A group of exiled Russian economists argued late last year that the Russian economy can sustain the war in Ukraine. The three men said in a report that the conflict’s consequences and sanctions, such as high inflation, will be evident in the future but pose no immediate threat to Putin’s regime.
That is far from a universally accepted view. Numbers unearthed by former Morgan Stanley and Bank of America financier Craig Kennedy make much less pleasant reading for the Kremlin.
He produces new evidence that the Russian government has created a shadow system to finance the war in Ukraine by instructing banks to give preferential loans to war-related industry. This led to a sharp 71% growth in corporate borrowing — almost 20% of GDP — between July 2022 and October 2024 and is 6.5 times greater than the rise in government borrowing over the same period. For scale, the sum is also greater than annual oil and gas revenue.
In this way, he wrote, the regime “misled observers into concluding — incorrectly as it turns out — that Moscow faces no serious risks to its ability to sustain [its war] funding.”
Of this $415bn of “off-budget” loans, as much as $250bn went to finance war-related and often insolvent enterprises, helping to drive up inflation. Kennedy predicts the government will have to take on obligations to save indebted companies, which would consume half its budget and hamstring its ability to finance the war if the West keeps sanctions in place.
Even with this tidal wave of state aid, most defense companies still struggle to meet demand for the frontline. This despite the fact that some factories now work in three shifts, some have switched to a 24-hour work schedule and many are operating on holidays.
As early as September 2023, when the post-invasion sanctions had only been in place for a year and a half, journalists reported that Russian defense plants were increasingly unable to make deliveries as a result of missing components and corruption. By that point in the war, more than 400 managers of workshops and plants had been fined for failing to fulfill Ministry of Defense orders.
The Instrument Design Bureau (KBP), for example, which produces high-precision weapons for the front, had promised to deliver a guided missile for X-UAV drones by April 2022, but still had not done so by the end of 2023.
The scale of the corruption and mismanagement behind such failures was laid bare when large-scale purges began in the Ministry of Defense under new minister Andrey Belousov last year. Colossal theft was revealed in areas of logistical support for the army, construction, and the recycling of obsolete or damaged weapons.
In November, the military prosecutor’s office approved an indictment against Colonel Ilya Timofeev, former head of the disposal service for the Ministry of Defense’s Main Armored Directorate. The head of the state’s “military recycler” is charged with receiving a bribe of almost 3 million rubles ($30,000.)
Defense Ministry contractor Aleksey Zolotarev, who is close to the Kremlin and responsible for weapons disposal, not only made billions through his business in Russia but also acquired a luxury villa on the French Riviera and Maltese passports for himself and his family.
His company, TransLom, which receives ferrous and non-ferrous scrap metal from the Defense Ministry, has avoided competitive procedures for the work. Yet while Zolotarev’s former partner is under investigation, he remains free and has not been included in European Union sanctions.
Yet a report by British defense intelligence noted that purges of officials are unlikely to eradicate corruption as it “is endemic in the Russian defense industry and is tolerated within certain limits and so long as those involved enjoy the requisite level of political patronage.”
It has often been observed that Russia’s entire power structure could not exist without corruption. Analysts also point out it is likely Belousov, who has led the purges, will soon create his own clan uniting other influential groups in the Kremlin, and they all will lay claim to their own share of kickbacks and bribes.
At the same time, it will be impossible to finance the war indefinitely, from either the budget or hidden means, without seriously degrading the well-being of ordinary Russians.
Kseniya Kirillova is an analyst focused on Russian society, mentality, propaganda, and foreign policy. The author of numerous articles for CEPA and the Jamestown Foundation, she has also written for the Atlantic Council, Stratfor, and others.
Europe’s Edge is CEPA’s online journal covering critical topics on the foreign policy docket across Europe and North America. All opinions expressed on Europe’s Edge are those of the author alone and may not represent those of the institutions they represent or the Center for European Policy Analysis. CEPA maintains a strict intellectual independence policy across all its projects and publications.
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