Russia’s Ballooning National Debt: A Ticking Time Bomb for the Kremlin’s Economic Model

Since the full-scale invasion of Ukraine in February 2022, the Russian Federation has become increasingly isolated from global financial markets. Western sanctions have decoupled Russia from international capital, investment, and trade flows. In response, the Kremlin has shifted toward a command economy oriented around war production, funded by increasingly unsustainable levels of borrowing. As of mid-2025, Russia’s national debt is growing at a pace not seen since the 1990s, raising urgent questions about the future stability of her macroeconomic foundations.

The Rise of Russian Sovereign Debt

Historically, Russia maintained one of the lowest debt-to-GDP ratios among major economies. As recently as 2019, public debt stood at approximately 13 percent of GDP. Fiscal conservatism had long been a point of pride among Russian economic policymakers, particularly during the tenure of former Russian Finance Minister Alexei Kudrin (2000-2011). But the war effort has decisively ended this restraint.

According to recent estimates from the Russian Accounts Chamber and independent economists tracking Russia’s closed fiscal data, the national debt now exceeds 30 percent of GDP, with some analysts suggesting the real figure could be substantially higher once off-balance-sheet military expenditure and regional borrowing are accounted for. The federal budget deficit reached over 3.5 percent of GDP in 2024 and is expected to exceed 4 percent in 2025, fuelled by record defence spending, spiralling subsidies to state-owned enterprises, and costly social support for war veterans and the families of deceased soldiers.

With international bond markets closed due to sanctions, Moscow is increasingly reliant on domestic borrowing, particularly through the sale of OFZ (federal loan) bonds to state-owned banks such as Sberbank and VTB. These institutions are in turn recapitalised by the Central Bank of Russia, creating a closed financial loop that critics have described as "monetary alchemy". The distinction between fiscal and monetary policy has become blurred, as the state prints money indirectly through the banking system to fund its own war effort.

A Fragile Balancing Act

Russia’s macroeconomic stability is now precariously dependent on three factors: high global energy prices, the continued ability to compel domestic institutions to finance sovereign debt, and the fragile discipline of monetary policy amidst wartime populism.

In 2022 and 2023, high prices for oil and gas partially shielded the Russian economy from the full effects of sanctions. But energy revenues declined in 2024 as China, India and other buyers extracted heavy discounts on Russian crude. Western sanctions and the enforcement of the G7 price cap on seaborne oil shipments have further constrained Russia’s ability to monetise her energy exports. Meanwhile Europe has mostly weaned herself off Russian hydrocarbons, with liquefied natural gas (LNG) imports from the United States and Qatar replacing former pipeline supplies.

The result is that Russia must borrow more domestically to cover widening deficits. Yet this borrowing comes at the cost of long-term economic growth. When Russian banks use their liquidity to buy government debt, they reduce credit availability to productive sectors of the economy. The state’s growing demand for funds is crowding out private investment. Furthermore the artificial demand for OFZs is beginning to strain the balance sheets of Russian financial institutions, which are now dangerously overexposed to sovereign risk.

Inflationary Pressures and the Risk of Fiscal Dominance

Although inflation has been officially reported at around 8 percent in early 2025, many independent observers estimate that real inflation is closer to 15–20 percent, particularly in food, construction materials and imported goods. The Central Bank of Russia has struggled to maintain credibility while juggling conflicting mandates: controlling inflation, stabilising the rouble, and facilitating fiscal policy.

Governor Elvira Nabiullina has resisted full-scale monetisation of the deficit, but her independence is increasingly symbolic. The creeping re-nationalisation of the banking sector, the heavy use of administrative controls on currency flows, and the use of state decrees to limit capital movement all point to a de facto return to "fiscal dominance" — a situation in which monetary policy is subordinated to the spending needs of the state.

If inflation accelerates further and confidence in the rouble erodes, Russia may be forced into a cycle of currency devaluation and emergency rate hikes, damaging domestic consumption and intensifying capital flight — even in the tightly controlled financial environment she has constructed since 2022.

Long-Term Consequences: A Road to Structural Decline

The long-term macroeconomic consequences of Russia’s mounting debt are serious and potentially irreversible.

1. Capital Misallocation

   
   

   Resources are being diverted into unproductive military and security sectors rather than infrastructure, education or technology. Once the war ends — or if it drags on indefinitely — Russia will face a daunting reconstruction challenge with depleted fiscal capacity.

   
   

2. Stagnant or Negative Growth

   
   

   Most forecasts for Russia’s economic growth between 2025 and 2028 are flat or mildly negative. High debt levels will constrain future government expenditure, while low investment and workforce shrinkage — due to emigration and military casualties — will reduce output potential.

   
   

3. Increased Risk of Default or Restructuring

   
   

   While Russia is not imminently at risk of a sovereign default in the traditional sense (given her domestic financing tools), she faces a growing risk of forced restructurings, payment delays, or inflationary ‘soft default’ on domestic obligations, particularly pensions and public wages.

   
   

4. Collapse in Financial Sector Confidence

   
   

   If Russian banks lose confidence in the state’s ability to honour her debts, or if their capital buffers become too thin due to overexposure to government bonds, a financial crisis could emerge. In an economy increasingly cut off from global markets, such a crisis would be entirely domestically sourced and difficult to contain.

   
   

5. Entrenchment of a War Economy

   
   

   Finally, as debt rises, so too does political dependency on war as a justification for unsustainable fiscal practices. The Kremlin may find itself unable to retreat from conflict without provoking an economic collapse, locking Russia into a destructive feedback loop of militarised spending and economic decay.

   
   

A Hidden Crisis in a Controlled Economy

To the casual observer, Russia’s economic crisis may not be immediately visible. The rouble has not collapsed (thanks to capital controls), there are no breadlines (due to food import substitution), and Moscow continues to boast of her "resilience" in the face of Western sanctions. But underneath this façade lies a macroeconomic structure that is slowly coming apart.

Debt, once shunned by Russian policymakers as a risk to national sovereignty, has become the silent partner in sustaining the Kremlin’s war. The longer the war continues, the heavier the burden will grow — not only on the state’s finances, but on the prospects for a return to normalcy. Without structural reform, debt restructuring, or peace, Russia may find herself repeating the economic implosions of 1917, 1991 or 1998 — only this time, with no Western aid to rescue her.