Madi Kapparov: Economic SitRep of Russia

Weekly Economic Update on Russia

Madi Kapparov, 30 June 2025

This is a new newsletter by Eurofile. Every Monday evening, we publish a weekly review of major economic news from Russia with a brief analysis. As most data on Russia’s economy is provided by the Russian state, many of the sources referenced will be either Russian state-controlled media or Kremlin-connected state and non-state organizations. Exercise caution using these sources.

Banking crisis potential in Russia discussed at SPIEF and by Bloomberg

Russian industry leaders discussed at the St. Petersburg International Economic Forum 2025 the bleak outlook for Russia’s economy two weeks ago that we covered in last week’s newsletter. Bloomberg took a particular interest in the commentary by Russian bankers in their most recent article on the debt crisis fears by Russian banks. Those who have been following the Russian economy closely are hardly surprised by the “news.”

However, before we do a brief discussion of the state of Russian commercial banks we need to discuss their importance for the Russian state. The Russians have been very creative with their financial system. What I am about to cover is discussed on the Russian side but not much by Western observers.

So, the Russians do not have access to the international borrowing market. What they do now is internal emissions relying on their domestic commercial banks. Like in any other country, the Ministry of Finance does auctions for newly minted government debt (Russian Federal Bonds or OFZ). Commercial banks are, in most cases, voluntold to participate in the auctions. Last year such auctions had a ~70-85% fill rate, meaning that around that percentage of auctioned government debt was purchased on the market. The rest remained as unsold debt (read as no debt). This year for two quarters in a row (the first two quarters of 2025) they reached ~130% of the planned target, meaning that they emit more than planned and it gets picked up by the "market."

Why do commercial banks in Russia buy that stuff? Well, for one they want to continue operating. So, they do what they are told. Second, they are not exactly flush with other investment opportunities. But obviously they can't do that indefinitely. That's where the Russian Central Bank steps in through repurchase agreements. Repurchase agreements (or repos for short) are very common in the West - a financial institution can borrow money from another financial institution using financial instruments as collateral. Such borrowing is usually very short term, one day to one year long. Once the term of debt is up, the borrower pays back the creditor the borrowed principal plus interest and gets the collateralized financial instruments back. The Russian Central Bank does that with Russian commercial banks where OFZs and other financial instruments are used as collateral.

In 2022 Izvestiya, a Kremlin-controlled outlet, directly pointed out that Russian commercial banks used funds raised through repo agreements with the Central Bank to finance their purchases of auctioned OFZs. In 2022, the banks raised two trillion rubles through repos to buy two trillion rubles worth of OFZs auctioned by the Ministry of Finance. So effectively, the Russian Central Bank financed Russian government debt using the commercial banks as intermediaries. Russian law prohibits the Central Bank to directly finance the government to ensure its “independence.” Afterall, Russia is still a procedural state and their own perverse ways they abide by the law.

Now consider the case where the second part of a repo in Russia is never completed – the commercial banks never pay back the Central Bank and the collateralized OFZs remain on the Central Bank's balance sheet. Hence, what happens is such case is that the Russian Central Bank gave money to the Ministry of Finance using a commercial bank as an intermediary with the involved commercial bank not even keeping the OFZs on their balance sheet. In my subjective opinion, the second case happens more often than we suspect. The Russian Central Bank does report annually their OFZ holdings and for 2023 and 2024 and it would seem that their OFZ balance remained stable. However, there are ways to use creative accounting to deflate the number held at year end.

So why would the Central Bank not just give money directly to the Ministry of Finance? Two reasons. One, as mentioned above it is illegal by Russian law and Russia is still a procedural state – the idea of the law is similar to what is implemented in any other country, for the Central Bank to remain an independent body. Two, interest earned on the OFZs by the Central Bank is taxed at a special rate of 75% because the Central Bank is not supposed to turn a profit. The remaining 25% of interest earned remains in the Central Bank's reserves. Thus, in cases where repo obligations are not fulfilled by commercial banks the Russian government printed money AND gets to pay only 25% of the interest payable, because the rest is returned via taxes. The Russian State Duma recently voted against a bill proposing to increase the 75% tax rate for the Central Bank to 80%.

None of this “creative government funding” would have been possible without Russian commercial banks acting as intermediaries.

The recent reduction in the key rate to 20% from 21% is now driving expectations of further rate cuts, ranging from 1% to 5% (translating to 19% and 15% respectively for the expected key rate). RGBI, Russian Government Bond Index on the Moscow Exchange (MOEX), set a new record today exceeding 115 points for the first time since April 2024. If coupon rates for fixed coupon bonds remain unchanged, this increase RGBI would translate to cheaper borrowing via OFZ auctions for the Ministry of Finance (NB: in this week’s note I didn’t delve with the outstanding government debt servicing costs, which have too been growing. I will leave it for another time).

And OFZ auctions are rolling at a faster pace this year – so far Russia raised over 2.8 trillion rubles or ~30% above announced plans (source: MOEX). And the Central Bank’s weekly repo volumes remain maxed out at the allowed limit of one trillion. Moreover, in Q3 the Russian Ministry of Finance plans to raise 1.5 trillion rubles via OFZ auctions. This would bring the total for the first three quarters of 2025 to over 4.3 trillion vs. 4.4 trillion rubles raised in 2024 for the entire year. Most attribute this borrowing expansion to oil and gas revenue contraction of 2.6 trillion rubles. However, there is also the secretive number for war related expenditures, for which we only have rough guesstimates using public sources. And for 2025 it grew again.

The banking sector in Russia is facing increasingly worse prospects this year. First, there is a dearth of investment projects meaning that the demand for new loans is drying up (example 1, 2, 3, 4, just this week, and highlighted by CMASF monthly updates). Loans are the primary way for any commercial bank to make money. And outstanding loans have increasingly gotten worse in credit quality meaning that borrowers are becoming less likely to pay the banks (as discussed in the Bloomberg article and has been increasingly discussed by Russian press over the past year or so, e.g. 72% increase in missed mortgage payments in St. Petersburg, Kuban leading the country in mortgage delinquencies, 8% year to date growth of 90 days past due credit card debt, etc.). The data on that are a bit disjointed but we have been seeing commentary from their bank CEOs and we are observing data on corporates becoming increasingly delinquent as recently analyzed by CMASF. CMASF points out that the “temporal profile [of the delinquencies] is most similar to the COVID shock of 2020.” The volume of missed payments grew 11.6% year to date across the entire Russian economy and 38.8% year to date in the manufacturing sector.

What happens in Russia once the banking sector goes bust? OFZ auctions would still be possible as long as a handful of banks remain/kept afloat. However, owners of such banks would grow in their power and influence, a prospect that might not be palatable to the Kremlin. Besides that, I honestly have no idea about the scale of the Charlie Foxtrot that would unfold as Russia is not a free market economy, but there is no doubt that the Kremlin would have a major political crisis at home if they allow it to happen. And right now, it looks imminent especially considering that over the past year Russian press and their industry leaders have been becoming increasingly vocal about the dreary future despite the tangible risk of having an “educational seminar” with the FSB.

For now, I see one of the following three scenarios unfolding over the coming 1-2 years:

1. Russia becomes a communist "paradise" - the final pretense of a free market economy would be completely shed, and Russia would return to its late 1980s state. The slow decay continues with the private sector reduced to nil and export revenues used to buy imports necessary for their war against Ukraine.

2. Russia starts a major offensive against the Baltics – that would alleviate the political pressure at home and give fuel to their narrative at home of "war with NATO." It would send shockwaves that would distract the population from the financial catastrophe. Civil discontent in Russia is overrated but it creates fertile ground for political opportunists among the elites. In February 2024, I briefly discussed the political logic that the Kremlin might rely on to motivate their potential invasion of the Baltic states. Most of it is still relevant. For military feasibility, I would have to refer you to military analysts, or better yet, to “Who Will Defend Europe?” by Keir Giles.

3. Putin’s regime gets toppled - apart from the war party oligarchs, the security apparatus, and those involved in the war either through direct participation or through adjacent industries (e.g. logistics, pharma), very few in Russia *financially* profit from the war against Ukraine. In fact, we see nationalizations going left and right. These “non-war” oligarchs and magnates are losing money and influence. The question is whether they could organize resistance and topple the regime? They would need major actors from the security apparatus (FSB/police) to make it happen and I am not sure they'd get any.

Scenario 1 is the most likely. Scenario 2 is possible. Scenario 3 is the least likely. None of the scenarios lead to a quick end to the Russian invasion of Ukraine.

Agriculture continues to struggle, inflation continues its march

As the Russian Federal government continues its struggle in finding new sources of revenue to fill their budget deficit, they prefer to avoid indexation of the domestic fertilizer prices with the discussion delayed till September, highlighting the government’s awareness of major problems in agriculture. “The relevant departments will return to considering the issue of indexing domestic fertilizer prices, fixed at the level of the beginning of the third quarter of 2022, in September,” reports RBC. At that same time Russia threatens that Europe might become a net importer of wheat if the European tariffs on Russian fertilizers are maintained.

Dmitry Patrushev, Russia’s Deputy Chairman of the Government, former Minister for Agriculture, and Nikolai Patrushev’s son, stated that the current record prices for potatoes are “not much different from the prices a few years ago” in an interview to Komsomolskaya Pravda. High level discussions of prices for potatoes indicate the importance of the age-old mantra in Russia of “TV vs. fridge,” where the reality presented on TV is not supported by the contents of the fridge. To address the issue with potatoes, Russia boosted potato imports from China 13-fold in January-May vs. similar period last year.

Spring wheat sowing acreage is to drop to a ten-year low of 11.8 million hectares or 4.1% annual reduction, reports Kommersant. The Kontur.Fokus project calculated that due to a sharp drop in the profitability of agriculture in Russia this year, the number of legal entities associated with the agricultural market is decreasing. In addition, agricultural machinery manufacturers are experiencing problems, having faced a precipitous drop in demand for their products due to the lack of funds among buyers.

To support the struggling agricultural producers, Russia decreased export tariffs for wheat on June 25 to 248.3 rubles per ton vs. prior 566 rubles per ton. However, the tariffs will be reviewed on July 1. Barley exports for the current agricultural year (from July 1, 2024 to June 30, 2025) dropped 44.8% on an annual basis. The reduction was driven by an export ban between February 15 to June 30 introduced to stabilize prices on the domestic market.

Russian livestock farmers suffer from expensive fodder and inflation eating away their profits reports NGS. NGS interviewed Alexey Zhdanov, a farmer from Proletarsky District of Rostov Region. Zhdanov stated that many farmer sell off their breeding stock to slaughterhouses to pay off their debts, which will cause serious issues in the long run. “This is a crazy number, we didn’t see anything like this even during the Great Patriotic War – the livestock has shrunk so much,” Zhdanov says about the crisis. By the beginning of 2022, there were 625 thousand heads of cattle in the Rostov region. By April 2025, there were 589.3 thousand heads left, with only 281.7 thousand heads of cows, according to Rostovstat data.

Starting from June 30, Rosselkhoznadzor, Russian agricultural regulator, banned all seed imports from the Netherlands (source: Rosselkhoznadzor press release). This decision will propagate the downward spiral in the Russian agricultural sector.

Russia extended the ban of rice exports till December 31, 2025, first introduced in 2022. This is another measure to combat inflation.

Russian fisheries will need to justify their price increases to the Federal Antimonopoly Service (FAS). For example, wholesale prices for the Atlantic capelin increased 2.9-fold since the start of the year.

The most popular type of bread in Russia might disappear from stores. The production of the sliced white loaf is marginally profitable and further price regulations would make the production financially unviable, according to Alexey Tulupov, CEO of the largest bakery holding company in Russia, Kolomensky.

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Russia’s quest to fund the war and the budget continues

Putin signed a new law approving the expanded Federal budget deficit to 1.7% of the GDP. And on the same week Russia launched a tax reform for small and medium-sized business with the overall effective tax rate increasing.

The Accounts Chamber proposed an increase in water usage fees. According to them, a tenfold increase in the fees would yield the budget 32 billion rubles annually and “would not significantly affect the economy.”

The Russian Social Fund reported that an average pension in Russia was 23 448 rubles a month (about 300 USD). Anecdotal observations by us across the regions of Russia suggest that the real number is unlikely to exceed 18 000 rubles a month.

Russia is rarely concerned about the environment unless it yields them money for the budget (or geopolitical gains) – the Russian Academy of Sciences produced a report proposing carbon emissions fees. Currently, Russia does not charge such fees.

Regional electrical power transmission tariffs will increase above earlier announced rates of 11.6%.

Starting from September 2025, Russia increases car ownership related service fees and taxes.

As gasoline prices in Russia set new records (12% increase in June on SPIMEX), Russia is considering an expanded gasoline exports ban till October.

Labor market and wages

Rosstat reports that wages and salaries owed in May 2025 grew 12.2% month to month or 240% vs. May 2024. Rosstat also reports that the average workday shortened for the first time since 2022, down 0.1%.

Okno Group, a project by reportedly independent journalists, finds that every second shift in the Russian Arctic oil fields in left unpaid.

Every third Russian was paid reduced bonuses or no bonuses at all in the past year.

RIA Novosti reports a collapse in the real estate development market in 5-7 years due to labor shortage.

Every sixth company in Russia is planning to cut wages in the coming year along with 3.6% planning to conduct layoffs in the coming month or three.

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Nationalization and bankruptcies

Optron-Stavropol, a Russian electronics manufacturer and military contractor, is close to bankruptcy. It is a major supplier of avionics for MiG, Sukhoi, and Tupolev aircraft.

One of the largest fashion retailers in Russia, Modnyj Kontinent, shut down all stores for their two brands, Incity and Deseo. In 2015 the company operated 450 stores in Russia but by August 2024 that number reduced to 116.

Gagar.In, a Russian manufacturer or “import substitution” servers, is teetering on the edge of bankruptcy. The company is facing twelve lawsuits from creditors, including one from Sberbank. The company owes Sberbank 106 million rubles.

The former CEO of VSMPO-Avisma, Mikhail Voevodin, was arrested in Moscow. Avisma is the largest manufacturer of titanium in the world and one of the key suppliers to the Russian MIC. He headed the company between 2009 and 2020 and is currently facing corrupting charges valued at 4 billion rubles.

The State Secretary of Dagestan, an autonomous republic in the North Caucasus, Magomed-Sultan Magomedov was arrested last week on the charges of illegal privatization. Following the arrest, the Office of the Prosecutor General filed a lawsuit to nationalize the largest oil refinery on the Caspian Sea. The refinery process Russian oil as well as oil from Kazakhstan and Turkmenistan.

Russian law enforcement agencies conducted searches in the mayor’s office of Surgut, the largest city of the oil-rich Khanty-Mansi Autonomous Okrug. The searches were conducted in the Property Department, which holds records on property transactions. Last year, the former mayor of Surgut, Andrei Filatov, was arrested on charges of corruption. Note that Surgut is also home to Surgutneftegaz, a Russian oil and gas company, that has 5.7 trillion rubles in cash reserves as of Q1 2025 which dwarf liquid reserves of the Russian National Wealth Fund at 2.8 trillion rubles.

For the sake of brevity, I omitted news from the Russian coal, oil and gas, and metals industries. We will return to them next week.

This is it for today. Until next week.