Why have half a million Russians gone bankrupt amid Ukraine war?

Half a cardinal Russians declared bankruptcy past twelvemonth arsenic the country’s banking institutions carnivore the brunt of the outgo of the warfare successful Ukraine, a European quality study says this week.

As the warfare successful Ukraine continues into its 4th year, Russia’s Ministry of Economic Development has chopped its GDP forecast for 2026 from 1.3 percent to 0.4 percent.

Rising household indebtedness is 1 of the things creating the conditions for an “explosive” banking crisis, according to the European quality report, seen by Reuters. But experts accidental that portion individuals are facing a cost-of-living situation – and galore look bankruptcy – a full-blown banking situation is unlikely.

Here’s what we cognize astir Russia’s fiscal woes and what this means for its warfare effort.

What has happened?

According to the European quality study seen by Reuters, arsenic Russia’s authorities continues to determination wealth into its warfare against Ukraine, it is relying much connected banks to enactment companies and mundane borrowers.

To bash this, Russia’s banks person extended a increasing fig of “risky” loans successful caller years, the study says.

While this has allowed Russia’s warfare instrumentality to support humming and helped galore Russians marque ends meet, including buying homes, it has besides introduced heightened fiscal risk, including much radical defaulting connected their indebtedness and galore declaring bankruptcy.

The two-page quality report, prepared to pass European officials astir the authorities of Russia’s banks, besides highlights their vulnerability to Western sanctions.

While Russia’s banks person mostly weathered sanctions imposed by the US and European countries since Moscow’s 2022 full-scale penetration of Ukraine, the caller study notes that the EU is preparing a 21st bundle of sanctions it hopes to finalise successful July, which volition people banks and cryptocurrency networks.

What is causing the strain connected Russian banks and borrowers?

Russian banks person issued an expanding magnitude of “bad” loans, according to the European quality report. Bad loans are those astatine higher hazard of default.

Ten percent of Russia’s firm loans are present doubtful, the study estimated, a crisp summation from 2 years ago. Meanwhile, much than 500,000 Russians declared bankruptcy past year, a year-on-year summation of astir one-third, it added, portion state-backed recognition programmes person encouraged much than 13 cardinal Russians to gully 3 oregon much loans from banks astatine the aforesaid clip to enactment afloat amid the cost-of-living crisis.

Vladislav Inozemtsev, an subordinate chap astatine the Russia and Eurasia Programme of the London-based deliberation tank, Chatham House, said overdue firm loans present magnitude to astir 7 trillion roubles ($91bn), comprising 3 percent of Russia’s GDP, presently estimated astatine $2.65 trillion, oregon 2 years’ worthy of the banking system’s full profits.

However, helium added that much than fractional of the overdue indebtedness successful firm loans consists of loans issued to defence-industry enterprises oregon to companies connected successful 1 mode oregon different with authorities defence.

“There should beryllium nary uncertainty that these volition yet beryllium repaid by the authorities (or, much likely, the authorities volition support the involvement payments connected them existent truthful arsenic not to complicate the banks’ position); adjacent if immoderate loans are ne'er repaid, the Central Bank volition supply the affected banks with the indispensable liquidity.”

Overdue loans to individuals full different 1.7 trillion roubles ($22bn).

“This conception whitethorn spot galore bankruptcies, and banks volition person to constitute disconnected portion of these loans, but reserves person already been acceptable speech for that,” Inozemtsev said.

So, is Russia facing a banking crisis?

The European quality study claims that Russian banks’ reliance connected authorities support, specified arsenic state-backed recognition programmes, which person encouraged galore radical to instrumentality retired aggregate loans, arsenic good arsenic wide indebtedness restructuring, are masking a looming situation that a caller economical stressor – specified arsenic caller sanctions oregon much radical defaulting connected risky loans – could bring to the surface.

“The concern creates the illusion of a dynamic system that, successful reality, conceals an explosive concern which an economical shock, specified arsenic an ambitious bundle of sanctions against banks … could trigger,” said the report.

However, Russian authorities person consistently downplayed immoderate specified crisis, with cardinal slope Deputy Governor Filipp Gabunia past period saying that “vulnerabilities successful the fiscal assemblage are not critical”.

Some experts accidental that, truthful far, Russia does not look to beryllium facing a full-blown banking crisis.

In 2024 and 2025, Russian banks reported profits of astir $80bn to 90bn implicit the 2 years, according to Vladislav Inozemtsev, an subordinate chap astatine the Russia and Eurasia Programme of the London-based deliberation vessel Chatham House.

“Even though the system is slowing successful 2026 and problems successful the existent assemblage are mounting, the banks are earning adjacent much money,” Inozemtsev told Al Jazeera.

He added that successful the archetypal 5 months of this year, the full nett net of Russia’s banking assemblage exceeded 1.9 trillion rubles ($24.8bn) – and the existent full-year forecast stands astatine 3.9 trillion ($51bn), which would beryllium yet different all-time record.

Inozemtsev said the operation of the Russian banking system, comprising a few, large, heavy supervised banks, makes a full-blown banking situation little likely. He said that adjacent if smaller banks neglect and individuals look bankruptcy, it would not trigger a situation successful the country.

Inozemtsev concluded: “That is wherefore I americium assured that Russia cannot acquisition a banking situation adjacent remotely resembling the banking situation of 2012-14, erstwhile banks from the apical 50 went nether each period – to accidental thing of 1998, oregon of the concern successful the United States during the Great Depression. I spot nary threats to the stableness of the Russian banking system.”

How has the warfare affected Russia’s economy?

It has transformed Russia’s system by centring it connected a wartime footing.

Growth, which past twelvemonth slowed to 1 percent and is projected by Russian authorities astatine conscionable 0.4 percent this year, is present mostly fuelled by defence accumulation and authorities spending, arsenic Western sanctions person chopped the country’s exports – peculiarly lipid – disconnected from large overseas markets and investment. Russia has got astir overmuch of this by utilizing a shadiness fleet to export oil.

While the wartime system has truthful proven stronger than galore expected, determination are signs of cracks. The Russian energy sector has taken a pounding nether continued Ukrainian drone attacks connected vigor facilities.

A caller Gallup canvass recovered that 60 percent of Russians judge their economical conditions are worsening, marking the archetypal clip successful 2 decades that a bulk has held that view.

Fifty-six percent of Russians accidental surviving standards are deteriorating, portion 58 percent accidental it is simply a atrocious clip to get a occupation wherever they live, adjacent arsenic unemployment remains debased owed to subject recruitment and defence manufacture jobs.

“I would say, first, that it has caused the system to relation successful greater isolation from the satellite than earlier – that is, the economy’s dependence connected the extracurricular satellite has go overmuch lower,” Inozemtsev said.

“The system attempted to prosecute import substitution (successful successful lone a fewer industries), stopped relying connected inflows of overseas investment, and its banal marketplace nary longer reacts to movements connected overseas exchanges – successful each sense, the Russian system has go much closed.”

What does this mean for Russia’s warfare effort?

Inozemtsev said the warfare has triggered a accelerated summation successful subject spending and a rising taxation burden, which are weighing connected the system and progressively dragging it down.

Some economists reason that Russia’s system could proceed to turn indefinitely connected the backmost of subject orders, but that is unlikely, helium said.

“Military spending is efficaciously a axenic deduction from wide welfare, and Russia cannot wage warfare successful this mode forever; the state is losing some its existent and its aboriginal economical potential,” Inozemtsev said.

He added that innovation is astir wholly absent, determination is simply a important encephalon drain, and concern is falling sharply.

“It is worthy noting that authorities argumentation – including efforts to nationalise definite ‘strategic’ companies, rise taxes, and chopped societal spending – is doing acold much harm to the system than Western sanctions and the deteriorating outer situation combined,” Inozemtsev said.

“Frankly, it is hard to ideate immoderate betterment successful the authorities of the Russian system earlier the warfare ends.”