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Half a million Russians declared bankruptcy last year as the country’s banking institutions bear the brunt of the cost of the war in Ukraine, a European intelligence report says this week.
As the war in Ukraine continues into its fourth year, Russia’s Ministry of Economic Development has cut its GDP forecast for 2026 from 1.3 percent to 0.4 percent.
Rising household debt is one of the things creating the conditions for an “explosive” banking crisis, according to the European intelligence report, seen by Reuters. But experts say that while individuals are facing a cost-of-living crisis – and many face bankruptcy – a full-blown banking crisis is unlikely.
Here’s what we know about Russia’s financial woes and what this means for its war effort.
What has happened?
According to the European intelligence report seen by Reuters, as Russia’s government continues to pour money into its war against Ukraine, it is relying more on banks to support companies and everyday borrowers.
To do this, Russia’s banks have extended a growing number of “risky” loans in recent years, the report says.
While this has allowed Russia’s 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.
The two-page intelligence report, prepared to inform European officials about the state of Russia’s banks, also highlights their vulnerability to Western sanctions.
While Russia’s banks have mostly weathered sanctions imposed by the US and European countries since Moscow’s 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.
What is causing the strain on Russian banks and borrowers?
Russian banks have issued an increasing amount of “bad” loans, according to the European intelligence report. Bad loans are those at higher risk of default.
Ten percent of Russia’s 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.
Vladislav Inozemtsev, an associate fellow at the Russia and Eurasia Programme of the London-based think tank, Chatham House, said overdue corporate loans now amount to about 7 trillion roubles ($91bn), comprising 3 percent of Russia’s GDP, currently estimated at $2.65 trillion, or two years’ worth of the banking system’s total profits.
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.
“There 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’ position); even if some loans are never repaid, the Central Bank will provide the affected banks with the necessary liquidity.”
Overdue loans to individuals total another 1.7 trillion roubles ($22bn).
“This 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,” Inozemtsev said.
So, is Russia facing a banking crisis?
The European intelligence report claims that Russian banks’ 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 – such as new sanctions or more people defaulting on risky loans – could bring to the surface.
“The 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 … could trigger,” said the report.
However, Russian authorities have consistently downplayed any such crisis, with central bank Deputy Governor Filipp Gabunia last month saying that “vulnerabilities in the financial sector are not critical”.
Some experts say that, so far, Russia does not seem to be facing a full-blown banking crisis.
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.
“Even though the economy is slowing in 2026 and problems in the real sector are mounting, the banks are earning even more money,” Inozemtsev told Al Jazeera.
He added that in the first five months of this year, the total net profit of Russia’s banking sector exceeded 1.9 trillion rubles ($24.8bn) – and the current full-year forecast stands at 3.9 trillion ($51bn), which would be yet another all-time record.
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.
Inozemtsev concluded: “That 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 – 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.”
How has the war affected Russia’s economy?
It has transformed Russia’s economy by centring it on a wartime footing.
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’s exports – particularly oil – off from major foreign markets and investment. Russia has got around much of this by using a shadow fleet to export oil.
While the wartime economy has therefore proven stronger than many expected, there are signs of cracks. The Russian energy sector has taken a pounding under continued Ukrainian drone attacks on energy facilities.
A recent Gallup poll found that 60 percent of Russians believe their economic conditions are worsening, marking the first time in two decades that a majority has held that view.
Fifty-six percent of Russians say living standards are deteriorating, while 58 percent say it is a bad time to get a job where they live, even as unemployment remains low due to military recruitment and defence industry jobs.
“I would say, first, that it has caused the economy to function in greater isolation from the world than before – that is, the economy’s dependence on the outside world has become much lower,” Inozemtsev said.
“The economy attempted to pursue import substitution (successful in only a few industries), stopped relying on inflows of foreign investment, and its stock market no longer reacts to movements on foreign exchanges – in every sense, the Russian economy has become more closed.”
What does this mean for Russia’s war effort?
Inozemtsev said the war has triggered a rapid increase in military spending and a rising tax burden, which are weighing on the economy and increasingly dragging it down.
Some economists argue that Russia’s economy could continue to grow indefinitely on the back of military orders, but that is unlikely, he said.
“Military spending is effectively a pure deduction from overall welfare, and Russia cannot wage war in this mode forever; the country is losing both its current and its future economic potential,” Inozemtsev said.
He added that innovation is almost entirely absent, there is a significant brain drain, and investment is falling sharply.
“It is worth noting that government policy – including efforts to nationalise certain ‘strategic’ companies, raise taxes, and cut social spending – is doing far more damage to the economy than Western sanctions and the deteriorating external environment combined,” Inozemtsev said.
“Frankly, it is hard to imagine any improvement in the state of the Russian economy before the war ends.”
