For at least a year now, the Kremlin has been convinced — and persuaded many others — that it holds all the cards in Ukraine, with more personnel and ammunition, a bigger arms industry and, as a result, an advantage in the most important commodity of all for a war of attrition: time.
This presumption proved a fallacy from the first day of the war, when Russian troops marched into Ukraine expecting instant victory, with parade uniforms in their backpacks, but just a few days’ worth of fuel and supplies. It remains false today, as difficult as Ukraine’s position on the front lines has become — not least because Russia’s economy is losing its near-miraculous Teflon shield.
This is a critical point to understand as a new US administration prepares to announce a plan for peace talks. If Russian President Vladimir Putin does have time to burn, he can bargain from a position of strength, knowing that Ukraine must eventually fold to his demands. The reality, however, is that Putin’s hand is weaker than he would have us believe, and it is US President Donald Trump who can afford to dig in at the negotiating table.
Because some of the strong cards the Kremlin is often claimed to hold are either contingent on choices made in the West (with its far larger economic and military potential), contested by Ukraine (think of Kyiv’s growing long-range strike capability or the territory it still holds in Russia’s Kursk region) or illusory.
Putin’s threats of a nuclear strike falls into this last category and serve as a perfect example of just how effective a bluff can be (in this case restricting the flow of arms to Ukraine) when it is believed. Russia’s economy is also now moving toward this group, if it is not there already.
Russian resilience in the face of unprecedented Western sanctions and asset seizures has been a surprise similar to Ukraine’s ability to resist on the battlefield. Instead of collapsing, as many believed it would, the economy grew, thanks not only to evasion of sanctions, but also to a world-class central bank governor and massive official and unofficial fiscal stimulus for the war effort.
Even now there is no sign of crisis, but there has been a sharp turn for the worse that creates opportunities to pile on pressure and change Putin’s risk calculations during talks. This chance needs to be taken, not as an alternative to a peace settlement, but to make one possible. How do we know this is not just wishful thinking (again)?
In a report published on Jan. 23, the Center for Macroeconomic Analysis and Short-Term Forecasting, a Moscow nonprofit that advises the Russian government said that, despite strong overall growth numbers, Russia’s non-defense economy has been stagnant since the middle of 2023. More recently, investment and household consumption stopped growing, too, as the central bank drove its key interest rate up to 21 percent, to battle stubborn inflation. So far so manageable for a wartime economy. The danger lies in the amount of credit that has been pumped into the defense industry to fund its extraordinary growth, much of it taken out on variable rates.
The report added that a credit crunch began in November-December. The full extent of the problem remains hidden, the center said, as banks opt to restructure bad debt discreetly rather than report it, thereby mitigating the risk of failing capital ratio requirements.
Craig Kennedy, a former US banker who worked in Russia’s energy sector and is now at Harvard University writing a book on the history of the Russian oil industry, thinks the situation is worse. Based on Russian central bank data, he estimates the nation’s corporate debt load surged by 36.6 trillion rubles (US$446 billion at historical rates) since 2022, or more than 70 percent.
A large proportion of that debt is the result of preferential loans the state directed Russian banks to make to defense contractors. Yes, the banks can just keep extending repayment on the loans and pretending they are good.
However, by now the central bank is worried because this is damaging the transmission mechanism it relies on to rein in inflation — at 9.5 percent, still twice the bank’s target rate. Companies forced by law to make unaffordable loans to arms manufacturers are not sensitive to interest-rate increases. They are confident the state would bail them out if necessary — a reasonable assumption until it cannot.
It is not that the economy is about to collapse, Kennedy said, but that the longer Russia keeps relying so heavily on state-directed, off-budget lending to fund its war, the greater the risk of a credit-default event that could spin out of control.
What all this means is that Putin cannot count on having as much time to continue the invasion as he would like the world to believe. Keeping pressure on Russian funds and revenue “is the best leverage Ukraine and its allies have, because Russia will have a huge [financial] cleanup job to do after the war,” Kennedy said.
Not everyone agrees this potential credit trap presents as high a risk to the Kremlin as Kennedy believes. Janis Kluge, another close watcher of Russian economic data, sees a long-term debt burden for the country’s arms industry, but one it can pay down over many years, because the economy would remain on a war footing even after a deal in Ukraine is reached.
“There will definitely be problems for Putin in 2025,” Kluge, deputy head of research at the German Institute for International and Security Affairs, said in Berlin. “But I don’t think these will be big enough to force him to negotiate.”
I do not know which of these very astute Russia analysts is right, but it is clear the risks of continuing the war are rising for Moscow, as well as for Kyiv. Both Ukrainian President Volodymyr Zelenskiy and Putin have softened their positions on talks a little lately, saying they would be willing to negotiate with each other directly where they had previously ruled that out.
What should be crystal clear to everyone involved, though, is that the worst thing the US and Europe could do right now would be to strengthen Putin’s hand as negotiations approach. That could be done by engaging in a fratricidal trade war that divides and weakens the West, cutting short aid to Ukraine or easing economic pressure on Russia in exchange for a pre-settlement ceasefire that Putin would — if the past is any kind of prologue — have no intention of respecting.
Marc Champion is a Bloomberg Opinion columnist covering Europe, Russia and the Middle East. He was previously Istanbul bureau chief for the Wall Street Journal. This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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