“Putin is on a time bomb”

Vladimir Putin hid up to $250 billion in debts to the West. A “house of cards” that threatens to collapse.

Niklaus Vontobel / ch media

Vladimir Putin is deceiving the world. Russian public finances appear solid, despite the heavy burden of war. Western analysts have mostly fallen into the trap. They only see what Putin wants to show them: the official figures. These give the impression of “surprisingly resilient” finances. Putin the invincible.

But in fact, Putin has accumulated debts. New research sheds light on these “hidden war debts.” The specialist in the European economy of Financial Times states:

As for the report, we owe it to Russia analyst Craig Kennedy. He has worked for leading US banks and has now joined Harvard University. Craig Kennedy thus describes how Putin built his house of cards, and how it could collapse and bring with it the leader’s aura.

The Russian president began his work on the second day of the war. At the time, he passed a law that forced banks to work for his war economy. They therefore no longer decide to which company they entrust their clients’ money.. They must now grant credits in accordance with the wishes of the Kremlin.

The banks did what they were asked. As of mid-2022, Russian companies have taken on debt to an “unprecedented” extent – ​​totaling $415 billion. Craig Kennedy was unable to determine which companies received how much, although he was able to proceed by sector. He estimates that 210 to 250 billion dollars have been spent on armaments.

A systemic financial crisis in Russia

That’s a lot of money for Russia: about as much as the official state defense budget. Putin therefore finances his war half by hiding from Western eyes and half through official public finances, which seem somehow surprisingly resilient. Putin the magician.

But it cannot make hidden debts disappear. They reach a level such that they have consequences on the entire population. In 2024, the central bank began to warn: this debt management could trigger high inflation and a systemic financial crisis.

Inflation probably reached close to 10% last year. Consumer prices therefore rose by the same amount on average, but there were even more spectacular cases. Butter increased by 25%, becoming the favorite target of shoplifters. The head of state even had to explain:

Yet that is exactly what happened. Vladimir Putin spends far too much on his war, via the State or hiddenly via the banks. The economy is no longer keeping up. Especially since sanctions prevent the supply of many intermediate products. And what it can still buy, Russia must pay much more for it because of the weakness of the ruble. Labor is also becoming scarce or more expensive: thousands of people have fled, gone to fight in Ukraine, died or injured.

Inflation fatal to many leaders

Inflation could harm the Russian president. The historian Harold James pointed out in 2023 that the phenomenon had already been fatal on several occasions for the leaders of the former Soviet republic. If governments do not keep their promises, they alienate the people. And money represents one of the oldest promises. The historian even ventured a prognosis:

Craig Kennedy sees inflation as a lesser evil for Putin, for whom a systemic financial crisis would be more problematic. Inflation acts insidiously, while financial crises strike like earthquakes: sudden, unpredictable, with great destructive force.

The high key rates of 21% – which the Russian central bank must impose to fight inflation – could plunge the country into crisis. Companies working for the war certainly continue to obtain advantageous credits. Inflation or not. Putin imposes, the banks dispose. But all the others pay much more than the key rate of 21%. They are buckling under this weight – and may soon give way.

The central bank therefore warned of the risk of “over-indebtedness” of “large companies”. For example, Gazprom, one of Russia’s largest employers, seems under threat. It lost its main market, European exports, suffered a record loss in 2023 and took on significant debts at interest rates above 21%. According to the Financial Timesit is now considering drastic measures: cutting around 40% of all positions at head office.

According to the specialist, it is not a revolution that threatens Putin in the first place. Even if the financial crisis came for real, he would find the money to prop up all the faltering companies and plug the holes in their balance sheets. He would have to raise taxes and go into even more debt. He would do it reluctantly and the people would put up with it.

But this image of invincibility that Putin cultivates so carefully would disappear. The West would then discover that Russia is paying a high price for the war, that its public finances are fragile and that Western sanctions are working. A Russian financial crisis would show what Putin has long been aware of: if the West uses its resources decisively, Russia will not be able to win

If this conclusion prevails, Vladimir Putin will find himself in a very poor position to negotiate with Ukraine and the West, writes Craig Kennedy. And Martin Sandbu thus concludes in the Financial Times:

French adaptation: Valentine Zenker

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