A banking crisis made in the Kremlin is gripping Russia

The biggest lender to Russia’s defence companies is in free fall.

Two years ago, Promsvyazbank (PSB) was raking in cash as it bankrolled Vladimir Putin’s war machine. Now, four years after the Ukraine conflictbegan, it is haemorrhaging hundreds of millions of dollars.

In 2025 alone, it recorded a loss of 19.2bn rubles (£190m) after setting aside 300bn rubles to cover soured loans.

Typically, losses of this nature could be attributed to a flawed corporate strategy. However, many believe PSB is on the front line of a breakdown in Russia’s financial system as a defence-fuelled borrowing binge hits a wall.

Even beyond weapons makers, experts predict that Russia’s banks are grappling with a debt bomb lurking in the economy.

Vladimir Milov, an exiled opposition politician who was formerly a deputy energy minister under Putin, says: “We are already formally under the criteria of a banking crisis. The only thing that is missing is a bank run.”

Russian central bank data show banking sector profits plunged by 55pc to 176bn rubles in December.

Moscow Credit Bank, another major lender tied to the state oil giant Rosneft, also reported a loss in the final quarter of last year as it grappled with a surge in loan defaults.

At the start of February, the Centre for Macroeconomic Analysis and Short-term Forecasting (CMASF), a think tank aligned with the Kremlin, published a report stating that a “banking crisis has now been confirmed”.

This is based on the CMASF’s technical definition: that more than a tenth of banks’ loan books are unlikely to be repaid.

Businesses are only officially overdue on 3.3pc of their bank loans. But Russian central bank data show that the share likely to default soon is at 11.3pc, equivalent to 10.6tn rubles.

This has climbed from 10.4pc a year earlier.

Households are in even worse shape, with 13.3pc of retail loans deemed problematic.

However, when it comes to the threat of crisis, it is believed that the batch of bad business loans will pose the biggest problems for the Kremlin.

Since the start of Russia’s invasion of Ukraine, the Kremlin has covered the costs of its war largely by injecting massive amounts of cash into Russian companies through its banks.

This fuelled economic growth and created an illusion of Russian resilience, says Craig Kennedy, of Harvard’s Davis Center for Russian and Eurasian studies.

In particular, the Kremlin significantly watered down rules and credit checks for defence-sector lending, says Kennedy, who was formerly vice chairman at Bank of America Merrill Lynch.

“This has created a large pool of opaque, unmeasured and poorly managed default risk at the heart of the Russian banking system,” he warns in his Substack, Navigating Russia.

As of December, banks’ total loans to defence companies exceeded $200bn (£148bn), more than 23pc of banks’ corporate loan books. And this is a sector that has a notoriously bad credit history.

PSB’s losses reflect “deep troubles in the Russian military industrial sector”, says Milov.

But the vulnerabilities extend far beyond the defence sector, as the majority of businesses in Russia are in a painful downturn.

Putin has revealed that Russian GDP contracted by 1.8pc in January and February.

Three quarters of Russia’s industries are either underwater or flatlining, says Milov, with the coal, steel, paper and construction sectors all grappling with crises.

“You can imagine that most of the sectors of the economy are very weak in servicing their debts,” he says.

Unsurprisingly, the Kremlin is anxious.

In March, Putin told Russia’s oil and gas companies that they should use windfall oil profits triggered by the war in Iran “to reduce their debt burden and pay off their debt to domestic banks”.

Elvira Nabiullina, the Russian central bank governor, warned last June that the resources that had fuelled two years of economic growth in Russia – namely banking capital reserves and Russia’s national wealth fund – were “truly exhausted”.

In response to the looming blow-up, the central bank has already announced a fleet of measures to tighten lending rules.

Nabiullina said in March that the central bank would stop banks from assessing corporate loans “on the assumption that a borrower will receive government support even if there are no solid grounds for that”.

This advice highlights the nature of the problem facing the Kremlin.

The CMASF’s definition of a “banking crisis” does not mean that Russia’s financial institutions are collapsing, says Milov: “It means that we are on the verge of a situation where banks will soon arrive at the government’s doorstep asking for major bailouts.”

Tom Keatinge, the director of the Centre for Finance and Security at the Royal United Services Institute, adds: “The country is in a banking crisis, there’s no question – but a banking crisis is only as serious as the state allows it to be.”

Russia’s national wealth fund injected around $10bn into several leading banks last year.

“In effect, the central bank prints money to support them,” says Elina Ribakova, a senior fellow at the Peterson Institute for International Economics.

Strain on the banking sector is already leading to lower lending. Russia’s combined war funding slumped by 16pc in 2025, driven by less borrowing among defence firms, according to Kennedy.

Central bank data also showed consumer lending contracted by -0.7pc in 2025, a stark shift from the 11.3pc growth recorded in 2024.

For now, soaring oil and gas prices are bringing some solace, resulting in higher revenues for Russia’s energy giants since war broke out in the Middle East.

This has already led some economists to predict that it will help the Kremlin skirt a recession in the second half of this year.

But Putin is on borrowed time if Donald Trump strikes a peace deal in Iran and the global energy crisis falls away.

“The numbers all look good as long as the oil price is high,” says Ribakova.

“If it goes down, you’ll have these sprawling quasi-government institutions everywhere that will suddenly have problems and will come onto the balance sheets of the central government.”

If oil prices crash to $40, the Russian government would suddenly face the prospect of needing to recapitalise state energy giants Gazprom and Rosneft and its banks, says Ribakova.

“It would not be small numbers. If you look at past financial crises, it easily gets to 10pc to 20pc of GDP.”

All of which suggests that it won’t take much for the banking crisis gripping Russia to develop into something much more serious.

“The underlying problems are multiplying and at some point, all of this explodes at once,” says Milov. “2026 might be a breaking point.”

[Source: Daily Telegraph]