Russian Banks Step In to Cover Growing War‑Spending Gap

Russia’s Finance Ministry Turns to State Banks for War‑Budget Funding

Russia’s war budget has surged past six trillion rubles in just half a year, prompting the finance ministry to seek help from state banks. The government has issued two large floating‑rate bond packages—one worth 500 billion rubles and another for a trillion rubles—to fill the gap left by failed bond auctions. Analysts see this as a shift toward private banks, especially those owned by the state, to purchase the debt.

The move follows a string of unsuccessful attempts to sell fixed‑rate bonds. In July, the ministry halted regular auctions after four consecutive failures and a single modest sale that raised only nine billion rubles, far below the quarterly target of 1.5 trillion. Rising yields on long‑term bonds—now above 16.5%—made the market unattractive for investors, and the ministry refuses to lock in such high rates for long periods.

To keep spending on the war front, Russia’s military budget is projected to jump another four to five trillion rubles this year. The ministry plans to borrow an additional two to three trillion, largely through new floating‑rate issues that expose it to interest‑rate swings. While fixed‑rate bonds pay a set coupon, floating ones increase the cost if market rates climb.

The central bank backs this strategy by providing banks with liquidity via repo operations that use government bonds as collateral. Banks then buy more debt, effectively creating new money to fund the state’s needs. Repo volumes have surged to 6.2 trillion rubles, up by more than two trillion since the year began.

Critics argue that this approach keeps the budget deficit in a precarious position, with higher borrowing costs and greater exposure to rate hikes. Still, the ministry appears prepared for a worst‑case scenario, where it must rely on floating debt and accept higher risks to keep the war budget afloat.