Hidden Military Spending: Russian Banks Hold $131 Billion in Problem Debt

(MOSCOW) – Russian banks are preparing for a potential systemic collapse as the Kremlin’s war economy enters what economists describe as an escalating financial trap, with problem debt now exceeding the threshold for systemic risk and military spending consuming an increasingly unsustainable share of national resources.

According to economic experts inside and outside Russia, approximately 11% of all corporate debt in the Russian Federation is now classified as problem debt, a figure estimated at 131 billion US dollars. This surpasses the 10% threshold widely recognised as systemic risk territory, indicating that Russian banks are facing serious solvency challenges.

The Russian government has sought to conceal the true scale of military expenditure. Official federal budget figures place defence spending at approximately 7% to 7.5% of GDP, more than double the United States’ 3.5%. However, analysts estimate that hidden expenditures including bank financed defence plant construction and regionally funded soldier bonuses push the real figure to between 15% and 20% of GDP.

The mechanism of concealed spending operates through forced lending. Russian defence contractors obtain loans from banks that are effectively compelled to approve them. These loans finance the construction of new factories and facilities costing multiples of the value of the military equipment the government purchases. When the war ends and contractors default, the banks and ultimately the Russian state will be left with the liabilities. Regional governments, many already bankrupt, have also been paying soldier bonuses from their own budgets, requiring federal bailouts.

Ukraine has simultaneously targeted Russia’s primary revenue source. For more than a month, Ukrainian forces have systematically struck oil and gas export terminals on the Black Sea and Baltic Sea, facilities used to load crude and natural gas onto Russia’s shadow fleet. These sustained attacks have kept key terminals offline, reducing Moscow’s ability to generate foreign currency income.

In early April, Russia experienced a temporary bank shutdown caused not by a financial collapse but by a technical glitch resulting from the government’s attempt to block virtual private network services. However, the incident triggered widespread public fears of bank runs, with Russian citizens speculating that the economy had finally collapsed and that the government was imposing withdrawal restrictions. The glitch was resolved quickly, preventing those fears from escalating into protests.

The Russian government has since intensified information controls, blocking VPN services and messaging platforms including Telegram to limit citizens’ ability to coordinate around government buildings. Analysts interpret these measures as evidence that both the Kremlin and the Russian public recognise deepening economic instability.

Economic historians have drawn parallels between Russia’s current predicament and Nazi Germany’s late World War Two economy. Germany entered the war spending approximately 25% of GDP on its military, a figure that rose to 40% and eventually 75% as the conflict progressed. The German economy became entirely dependent on war production, creating a trap in which victory became the only path to national survival. Civilian sectors became unprofitable and were cannibalised for military production.

Russia now faces a similar dynamic. Unproductive military spending, which invests resources in equipment that is rapidly destroyed rather than in productive civilian assets, is shrinking the economy with each cycle. However, that same spending has become necessary to keep money in people’s pockets, maintain employment and prevent public discontent from turning against the government. The Kremlin has drawn down its fiscal reserves and can no longer rely on savings to offset the contraction.

Russian authorities have multiple tools to prevent dramatic bank runs, including withdrawal limits, capital controls and state backed deposit guarantees. Economists suggest the more likely outcome is a prolonged period of stagnation similar to Japan in the 1990s, where bad debt was restructured through government programmes, banks were kept solvent, and unprofitable companies were allowed to survive. That approach produced economic stability without growth, leaving Japan further behind global competitors over time.

For Russia, the situation is more severe than Japan’s experience because Moscow is simultaneously fighting a war that destroys a significant percentage of GDP annually. Unlike Germany after World War Two, which received Marshall Plan aid to rebuild, Russia may face international isolation and no comparable recovery programme.

The Russian government is therefore pursuing an “extend and pretend” strategy, deferring problems into the future rather than allowing a dramatic collapse. However, each day the economic system degrades further, increasing the probability of public unrest. As Russia’s economy weakens, its military capacity diminishes correspondingly, improving Ukraine’s prospects in the war.

The analysis draws on statements from Russian economic experts who have spoken out despite the personal risks of doing so, as well as international observers monitoring the Russian financial system. The Ukrainian strikes on energy infrastructure have been well documented by multiple sources.