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The most important thing that Russian President Vladimir Putin is trying to impress on his western friends in Ukraine is that he has time on his side, so the only way to end the war is to accommodate his like The apparent strength of Russia’s economy, and the resulting skepticism in some quarters that western sanctions are having an effect, is a central part of this information warfare.

The truth is that the financial foundations of the Russian war economy are increasingly looking like a house of cards — so senior members of the ruling public elite are expressing concern. They include Sergei Chemezov, chief executive of state defense giant Rostec, who warned that expensive credit was killing his arms export businessand Elvira Nabiullina, head of the central bank.

This pair knows more than many people in the west, who taken in numbers which shows steady growth, low unemployment and rising wages. But any economy on a fully functioning footing can produce such results: this is basic Keynesianism. The real test is how used resources – rather than useless ones – are diverted from their previous uses and to the needs of war.

A state has three methods to achieve this: borrowing, inflation and expropriation. It should choose the most effective and painless combination. Putin’s arrogance – to the west and to his own public – is that he can finance this war without financial stability or significant material sacrifices. But this is an illusion. If the frustrations of Chemezov and Nabiullina are broken in public, it means that the illusion is flickering.

A new report by Russia analyst and former banker Craig Kennedy highlights the huge growth of Russian corporate debt. It has increased by 71 percent since 2022 and reduced new household and government lending.

Actually private, this lending is actually a creation of the state. Putin dictated the Russian banking system, with banks having to lend to government-appointed companies on hand-picked, preferential terms. The result is a flood of below-market-rate credit to favored actors in the economy.

In essence, Russia is engaged in a lot of money printing, outsourced so that it does not appear on the public balance sheet. Kennedy estimates a total of about 20 percent of Russia’s 2023 national output, comparable to the accumulated budget allocations for the entire war.

We can tell from the Kremlin’s actions that it sees two things as anathema: apparently weak public finances and runaway inflation.

The government avoided a significant budget deficit, despite growing war-related spending. The central bank remains free to raise interest rates, which are currently at 21 percent. Not enough to beat inflation driven by state-mandated subsidized credit, but enough to keep price growth contained.

The consequence is that the problems of Chemezov and Nabiullina are not a mistake that can be fixed but inherent in Putin’s choice to flatter the public finances and keep a (high) lid on inflation. There is something else that needs to be given, and the other thing includes businesses that cannot operate profitably if the cost of borrowing exceeds 20 percent.

Putin’s privatized credit scheme, meanwhile, kept a credit crisis at bay as loans went bad. Banks can be bailed out by the state – if they don’t collapse first. Given the Russians’ experience with suddenly worthless deposits, fears of a reversal could easily trigger a run on its own. That would destroy not only the banks but the legitimacy of the government.

Putin, in short, does not have time on his side. He is sitting on a ticking financial time bomb of his own making. The key for Ukraine’s friends is to deny him the one thing that could prevent this: greater access to outside funds.

The west has blocked Moscow’s access to some $300bn in reserves, put spanners in its oil trading operations and hit its ability to import various goods. Taken together, this prevents Russia from spending all of its foreign earnings to alleviate resource constraints at home. Intensifying sanctions and eventually transferring reserves to Ukraine as a payment for reparations will strengthen restraints.

Putin’s obsession is the sudden collapse of power. That, as he must have known, was the risk his war economy was running. Making this retreat, by increasing access to external resources through the relief of sanctions, is his goal in any diplomacy. The west had to convince him that this was not going to happen. That, and that alone, will force Putin to choose between his attack on Ukraine and his hold on power at home.

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