Russian government presents: An economic failure once in 30 years
The war has pushed Russia into a deficit of about $74 billion. To bridge it, the government attempted to raise funds through bonds but failed. Meanwhile, Ukraine is increasing pressure on Russian infrastructure and logistics.
The Russian government attempted to raise debt from the public to finance the costs of the war, but canceled the tender when it received offers at interest rates exceeding 16% per year.
This is the largest bond issuance failure since the economic crisis in Russia in the nineties. Russian bonds are trading on the secondary market at an increasing price, while the interest rate in Russia is being suppressed under government pressure.
At the same time, Ukraine is increasing pressure on the economy with a new target for attacks: the popular retail chain Wildberries, whose warehouses are used to supply the Russian army.
Deficit at a peak
"Russia's government deficit is breaking records," explains Dr. Evgeny Klauber, an expert on the politics of former USSR countries at the School of Political Science at Tel Aviv University.
The reason for this, according to him, is "Ukrainian attacks on refinery infrastructure in Russia, which reduced the government's profits from gas and oil by 22%."
"This has led to a deficit of $74 billion, or 2.5% of GDP. Any deficit in Russia is particularly problematic when it is cut off from international debt markets and forced to rely on the local market alone, especially when the Central Bank's interest rate is at 14%," notes Klauber.
The interest rate on Russia's bonds has nearly doubled since the beginning of 2022. Despite successful fundraising in the first half of the year, the continuation of bond issuance is in question as market expectations and government willingness to pay do not converge.
Contingency plan
According to reports in the Moscow Times, Russia's plan B is to turn to state-owned banks to raise debt at lower interest rates. However, this is not a sustainable solution and merely shifts the problem within the state financial system.
According to a report by European intelligence agencies cited by Reuters, shifting the burden to state-owned banks increases the risk of a major banking crisis amid rising loan defaults. Loan programs under state guarantees hide the weakness of the banking system, creating an illusion of a dynamic economy that is close to a breaking point.
"Key figures in the Russian economy say that the economy is reaching exhaustion. It is difficult to deal with the deficit because it is expensive to maintain," says Dr. Klauber.
Pressure from Ukraine is increasing
The economic pressure is also strengthening following attacks on Ukrainian missiles and UAVs on the retail chain Wildberries. Since the beginning of July, five different warehouses across Russia have been targeted.
Meanwhile, the logistical campaign is spilling over into the Black Sea, where Ukraine has begun attacking Russian ships carrying fuel and wheat. Russia is struggling to protect its merchant ships and has chosen to return fire against Ukrainian vessels.
On Saturday, Ukraine sank an Iranian ship in the Caspian Sea. President Volodymyr Zelensky stated that the vessel was transporting "military equipment related to Iran," which has been supplying Russia with "Shahed" UAVs used against Ukrainian positions.
