Russia is consuming itself

Building on my story about banks win wars, not soldiers, there have been two interesting headlines over the last week:

Half a million Russians go bankrupt as Putin risks banking crisis
Russians turn to cash putting more strain on slowing wartime economy

The stories boil down to the fact that the Russian economy is bust.

For much of the war in Ukraine, Vladimir Putin has been able to point to Russia’s economy as evidence that Western sanctions have failed. Growth remained surprisingly strong. Russian energy products from gas to oil to its major farm production of wheat and metal production of steel and aluminium were still buoyant and the economy was booming.

Unemployment fell to extraordinary lows and factories worked around the clock, producing weapons, ammunition and military equipment. Russia did not collapse under sanctions. Instead, it reorganised itself around the war.

The trouble is that this apparent resilience has been built on increasingly fragile foundations.

For example, according to the first report above, a record 636,000 Russians declared bankruptcy in 2025, around 30 per cent more than the previous year and more than three times the number recorded in 2021. The increase continued into the first quarter of 2026, when another 137,500 people entered bankruptcy proceedings.

This is not simply a story about Russian consumers borrowing too much. It is connected directly to the way the Kremlin has financed the war.

With Russia restricted from Western financial markets, the government and many of its largest companies have become increasingly dependent on domestic banks like Sberbank, VTB and Gazprombank.

Those banks have been encouraged to lend to defence manufacturers, sanctioned companies and strategically important industries, often with an implicit understanding that the state stands behind the loans.

Western sanctions have therefore not stopped Russia from accessing money, but they have forced much of the financial burden back into the Russian banking system.

At the same time, high interest rates, inflation and tax increases are squeezing households and ordinary businesses. Companies outside the defence sector face rising costs, weaker demand and expensive credit, while consumers are struggling to service mortgages, credit cards and personal loans. The official economy may still be functioning, but a growing number of Russians are discovering that the wartime boom does not include them.

Then there is the other side of the story which is that Russians are moving substantial amounts of money out of the banks and into physical cash.

Cash held outside the banking system has risen by 17.5 per cent in a year to more than 19 trillion roubles ($240 billion), creating a liquidity shortage estimated at around 2 trillion roubles ($25 billion) in June. The central bank believes that gap could grow to 3.6 trillion roubles ($40 billion) by the end of 2026.

Some of this demand for cash has a practical explanation.

Russia has repeatedly shut down mobile internet services in an attempt to interfere with Ukrainian drone operations, making digital payments unreliable in some regions. The amount of cash in circulation reportedly jumped by around 600 billion roubles ($7.5 billion) in April alone as people sought protection against payment outages.

Yet this is not purely a technical response to unreliable connectivity as cash is also a measure of confidence. People hold bank deposits when they trust the financial system and withdraw money when they don’t.

Russia’s central bank insists that the withdrawals remain manageable, but the movement into cash is draining liquidity from banks at precisely the moment when those banks are being asked to carry more government debt, more corporate lending and more potentially bad loans.

There is also a growing shadow economy looming in the background.

Higher taxes and tighter state oversight are encouraging small businesses to use cash to conceal revenues and avoid taxation. That creates another problem for the Kremlin because the government needs more tax income to finance the war, but the policies introduced to raise that income may be driving more economic activity underground.

This is where the effect of sanctions needs to be properly understood.

Sanctions were never likely to produce an immediate collapse. Russia is too large, too rich in natural resources and too experienced at operating around restrictions. It has rerouted trade, developed alternative payment channels and deepened its relationships with China, India and other countries willing to buy Russian commodities.

Nevertheless, sanctions have narrowed Russia’s choices and steadily increased the cost of sustaining the war.

Financial restrictions have reduced access to international capital and forced the state and its companies to rely on domestic resources. Export controls have made technology and industrial components more expensive. Energy sanctions and discounted oil sales have weakened government revenues. Russia’s liquid sovereign wealth reserves have fallen from around 6.5 per cent of GDP at the beginning of the war to 1.8 per cent by April 2026. Oil and gas revenues reportedly dropped 45 per cent year-on-year in the first quarter of 2026.

In other words, sanctions have not switched off the Russian economy. They have progressively boxed it in, and Russia is now dealing with itself.

Putin can continue funding the war by taxing more, borrowing more, drawing on reserves and directing banks to lend more. Each of those actions, however, transfers the cost of the invasion onto Russian citizens, businesses and financial institutions.

Rising bankruptcies show the pressure on households. The move into cash shows anxiety about payments and financial access. Weakening bank liquidity and mounting bad debts show the danger accumulating inside the system.

A full-scale banking collapse is not going to happen tomorrow, however. Russia’s largest banks remain closely controlled by the state, and the central bank can provide emergency liquidity, relax regulations or recapitalise lenders. The state can probably prevent the banks from visibly failing. What it cannot do indefinitely is make the losses disappear. It can move them from households to banks, from banks to the central bank and from the central bank onto the national balance sheet, but ultimately someone has to pay.

That may be the most important lesson which is that Russia’s economy has not defeated the sanctions. It has absorbed them, hidden them and redirected their effects. The costs are now emerging through personal bankruptcies, cash hoarding, weaker investment, strained banks and an economy increasingly divided between the protected military sector and everyone else.

Wars are often described as being won by soldiers and weapons. In reality, they are sustained by banks, credit and public confidence. Putin has kept the Russian war machine moving by forcing the financial system to support it. The growing question is not whether Russia can continue fighting tomorrow but how long its banks, businesses and people can keep financing a war that is steadily consuming the economy behind the front line.