Russia's war spending may be twice its military budget, risking economic collapse
www.pravda.com.ua
Sun, 12 Jan 2025 23:32:59 +0200
The amount of Russias military spending that is funded through a shadow financing scheme could be equal to its official military budget and may be contributing to rising inflation risks in the country.
Source Craig Kennedy, a former investment banker at Bank of America and Morgan Stanley, in his Navigating Russia newsletter Details Since February 2022, Russian banks have been required to issue preferential loans to military enterprises on terms dictated by the state.
According to Kennedy, over 70 of corporate loans in Russia since 2022 have been granted to sectors involved in the war.
Kennedy reports that over the three years of the war, this scheme may have provided the aggressor with funds equal to its official military budget.
At the same time, it has led to unprecedented corporate borrowing, reaching US415 billion.
Quote This report estimates that US210 to US250 billion of this surge consists of compulsory, preferential bank loans extended to defence contractors many with poor credit to help pay for warrelated goods and services. More details At the start of the fullscale invasion, the offbudget financing scheme helped Russia maintain its military budget at a controllable level, misleading international experts into believing the country faced no financial issues in funding the war.
However, Kennedy says Russias current reliance on offbudget financing is creating problems, driving inflation and interest rate hikes.
Now the scheme risks triggering a systemic crisis due to disproportionately high interest rates, liquidity and reserve problems at banks, and a severely compromised monetary transmission mechanism.
Kennedy emphasises that the longer Moscow delays ending the war in Ukraine, the closer it will move towards corporate and banking collapses which the Russian government would be forced to cover.
These difficulties could also lead to a fall in GDP.
Kennedy argues that Western resources can surpass Russias capacity to sustain a war of attrition against Ukraine.
He calls for continued support for Ukraine and tougher sanctions, and rejects any notion of sanctions being lifted in exchange for a ceasefire.
Quote Moscows funding challenges only increase from here, especially if coalition countries enforce more fully the powerful energy sanction tools at their disposal.
Through continued resolve and a clear understanding of Moscows vulnerabilities, Ukraine and its allies can realise the full potential of their negotiating leverage, avoid making unnecessary concessions, and reduce the longerterm risks posed by Russian revanchism. Background Sanctions against Russia, combined with widespread corruption, labour shortages, the costs of the war in Ukraine and the inefficiency of its defence industry, are undermining the Russian Federations ability to sustain both its defence sector and economic stability.
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