Russia’s financial system is reportedly under more pressure as Moscow’s war on Ukraine nears the end of its fourth full year.
The White House is looking to revive peace talks this weekend with Ukrainian President Volodymyr Zelensky who is due to meet with President Donald Trump in Florida on Sunday. Russian forces have stepped up their bombing of Ukraine ahead of the meeting, but prolonged fighting poses risks to the economy.
“A banking crisis is possible,” a Russian official told the Washington Post recently on condition of anonymity. “A crisis of non-payment is possible. I don’t want to think about a continuation of the war or an escalation.”
Russia’s economy has been surprisingly resilient in the face of severe Western sanctions after President Vladimir Putin launched his invasion of Ukraine in early 2022. Just as China and India were eager to acquire cheap Russian oil, keeping the Kremlin’s coffers full and providing revenue for its military.
But more recently, energy prices have fallen while Europe and the United States have tightened sanctions. Oil and gas revenue fell 22% in the first 11 months of the year, and Reuters estimated December revenue is down nearly 50%.
To cover the shortfall in energy revenue, Moscow tapped its sovereign wealth fund. But this is also ending now, so the government has resorted to raising more revenue through tax increases.
Meanwhile, a tight labor market and high inflation have forced the central bank to keep interest rates high, and recent cuts have failed to prevent spending cuts across various consumer categories.
With companies feeling the pinch of high rates and weaker consumption, Russian data show unpaid wages nearly tripled in October from a year ago to more than $27 million, with Location and added that furloughs and shorter work weeks are also becoming more common.
As a result, more consumers are having trouble servicing their loans. Due to the headwind, the Russian official warning of a banking crisis or non-payment is not the first of its kind.
In June, Russian banks raised red flags about a potential debt crisis as high interest rates weigh on borrowers’ ability to service loans. Also that month, the head of the Russian Union of Industrialists and Entrepreneurs warned that many companies were in a “pre-default situation.”
And in September, Sberbank CEO German Gref, one of Russia’s top banking chiefs, said the economy was in “technical stagnation”, following his warnings in July and August that growth was close to zero.