Russia's economy, which has withstood Western sanctions since the Ukraine war, faces a new risk: "financial-sector distress." Massive defense expenditure and government support gave it stronger resilience than expected, but as the war drags on, the expense burden is shifting to banks, increasing potential risks to the financial system, analysts said.
On the 6th, Reuters reported, citing a European intelligence report, that Russia could face a banking crisis due to the prolonged Ukraine war. The report was prepared for European Union (EU) officials, according to the outlet. The report warned that "Russia is at risk of an explosive banking crisis."
In particular, the increase in war expenses and Western sanctions have burdened Russia's finances, raising risks in the banking sector. As the Russian government supported defense industry and strategic corporations, it increased reliance on banks, forcing financial institutions to shoulder greater risks.
Russia's economy avoided a steep downturn after its 2022 invasion of Ukraine despite strong sanctions from the United States and Europe. Energy exports, large-scale defense expenditure, and government support measures propped up growth. According to the International Monetary Fund (IMF), Russia's economic growth rate was in the 4% range in 2024 but slowed to around 1% in 2025. The IMF projected that Russia's economic growth rate this year will also remain in the 1% range.
However, the report said this growth model could become a burden on the financial system over the long term. It said the loans that increased as part of support for the defense industry and strategic corporations are piling up as potential risk factors for banks.
The report particularly assessed that risks in Russia's banking sector have not yet surfaced in full. Government support and loan restructurings are preventing an immediate surge in bad debt. But it noted these steps could postpone, rather than solve, the underlying problems. In fact, according to the report, about 10% of corporate loans in Russia are estimated to be at risk of distress. The burden on the household institutional sector is also growing, with more than 500,000 people filing for personal bankruptcy in Russia last year.
Russian authorities are pushing back against the possibility of such a financial crisis. The Central Bank of Russia said banks have secured sufficient capital buffers and that the financial system is operating stably. How much the banking sector can absorb the shock from accumulated loan burdens and an economic slowdown is expected to emerge as a key variable for Russia's economy going forward.