Moscow has been stealthily funding much of its war costs with risky, off-budget financing overlooked by the West. That funding is now under pressure, offering new leverage to Ukraine and its allies.
The claim that $415 billion of corporate debt growth since 2022 is directly tied to war funding is problematic.
Around $250 billion of this increase can be attributed to non-war factors, such as:
- Russian companies acquired $328 billion in foreign-owned assets after sanctions, likely requiring $50–80 billion in borrowing.
- Corporate obligations to non-residents have fallen by $130 billion, necessitating refinancing within Russia.
- Changes in trade terms, such as the loss of advance payments and payment delays, likely added $50 billion in financing needs.
These factors account for much of the debt surge, leaving an estimated $70–100 billion potentially linked to war-related preferential loans.
The suggestion that the banking sector is the primary source of war funding also overlooks critical details:
- Corporate deposits have also risen significantly.
- Banks owe over $200 billion to the extended government (Treasury and Central Bank), creating a more complex picture.
Also, note that investment levels in 2023 were the highest in post-Soviet history. Also, management buyouts of businesses previously owned by expatriates were often financed domestically, further driving corporate borrowing.
it would be interesting to know which Russian companies (non-financial sector) have bought $328 billion of assets abroad since July 2022, with sanctions threatening to freeze such acquisitions; also, which assets did they buy? and why they decided to finance $80 billion of them with ruble debt at interest rates ranging from the high teens to the mid 20s?
Not being a full-time expert in the field, but as far as I'm aware, these companies were buying previously foreign-owned assets at very substantial discounts. Paying high interest wasn't an issue in this scenario. And financing these purchases with loans was the best available alternative.
I also don't think these types of transactions led to significant sanctions, but I may be wrong.
Well-known examples are numerous: McDonald's, Nissan, and Shell. There were dozens (possibly hundreds) of similar cases.
The author of the piece simply overlooked one thing - Russian largest businesses lost their offshore funding base. All (USD and other currency) debt had to be refinanced in RuR.
They bought assets of the western companies in Russia that exited Russia financing this with the rouble debt. There were no options to finance these acquisitions other way. So RUR@20+% p.a.
1. He did not claim that all $415 billion of corporate debt was directly tied to war funding. His estimate was $210-250b. This is clearly stated in the first paragraph and again in the post.
2. You state that $250b can be accounted for by non-defense related corporate borrowing, though your own figures are (unsourced) estimates, in which a range of $30b appears twice. But if we take your topline figure of $250b for non-defense purposes, that would still leave $165b for defense lending. So I'm not sure how you got to your later estimate of only $70-100b linked to defense. If we assume that borrowing for acquiring foreign-owned assets was actually closer to $50b than $80b, and add the difference to $165b, then your numbers would actually nearly line up with the low end of Kennedy's range.
3. Regarding Russian firms and individuals buying $328 billion in foreign-owned assets after sanctions. a) Remember that many of those were sold at fire sale prices by Western businesses in a rush to leave, while others were nationalized. Western companies lost around $107b in the exit. McDonalds and Daone were well-known examples. The latter was sold for $17.7b rubles, though its assets in Russia were likely worth between $60-80b. So which figure was used to calculate your $328 billion figure, the actual asset values, or the sale prices? b) More importantly, where did you get that $328 billion figure from? Not that it's a reliable source, but last year RIA Novosti claimed that in 2022 total Western investment in Russia was $288b, (implying those investments could be seized in retaliation if frozen Russian reserves were used to fund Ukraine's defense). And where did you get the figure for corporate borrowing to finance purchases of foreign-owned assets? Not saying your figures are wrong, just would like to know where they came from.
The critical question is not how much of this money went to the war effort. The critical question is how much of the lending is unserviceable or impossible to repay. The total amount of bad debt is what creates the stress on the Russian economy. Even if much of the money went to buy foreign assets at a discount, this makes no difference if those assets cannot be used to turn a profit for the new owners.
I have asked the author (posted a comment) for links to the raw data underlying the graphs.
Based on the Russian raw data I have seen, the data underlying the graphs appear to be incorrect. This would make the graphs—and the conclusions drawn from them—inaccurate.
However, I am open to being wrong. A link to the underlying raw data for each of the graphs would clarify this matter.
The opinion you shared refers to the article we’re discussing here and doesn’t present any additional facts (except for Russia's officials' concerns). So I don’t see how anything there contradicts what I wrote above.
You can go round in a circle if you like as so much of the MSM press does but the FT article was based on the facts or given data supplied in this original article above.
This is so frustrating, but thank you for finally publishing research that will convince western media to dispel Russian propaganda.
If you simply look at money supply in the Russian economy and the difficulties with which MinFin had raising OFZ attraction until December, it’s clear that the Russian state itself is struggling.
The Central Bank has had to flood the economy with cash despite raising rates.
Thanks, excellent work really! Sounds to me like doubling down on sanctions and tripling military support to Ukraine can actually become the cheapest way to create lasting peace around #Russia (as #Russia would be broke). And likely also promote peace around North Korea and Iran, as they would likely receive much less military and nuclear support than currently expecting.
As the US discovered in 1945 Keynesian economics can work very well in an economy that is recovering from a depression with large amounts of unused capacity. Large payments are going to the soldiers in form of bonuses and much higher than normal pay all of this of course flows back into the real economy unlike QE for example.
Russia does NOT have the productive capacity available that the US relied on to fuel its post WWII boom. Not even remotely close to it. White goods; electronics; oil; coal; steel; cars, ships - you name it...the US made all these things. Russia barely makes anything value added. It's a failing primary producer. It underperformed on agriculture because of climate this year because (a) climate issues; and (b) labour shortages - rural workers were dragged off to war, and lie wasted in the fields of Ukraine.
Russia has all but lost its energy sector, and it's going to have to shut down oil production, because Ukraine has hammered its storage and refining capacity, and the secondary sanctions are hitting its shadow fleet of dodgy tankers.
There are some 61 Russian oil tankers standing at anchor, filled with oil that have been denied access to a port to off-load it due to secondary sanctions.
Putin overplayed his hand, and the consequences are going to be brutal for Russia when its chickens come home to roost.
I was not comparing US economy in 1942 with that of Russia now except that in both cases there was a unused capacity from the 1930's depression in the US and from the 2010's in Russia. Most ot the industrial increase in the US happened in new purpose built factories not repurposed domestic item factories and often had a largely new freshly trained workforce too ( often female)
There are a LOT of reports of soldiers not getting paid at all. That is to start with. Second, a lot of soldiers join to pay off debt, not purchase new items. Third, a lot of soldiers spend all their money on drones, warm clothes, and cell phones - essentially military supplies that don't generate growth. (made in China)
As matter of fact Military Drone production in Russia is very large now and I doubt that Russia needs to get warm clothes from China and even if debt is paid down that still flows into the real economy. Interestingly off topic there were serious suggestions that after the financial crisis in 2008 here instead of QE going to Banks that money could have been distrributed to every citizen with a proviso that in first instance any debt should be paid off. This would have affected the real economy far more than QE which most agree just helped out the banks not the real economy.
References like "Central Bank of Russia" are not much informative; one would expect references to specific tables and publications, better yet direct internet links, because everything the CBR publishes is available online.
For instance, here is the regular release:
Non-financial sector and Households debt, extended
Graphs do not seem to demonstrate anything exceptionally dramatic on the non-financial debt front.
As for the supposed riddle of the continuing expansion of business debt after the discontinuation of the subsidized mortgage program, it most likely reflects the legal mechanics of the urban residential construction sector in Russia. Specifically, mortgages extended to households are held in escrow accounts, and only after the proposed development project (almost invariably condo apartments) is fully subscribed to, developers borrow against these escrow accounts (at the rates that more or less match the underlying mortgages rates), and start actual construction activities. This mechanism creates a lag between the approval of mortgages to households and the approval of lending to developers.
Thank you! Very insightful and well written, and an excellent explanation of the funding conundrum.
I eagerly await the full report.
Such massive credit expansion will make inflation unavoidable near term, whatever the interest rate.
That's a pain voters will feel.
These zombie war-related manufacturers, kept barely alive with a financing "trickle" (although cumulatively, a big number) to cover raw material and payroll costs, will have no life support once the peace is signed.
That will be a painful triple punch of bankruptcies, banking sector bad debts / systemic credit crisis, and an unemployment spike.
Bank collapses will be likely, and probably dressed up as 'mergers' or 'sector consolidations'.
At the same time there are stories circulating of massive theft from the military budget. (Same for Ukraine, of course). For example regarding food for the soldiers. Doing the basic maths suggests outrageously high pricing. Is the theft centralised, or out of control?
It does give me pause to wonder what kind of reparations deal will be possible.
First of all, this article and FT’s one are just an opinion without any facts or evidence. Secondly, FT’s article is based on this one. I suppose both authors wrote their wishful thinking as reality. Both articles have no URL-links to official sources.
I'm also curious to see exactly where the data used in this analysis are coming from. My cursory look at the CBR data says that total nonfinancial corporate debt increased only 26% from 2021Q4 to 2024Q2. *Domestic* nonfin. corporate debt increased more, naturally, by 51%. But nominal GDP increased a lot as well. Total private nonfinancial debt (nonfin. corporate + households) as % of GDP at the end of 2024Q2 is basically where it was at the end of 2021Q4, at 67%. And this is in fact *lower* than in 2018-2020.
So from the aggregate debt figures I could find, it's hard to conclude that debt is increasing unsustainably.
P.S. in your Figure 1, it seems that Jul-2022 level is about 100, and then Oct-2024 level is about 145. How does this yield a 71% increase?
In the post below I described the increase in nonfinancial credit, if in numbers, it was 31.761 billion rubles in January 2022, and became 74.835 billion rubles in November 2024, according to the Russian Central Bank (CBR). I don't know how you got 26%. It seems to me that the credit growth of 49 trillion is incredibly significant.
Could be that I'm looking at the wrong thing, just trying to understand. Could you please point me to the data series/page you are using? I've used this table from CBR: https://www.cbr.ru/eng/statistics/macro_itm/dkfs/ (Non-financial sector and Households debt, extended). Here the outstanding debt of nonfinancial corporates is recorded as 69.598 trillion RUB as of 2022/01/01, and as 87.67 trillion RUB as of 2024/07/01, or a 26% change.
As a perfume export director I have worked with Russia since 98. I do not have any specific macroeconomy expertise, but I see the fall of daily consumption of superfluous products to a desperation level. In the real economy many sector players disappeared or are simply not able to sustain their operations anymore. They are surviving zombies. The biggest ones are downsizing badly, as only the richest % of consumers are still able to access superfluous goods. Another point for the future: so many Russians that had management positions in international companies have moved abroad to escape constrains to military calls and economic disruption. They have lived in Europe, Dubai or ex Sovietic countries for years now, and might decide not go back the day war will hopefully stop. So there might be shortage of capable work force then.
But according to FUCKER Carlson who had a “interview” with Putin and then toured Russian grocery stores, they were stock full of goodies in an amazing space 🙄🙄🙄
Русскому народу:"Боритесь и покажите СВОЮ ПОЛНУЮ ПРОТИВОПОЗИЦИЮ Cвоему Говному ДИКТАТОРУ по всей России;не будьте просто Обыкновенными Пьяными,Пугливыми и Трусливыми Негодяями, как вас воспитывали в прошлом и настоящем;Путину:Умри в аду:АМИНЬ.🖕https://t.me/vesna_democrat
The claim that $415 billion of corporate debt growth since 2022 is directly tied to war funding is problematic.
Around $250 billion of this increase can be attributed to non-war factors, such as:
- Russian companies acquired $328 billion in foreign-owned assets after sanctions, likely requiring $50–80 billion in borrowing.
- Corporate obligations to non-residents have fallen by $130 billion, necessitating refinancing within Russia.
- Changes in trade terms, such as the loss of advance payments and payment delays, likely added $50 billion in financing needs.
These factors account for much of the debt surge, leaving an estimated $70–100 billion potentially linked to war-related preferential loans.
The suggestion that the banking sector is the primary source of war funding also overlooks critical details:
- Corporate deposits have also risen significantly.
- Banks owe over $200 billion to the extended government (Treasury and Central Bank), creating a more complex picture.
Also, note that investment levels in 2023 were the highest in post-Soviet history. Also, management buyouts of businesses previously owned by expatriates were often financed domestically, further driving corporate borrowing.
it would be interesting to know which Russian companies (non-financial sector) have bought $328 billion of assets abroad since July 2022, with sanctions threatening to freeze such acquisitions; also, which assets did they buy? and why they decided to finance $80 billion of them with ruble debt at interest rates ranging from the high teens to the mid 20s?
Not being a full-time expert in the field, but as far as I'm aware, these companies were buying previously foreign-owned assets at very substantial discounts. Paying high interest wasn't an issue in this scenario. And financing these purchases with loans was the best available alternative.
I also don't think these types of transactions led to significant sanctions, but I may be wrong.
Well-known examples are numerous: McDonald's, Nissan, and Shell. There were dozens (possibly hundreds) of similar cases.
The author of the piece simply overlooked one thing - Russian largest businesses lost their offshore funding base. All (USD and other currency) debt had to be refinanced in RuR.
So, are the numbers on your first point made up with no sources? How can we trust your other points?
They bought assets of the western companies in Russia that exited Russia financing this with the rouble debt. There were no options to finance these acquisitions other way. So RUR@20+% p.a.
1. He did not claim that all $415 billion of corporate debt was directly tied to war funding. His estimate was $210-250b. This is clearly stated in the first paragraph and again in the post.
2. You state that $250b can be accounted for by non-defense related corporate borrowing, though your own figures are (unsourced) estimates, in which a range of $30b appears twice. But if we take your topline figure of $250b for non-defense purposes, that would still leave $165b for defense lending. So I'm not sure how you got to your later estimate of only $70-100b linked to defense. If we assume that borrowing for acquiring foreign-owned assets was actually closer to $50b than $80b, and add the difference to $165b, then your numbers would actually nearly line up with the low end of Kennedy's range.
3. Regarding Russian firms and individuals buying $328 billion in foreign-owned assets after sanctions. a) Remember that many of those were sold at fire sale prices by Western businesses in a rush to leave, while others were nationalized. Western companies lost around $107b in the exit. McDonalds and Daone were well-known examples. The latter was sold for $17.7b rubles, though its assets in Russia were likely worth between $60-80b. So which figure was used to calculate your $328 billion figure, the actual asset values, or the sale prices? b) More importantly, where did you get that $328 billion figure from? Not that it's a reliable source, but last year RIA Novosti claimed that in 2022 total Western investment in Russia was $288b, (implying those investments could be seized in retaliation if frozen Russian reserves were used to fund Ukraine's defense). And where did you get the figure for corporate borrowing to finance purchases of foreign-owned assets? Not saying your figures are wrong, just would like to know where they came from.
The critical question is not how much of this money went to the war effort. The critical question is how much of the lending is unserviceable or impossible to repay. The total amount of bad debt is what creates the stress on the Russian economy. Even if much of the money went to buy foreign assets at a discount, this makes no difference if those assets cannot be used to turn a profit for the new owners.
I have asked the author (posted a comment) for links to the raw data underlying the graphs.
Based on the Russian raw data I have seen, the data underlying the graphs appear to be incorrect. This would make the graphs—and the conclusions drawn from them—inaccurate.
However, I am open to being wrong. A link to the underlying raw data for each of the graphs would clarify this matter.
We shall see.
Except it's not:
https://on.ft.com/4hbKSdN
The opinion you shared refers to the article we’re discussing here and doesn’t present any additional facts (except for Russia's officials' concerns). So I don’t see how anything there contradicts what I wrote above.
The FT article isn't opinion. It shares data. Unfortunately, it's also paywalled (it was supposed to be a gift article).
More on the Russian off-budget balance sheet trickery can be found here: https://bsky.app/profile/evgen-istrebin.bsky.social/post/3lfl5vzang22x
You can go round in a circle if you like as so much of the MSM press does but the FT article was based on the facts or given data supplied in this original article above.
This is so frustrating, but thank you for finally publishing research that will convince western media to dispel Russian propaganda.
If you simply look at money supply in the Russian economy and the difficulties with which MinFin had raising OFZ attraction until December, it’s clear that the Russian state itself is struggling.
The Central Bank has had to flood the economy with cash despite raising rates.
Thanks, excellent work really! Sounds to me like doubling down on sanctions and tripling military support to Ukraine can actually become the cheapest way to create lasting peace around #Russia (as #Russia would be broke). And likely also promote peace around North Korea and Iran, as they would likely receive much less military and nuclear support than currently expecting.
As the US discovered in 1945 Keynesian economics can work very well in an economy that is recovering from a depression with large amounts of unused capacity. Large payments are going to the soldiers in form of bonuses and much higher than normal pay all of this of course flows back into the real economy unlike QE for example.
Russia does NOT have the productive capacity available that the US relied on to fuel its post WWII boom. Not even remotely close to it. White goods; electronics; oil; coal; steel; cars, ships - you name it...the US made all these things. Russia barely makes anything value added. It's a failing primary producer. It underperformed on agriculture because of climate this year because (a) climate issues; and (b) labour shortages - rural workers were dragged off to war, and lie wasted in the fields of Ukraine.
Russia has all but lost its energy sector, and it's going to have to shut down oil production, because Ukraine has hammered its storage and refining capacity, and the secondary sanctions are hitting its shadow fleet of dodgy tankers.
There are some 61 Russian oil tankers standing at anchor, filled with oil that have been denied access to a port to off-load it due to secondary sanctions.
Putin overplayed his hand, and the consequences are going to be brutal for Russia when its chickens come home to roost.
I was not comparing US economy in 1942 with that of Russia now except that in both cases there was a unused capacity from the 1930's depression in the US and from the 2010's in Russia. Most ot the industrial increase in the US happened in new purpose built factories not repurposed domestic item factories and often had a largely new freshly trained workforce too ( often female)
There are a LOT of reports of soldiers not getting paid at all. That is to start with. Second, a lot of soldiers join to pay off debt, not purchase new items. Third, a lot of soldiers spend all their money on drones, warm clothes, and cell phones - essentially military supplies that don't generate growth. (made in China)
As matter of fact Military Drone production in Russia is very large now and I doubt that Russia needs to get warm clothes from China and even if debt is paid down that still flows into the real economy. Interestingly off topic there were serious suggestions that after the financial crisis in 2008 here instead of QE going to Banks that money could have been distrributed to every citizen with a proviso that in first instance any debt should be paid off. This would have affected the real economy far more than QE which most agree just helped out the banks not the real economy.
References like "Central Bank of Russia" are not much informative; one would expect references to specific tables and publications, better yet direct internet links, because everything the CBR publishes is available online.
For instance, here is the regular release:
Non-financial sector and Households debt, extended
https://www.cbr.ru/eng/statistics/macro_itm/dkfs/ext_dep_indicator
Graphs do not seem to demonstrate anything exceptionally dramatic on the non-financial debt front.
As for the supposed riddle of the continuing expansion of business debt after the discontinuation of the subsidized mortgage program, it most likely reflects the legal mechanics of the urban residential construction sector in Russia. Specifically, mortgages extended to households are held in escrow accounts, and only after the proposed development project (almost invariably condo apartments) is fully subscribed to, developers borrow against these escrow accounts (at the rates that more or less match the underlying mortgages rates), and start actual construction activities. This mechanism creates a lag between the approval of mortgages to households and the approval of lending to developers.
Thank you! Very insightful and well written, and an excellent explanation of the funding conundrum.
I eagerly await the full report.
Such massive credit expansion will make inflation unavoidable near term, whatever the interest rate.
That's a pain voters will feel.
These zombie war-related manufacturers, kept barely alive with a financing "trickle" (although cumulatively, a big number) to cover raw material and payroll costs, will have no life support once the peace is signed.
That will be a painful triple punch of bankruptcies, banking sector bad debts / systemic credit crisis, and an unemployment spike.
Bank collapses will be likely, and probably dressed up as 'mergers' or 'sector consolidations'.
At the same time there are stories circulating of massive theft from the military budget. (Same for Ukraine, of course). For example regarding food for the soldiers. Doing the basic maths suggests outrageously high pricing. Is the theft centralised, or out of control?
It does give me pause to wonder what kind of reparations deal will be possible.
We live in interesting times.
M
"That's a pain voters will feel" - there is no such thing as a voter in russia.
Can you provide REAL information? Where did you get all theese numbers and graphs?
The UK's Financial Times has a story on this as well:
https://on.ft.com/4hbKSdN
First of all, this article and FT’s one are just an opinion without any facts or evidence. Secondly, FT’s article is based on this one. I suppose both authors wrote their wishful thinking as reality. Both articles have no URL-links to official sources.
How do you know they are "just opinion"? Quote from the FT article.
Quotation:
“Opinion War in Ukraine
Russia’s war economy is a house of cards”
“Opinion” word before the header.
"The full report, Russia’s Hidden War Debt, is expected to be published in the coming days on Navigating Russia."
do we have a date for the publishing?
Another neocon boomer who wants war with Russia. Disregard.
I'm also curious to see exactly where the data used in this analysis are coming from. My cursory look at the CBR data says that total nonfinancial corporate debt increased only 26% from 2021Q4 to 2024Q2. *Domestic* nonfin. corporate debt increased more, naturally, by 51%. But nominal GDP increased a lot as well. Total private nonfinancial debt (nonfin. corporate + households) as % of GDP at the end of 2024Q2 is basically where it was at the end of 2021Q4, at 67%. And this is in fact *lower* than in 2018-2020.
So from the aggregate debt figures I could find, it's hard to conclude that debt is increasing unsustainably.
P.S. in your Figure 1, it seems that Jul-2022 level is about 100, and then Oct-2024 level is about 145. How does this yield a 71% increase?
In the post below I described the increase in nonfinancial credit, if in numbers, it was 31.761 billion rubles in January 2022, and became 74.835 billion rubles in November 2024, according to the Russian Central Bank (CBR). I don't know how you got 26%. It seems to me that the credit growth of 49 trillion is incredibly significant.
Could be that I'm looking at the wrong thing, just trying to understand. Could you please point me to the data series/page you are using? I've used this table from CBR: https://www.cbr.ru/eng/statistics/macro_itm/dkfs/ (Non-financial sector and Households debt, extended). Here the outstanding debt of nonfinancial corporates is recorded as 69.598 trillion RUB as of 2022/01/01, and as 87.67 trillion RUB as of 2024/07/01, or a 26% change.
As a perfume export director I have worked with Russia since 98. I do not have any specific macroeconomy expertise, but I see the fall of daily consumption of superfluous products to a desperation level. In the real economy many sector players disappeared or are simply not able to sustain their operations anymore. They are surviving zombies. The biggest ones are downsizing badly, as only the richest % of consumers are still able to access superfluous goods. Another point for the future: so many Russians that had management positions in international companies have moved abroad to escape constrains to military calls and economic disruption. They have lived in Europe, Dubai or ex Sovietic countries for years now, and might decide not go back the day war will hopefully stop. So there might be shortage of capable work force then.
But according to FUCKER Carlson who had a “interview” with Putin and then toured Russian grocery stores, they were stock full of goodies in an amazing space 🙄🙄🙄
Excellent analysis. So glad that someone is covering this and studying the Potomkin village that is the Russian economy.
How much of the USD rise in corporate lending is due to XR revaluation of the portfolio as the RUB declined? Probably a lot.
Please present the chart in RUB and then we can analyze further.
Русскому народу:"Боритесь и покажите СВОЮ ПОЛНУЮ ПРОТИВОПОЗИЦИЮ Cвоему Говному ДИКТАТОРУ по всей России;не будьте просто Обыкновенными Пьяными,Пугливыми и Трусливыми Негодяями, как вас воспитывали в прошлом и настоящем;Путину:Умри в аду:АМИНЬ.🖕https://t.me/vesna_democrat
Кто на самом деле «денацифицирует» Украину?
https://activatica.org/content/32b41e80-56bd-41b9-8447-3dd43e00ceee/a-sudi-kto
https://youtu.be/hFjdOMkrziE
Terrific article. Puts a lie to Putin’s bluff.