Half a million Russians declared bankruptcy last year as the country\u2019s banking institutions bear the brunt of the cost of the war in Ukraine, a European intelligence report says this week.<\/p>\n
As the war in Ukraine continues into its fourth year, Russia\u2019s Ministry of Economic Development has cut its GDP forecast for 2026 from 1.3 percent to 0.4 percent.<\/p>\n
Rising household debt is one of the things creating the conditions for an \u201cexplosive\u201d banking crisis, according to the European intelligence report, seen by Reuters. But experts say that while individuals are facing a cost-of-living crisis \u2013 and many face bankruptcy \u2013 a full-blown banking crisis is unlikely.<\/p>\n
Here\u2019s what we know about Russia\u2019s financial woes and what this means for its war effort.<\/p>\n
What has happened?<\/p>\n
According to the European intelligence report seen by Reuters, as Russia\u2019s government continues to pour money into its war against Ukraine, it is relying more on banks to support companies and everyday borrowers.<\/p>\n
To do this, Russia\u2019s banks have extended a growing number of \u201crisky\u201d loans in recent years, the report says.<\/p>\n
While this has allowed Russia\u2019s war machine to keep humming and helped many Russians make ends meet, including buying homes, it has also introduced heightened financial risk, including more people defaulting on their debt and many declaring bankruptcy.<\/p>\n
The two-page intelligence report, prepared to inform European officials about the state of Russia\u2019s banks, also highlights their vulnerability to Western sanctions.<\/p>\n
While Russia\u2019s banks have mostly weathered sanctions imposed by the US and European countries since Moscow\u2019s 2022 full-scale invasion of Ukraine, the new report notes that the EU is preparing a 21st package of sanctions it hopes to finalise in July, which will target banks and cryptocurrency networks.<\/p>\n
What is causing the strain on Russian banks and borrowers?<\/p>\n
Russian banks have issued an increasing amount of \u201cbad\u201d loans, according to the European intelligence report. Bad loans are those at higher risk of default.<\/p>\n
Ten percent of Russia\u2019s corporate loans are now doubtful, the report estimated, a sharp increase from two years ago. Meanwhile, more than 500,000 Russians declared bankruptcy last year, a year-on-year increase of nearly one-third, it added, while state-backed credit programmes have encouraged more than 13 million Russians to draw three or more loans from banks at the same time to stay afloat amid the cost-of-living crisis.<\/p>\n
Vladislav Inozemtsev, an associate fellow at the Russia and Eurasia Programme of the London-based think tank, Chatham House, said\u00a0overdue corporate loans now amount to about 7 trillion roubles ($91bn), comprising 3 percent of Russia\u2019s GDP, currently estimated at $2.65 trillion, or two years\u2019 worth of the banking system\u2019s total profits.<\/p>\n
However, he added that more than half of the overdue debt in corporate loans consists of loans issued to defence-industry enterprises or to companies connected in one way or another with state defence.<\/p>\n
\u201cThere should be no doubt that these will ultimately be repaid by the state (or, more likely, the government will keep the interest payments on them current so as not to complicate the banks\u2019 position); even if some loans are never repaid, the Central Bank will provide the affected banks with the necessary liquidity.\u201d<\/p>\n
Overdue loans to individuals total another 1.7 trillion roubles ($22bn).<\/p>\n
\u201cThis segment may see many bankruptcies, and banks will have to write off part of these loans, but reserves have already been set aside for that,\u201d Inozemtsev said.<\/p>\n
So, is Russia facing a banking crisis?<\/p>\n
The European intelligence report claims that Russian banks\u2019 reliance on government support, such as state-backed credit programmes, which have encouraged many people to take out multiple loans, as well as widespread loan restructuring, are masking a looming crisis that a new economic stressor \u2013 such as new sanctions or more people defaulting on risky loans \u2013 could bring to the surface.<\/p>\n
\u201cThe situation creates the illusion of a dynamic economy that, in reality, conceals an explosive situation which an economic shock, such as an ambitious package of sanctions against banks \u2026 could trigger,\u201d said the report.<\/p>\n
However, Russian authorities have consistently downplayed any such crisis, with central bank Deputy Governor Filipp Gabunia last month saying that \u201cvulnerabilities in the financial sector are not critical\u201d.<\/p>\n
Some experts say that, so far, Russia does not seem to be facing a full-blown banking crisis.<\/p>\n
In 2024 and 2025, Russian banks reported profits of roughly $80bn to 90bn over the two years, according to Vladislav Inozemtsev, an associate fellow at the Russia and Eurasia Programme of the London-based think tank Chatham House.<\/p>\n
\u201cEven though the economy is slowing in 2026 and problems in the real sector are mounting, the banks are earning even more money,\u201d Inozemtsev told Al Jazeera.<\/p>\n
He added that in the first five months of this year, the total net profit of Russia\u2019s banking sector exceeded 1.9 trillion rubles ($24.8bn) \u2013 and the current full-year forecast stands at 3.9 trillion ($51bn), which would be yet another all-time record.<\/p>\n
Inozemtsev said the structure of the Russian banking system, comprising a few, large, heavily supervised banks, makes a full-blown banking crisis less likely. He said that even if smaller banks fail and individuals face bankruptcy, it would not trigger a crisis in the country.<\/p>\n
Inozemtsev concluded: \u201cThat is why I am confident that Russia cannot experience a banking crisis even remotely resembling the banking crisis of 2012-14, when banks from the top 50 went under every month \u2013 to say nothing of 1998, or of the situation in the United States during the Great Depression. I see no threats to the stability of the Russian banking system.\u201d<\/p>\n
How has the war affected Russia\u2019s economy?<\/p>\n
It has transformed Russia\u2019s economy by centring it on a wartime footing.<\/p>\n
Growth, which last year slowed to 1 percent and is projected by Russian authorities at just 0.4 percent this year, is now mostly fuelled by defence production and state spending, as Western sanctions have cut the country\u2019s exports \u2013 particularly oil \u2013 off from major foreign markets and investment. Russia has got around much of this by using a shadow fleet to export oil.<\/p>\n