uncontrollably arise and weaken Moscow’s negotiating leverage,

says Kennedy

In the second half of 2024, the Central Bank began identifying the state’s preferential corporate lending scheme as a significant threat to Russia’s economic stability,

says Kennedy

The financial strain on Moscow has shifted the dynamics, offering unexpected leverage to Ukraine,

the report suggests

Unlike the slow-burn risk of inflation, credit event risk — such as corporate and bank bailouts — is seismic in nature: it has the potential to materialize suddenly, unpredictably and with significant disruptive force, especially if it becomes contagious,

the report says

Many members of the Politburo agree that the freeze is necessary, but they are in no hurry to introduce this measure and are trying to postpone the adoption of the final decision as much as possible,

the channel reported

This money was stolen from us, and the blocking of our assets is absolutely illegal, violating all norms and rules,

Putin spokesman Dmitry Peskov told reporters last month

Take money, what we need for our interior production, and we will buy all the weapons from the United States,

Zelensky said

For Moscow, credit event risk—with its seismically disruptive potential—will be of far more immediate concern than slow-burn risks like declining GDP."

Craig Kennedy, former investment banker on Substack

War spending is a clear fiscal liability for the state, whereas preferential credit is not. The latter would have entailed extra fiscal spending, only if the difference between 'market' and 'preferential' interest rates had been covered from the state pocket."

Vasily Astrov, senior economist at the Vienna Institute for International Economic Studies told Newsweek