Russia's Hidden War Debt (full report)

[Widget Jr]

Russia's Hidden War Debt (full report)

"Moscow has been discreetly funding heavy war costs with risky, off-budget debt.
But the scheme has caused major problems—with more likely to follow—offering useful leverage to Ukraine and its allies.
Craig Kennedy
Feb 13, 2025"

105 pages, more or less. This study was mentioned back in January and early February, not much has been said on this since, AFAIK.
The report has six sections, conclusion and two appendixes; there is a lot to read through. There is a shorter Executive Summary.

From the summary (please press "click to expand..." for the good part!):

"Moscow has been stealthily pursuing a dual-track strategy to fund its mounting war costs. One track consists of the highly scrutinized defense budget, which analysts have routinely deemed “surprisingly resilient.” The second track—largely overlooked until now—consists of a low-profile, off-budget financing scheme that appears equal in size to the defense budget. Under legislation enacted on the second day of the full-scale invasion, the Kremlin has been compelling Russian banks to extend preferential loans to war-related businesses on terms set by the state. Since mid-2022, this off-budget financing scheme has helped drive an unprecedented $415 billion surge in overall corporate borrowing. This report estimates that $210 to $250 billion of this surge consists of compulsory, preferential bank loans extended to defense contractors—many with poor credit—to help pay for war-related goods and services."

"Initially, this off-budget defense financing scheme proved advantageous to Moscow by enabling it to maintain its official defense budget at manageable levels. That misled observers into concluding—incorrectly as it turns out—that Moscow faces no serious risks to its ability to sustain funding its war. More recently, however, Moscow’s heavy reliance on its off-budget, compulsory lending scheme has begun to cause serious, adverse consequences at home. Not only has it become the main driver of inflation and interest rate hikes, but it is also creating the preconditions for a systemic credit crisis."

"In late 2024, the Kremlin became increasingly aware that its off-budget funding scheme is unleashing potentially disruptive systemic financial risks, such as prohibitively high interest rates, liquidity and reserve problems at banks, and a severely compromised monetary transmission mechanism. For Moscow, credit event risk—with its seismically disruptive potential—will be of far more immediate concern than slow-burn risks like declining GDP. Moscow now faces a dilemma: the longer it puts off a ceasefire, the greater the risk that credit events—such as corporate and bank bailouts—uncontrollably arise and weaken Moscow’s negotiating leverage. Moscow’s emerging financing dilemma is likely to weigh on its war calculus and offers unexpected negotiating leverage to Ukraine and its allies. This report details ways well-informed negotiators can exploit Moscow’s growing financial vulnerability."

The longer the war goes on without a ceasefire (which we know Russia will break eventually), the more Russia risks a major banking and credit crisis.
Basically, Russia is risking something like the Great Depression during the middle of a war of aggression.
Which if that happens, Putin, his core backers and loyalists will have a hard time escaping the consequences.

 

[Officer of Engineers]

Which if that happens, Putin, his core backers and loyalists will have a hard time escaping the consequences.

The history of strong dictators and economic collapse would suggest otherwise, even amongst the Banana Republics. Stalin and Mao survived unscathed in their man-made famines. In fact, I cannot think of one strong dictator who was overthrown by a collapsed economy.

 

[DOR]

When -- if ever -- the Russian people threaten to disrupt society; or the kleptocrats believe there investment in Putin is turning sour; or if the thug class gets tired of losing; then and only then will the real cost of the war become apparent.

Better not to hold your breath.

 

[DOR]

*their*

Where's the "edit" button.

 

[rj1]

It's really hard for me to care about other countries' debt when I'm an American and we've not had fiscally competent government running the country my entire adulthood. It's like Republicans and Democrats have this inane desire to recreate 3rd Century Rome.

 

[DOR]

It's really hard for me to care about other countries' debt when I'm an American and we've not had fiscally competent government running the country my entire adulthood. It's like Republicans and Democrats have this inane desire to recreate 3rd Century Rome.

Serious question: How has the level of the US federal debt affected you, personally?

I'll start: we didn't have a full-blown depression, three times (2001, 2008, and 2020) in the past 25 years; and my taxes are quite reasonable by OECD standards.

Your turn.

 

[Monash]

National debt does become problematic though when the level of debt reaches the point interest payments on that debt become unaffordable. The you get debt restructuring talks which always impose severe pain on citizens due to the inevitable demands for economic reform before any restructuring is agreed to. How many times have we all seen that exact scenario play on the nightly news?

 

[rj1]

Serious question: How has the level of the US federal debt affected you, personally?

I'll start: we didn't have a full-blown depression, three times (2001, 2008, and 2020) in the past 25 years; and my taxes are quite reasonable by OECD standards.

Your turn.

I don't let it, but then I have a good job and I don't spend a lot either, so I can live comfortable. That makes me incredibly unique for my generation financial planners have told me. When rates crashed in August 2020 I bought a house with a 20%+ down payment and 15-year mortgage at 2.375% interest rate. No one is getting that number now. Meanwhile my county assessor officially says my home has increased more than 50% in value since I bought it almost 5 years, which it hasn't in reality.

Debt is not something that affects now as much, it affects the future more. People that are going to be dead when the sh*t hits the fan don't care. (Baby Boomers effectively, which Presidents born in this 5-year range in the 1940s will have been our President from 1993 thru 2009 and 2017 thru 2029.) Its present effects are inflation and interest rates which reared its head for the first time in 40 years effectively during the Biden administration due to actions done when Trump was President the first time, government reactions to Covid, as well as follow-on actions done by Biden. Meanwhile you have an entire population in this country that thought the evil that was Zero Interest Rate Policy (ZIRP) that reigned for a period of 15 years is normal when you can go back through financial history the 400 years prior and see that period was this shocking abnormality and insinuated the notion of debt is costless. Now debt actually costs more, which is a good thing in a sense because it means you have to pay for stuff more instead of just punting it into the future, and anecdotal signs abound out there the economy was slowing down the last year (Republicans will blame Biden, Democrats will blame Trump, neither side gives a sh*t about what the real truth is).

I just look at our country and we've had for awhile now both parties constantly focused on winning elections instead of having the long-term health of the country in mind. There is no reason I can see that's going to change. I wrote the below all in response to the first quote in mid-February, the whole tariffs reaction was all after this. People that hate Trump see plans like the below and think it's wrong and evil of quid pro quo with our allies, but what is the counter-plan?

The tricky part of talking about "vibecession" is that there are multiple factors that hit different people differently. Some people are fairly well off and are mad about inflation (which hits basically everyone), but at the same time they benefit (at least theoretically) from increasing home prices since they are already owners.

They also "can't move" unless they want a big increase in their mortgage payment. Read yesterday the market now has 9 months' supply of housing comparing houses on the market to how much are being sold, which is a level when housing price recessions have normally occurred in the past. This is all due to interest rates being high but the reason interest rates are high is inflationary pressures wrought by the response to Covid from both Presidents Trump and Biden, as well as Yellen as Secretary of Treasury did these historically massive bond sales to fund the federal government which is providing pressure moving interest rates upward and can't simply snap your fingers and get rid of all those, you just have to wait until maturity under current setup. If you want to have real criticism of Biden's running of the economy, bonds are a good place to start.

Bond investor Andy Constan yesterday:

QUOTE:

"Terming out the debt was always going to take a long time.

What do we know. The Treasury has the largest proportion of bills outstanding in a non-recession non-wartime setting.

The Fed has $4.19 trillion in U.S. Treasures with a WAM (Weighted Average Maturity) of 8.6 [years] and is desired heading of a WAM of 5.9 which is $1.13 trillion 10-year WAM to adjust.

They will end QT [Quantitative Tightening] on schedule and all future action will be reserved neutral. They also have $2.2 trillion in mortgages.

The Treasury is irresponsibly dependent on bills and the Fed is irresponsibly long duration. Oh the banks who are NOT constrained by SLR (Statutory Liquidity Ratio - minimum amount of cash, gold, securities a bank must keep on hand) aren't buying and have been lugging around $1.3 trillion in bonds they bought that are low coupon and underwater.

This is a large headwind for assets and the government's deficit which so far shows no likelihood of falling."

END QUOTE

I know Democrats don't really like to hear it, and Republicans don't like to hear it when they're the ones in charge, but our country's debt of spending compared to income is reaching the point it's affecting normal people. High interest rates and mortgages for example.

Jim Bianco yesterday related a scheme he shared on CNBC and got some play by Bloomberg he calls the "Mar-a-Lago Accord" that the Trump administration are considering "forcing" U.S. allies to exchange their existing Treasury bonds with new "zero coupon perpetual Treasury bonds". Here's a summary:

START SUMMARY

Trump’s team has a bold economic strategy to address the $36 trillion U.S. debt—a three-pronged approach that could redefine global finance & security:

1. Tariffs as Leverage & Revenue

•Trump aims to use tariffs as both a negotiation tool and a funding mechanism.
•Plan to create an External Revenue Service (ERS)—shifting from income tax reliance to tariff-driven revenue.

2. U.S. Sovereign Wealth Fund

•Executive order signed to monetize U.S. assets (gold, land, potentially Bitcoin).
•Revaluing gold from its official $42 price to market rates (~$2,900) could unlock $800-900 billion. [@tomyoungjr point of view is that revaluation to a much higher number should be considered -- say $10K or higher]
•DOJ holds 207K Bitcoin (~$12 billion) from criminal seizures—likely moving to this fund.
•Unlike traditional sovereign funds (Norway, UAE), this is more of a leveraged hedge fund than a cash surplus investment vehicle.

3. Restructuring Global Security

•End of free U.S. military protection for allies (NATO, EU, etc.). NATO must pay 5% of GDP AND pay USA for "security back taxes".
•Debt swap plan: Countries holding U.S. treasuries must exchange them for 100-year, zero-coupon bonds. The zero-coupons cannot be sold, BUT bonds can be used in repo arrangements with the Fed at Par - providing liquidity and yielding interest payments to Fed.
•If allies refuse? Expect tariffs & potential U.S. military pullback.

Potential Outcomes & Risks

If successful:
•U.S. reduces debt burden, boosts domestic industry, and forces allies to pay for security.
•Gold & Bitcoin rise as stores of value.
•The dollar weakens, making U.S. exports more competitive.

If rejected:
•Trade wars, fractured alliances, & rising inflation.
•NATO & EU may seek alternatives, shifting alliances (China, Russia?).
•U.S. bond markets face volatility, leading to higher interest rates.

Big Picture:

•This could be as significant as Bretton Woods (1944) or the Plaza Accord (1985).
•The status quo is ending—whether through debt restructuring or crisis.
•Trump’s “America First” economic strategy is shifting global power dynamics in a way not seen in decades.

END SUMMARY

Bianco says "if Trump is willing to blow up NATO, he's willing to blow up the global financial order". Which has precedent, Nixon blew up the global financial order in the 1970s taking us off the gold standard, something everyone in this country except libertarians say was a good idea.

 

[rj1]

I'm not pro-Trump in the slightest. I left the Republican Party because it's no longer a conservative entity in my opinion and after you remove his stance on tax rates, Trump economically is effectively a northern Labor Democrat from a previous generation. Meanwhile I look around the world and all I see is the tea leaves of a globalized World War I-style conflict. We're on a world affairs board full of defense and military professionals, and either everyone is staying quiet on purpose or choosing blissful ignorance viewing the world.

 

[DOR]

National debt does become problematic though when the level of debt reaches the point interest payments on that debt become unaffordable. The you get debt restructuring talks which always impose severe pain on citizens due to the inevitable demands for economic reform before any restructuring is agreed to. How many times have we all seen that exact scenario play on the nightly news?

The theoretical problematic debt has been around for such a long time that we have to ask “how much is too much?” Your point on interest payments is on target, which moves the goal posts one heck of a long ways away.

Net interest outlays were 3% of GDP in the 1985-94 period, 2.8% in 1995-99, and between 1.5% and 2% in 2000-19. Since then? 2.1%.

Where it gets scary is this: Net interest outlays were 12.3% of federal revenues in the last five years, up from 8.5-10% in 2000-19. As a percent of total federal spending, however, the recent 8.6% level is no where near the 15%+ of the 1990s. That’s because of a concerted effort to pare down revenues, i.e., starve the beast.

As for debt restructuring, that’s for countries that borrow in someone else’s currency, and we don’t do that. Not going to be the issue, at any level of debt, in my lifetime.

 

[Monash]

I was focused mainly on the point you brought up about the cost of interest payments as a % of Federal Government debt i.e. not private sector debt. (I have no idea about the size/scale of State Government debt in the US but in theory I suppose that could be problematic as well.) Mainly the concern is that interest payments are eventually going to start eating the ability of the US Government to pay for all the other services it provides the Nation.

 

[DOR]

I was focused mainly on the point you brought up about the cost of interest payments as a % of Federal Government debt i.e. not private sector debt. (I have no idea about the size/scale of State Government debt in the US but in theory I suppose that could be problematic as well.) Mainly the concern is that interest payments are eventually going to start eating the ability of the US Government to pay for all the other services it provides the Nation.

8.6%, roughly half of what it was in the 1990s.