Russia's economy on the brink: loans disappear, inflation explodes!

Russia's economy on the brink: loans disappear, inflation explodes!

Russia's economy faces significant challenges, characterized by stagnant investment and production losses in key sectors such as steel and oil. High inflation is leading to record key interest rates, which are noticeably affecting borrowing. Currently, the Russian credit market grew by around 1.7 trillion rubles (approx. 18.2 billion euros) in July 2025, with total debt now reaching 150 trillion rubles (1.6 trillion euros). The annual growth rate of lending slowed to 10.1 percent, reaching its lowest pace since 2021.

The Central Bank of Russia classifies lending to private customers as “weak” and to businesses as “moderate”. Restrictive monetary policy is seen as the main cause of this slowdown. Households are focused on repaying past obligations with little interest in new loans, exacerbated by the high key interest rate of 18 percent, down from a record 21 percent. This rate cut represents the biggest move since May 2022 to encourage borrowing.

Difficult conditions for companies

The situation is particularly tense for companies that are suffering due to high key interest rates. Banks are forced to increasingly grant cheap loans to companies in the war economy. This approach creates an exercise in dealing with “toxic debt” in the corporate credit market. Although the Russian banking system is officially considered relatively stable, there are concerns about loan defaults and significant deficiencies in loan books. Fears of an imminent recession in 2026 are being expressed, particularly by leading bankers such as Sberbank's Herman Gref.

Russia's financing strategy supporting the war in Ukraine relies on both cash flows from the regular budget and loans from banks of a similar size to the defense budget. This strategy creates the appearance of a stable government budget while increasing pressure on banks to meet demands for loans to war-related companies. Consumption and new investments remain subdued due to financial uncertainties.

The Future of Lending and Inflation

A law passed in February 2022 forces banks to provide loans to companies necessary for war operations. In this context, corporate debt in Russia currently stands at $415 billion, which is 19.4 percent of GDP. About half of this debt goes to areas related to the war. At the same time, the number of payment defaults is increasing, with 19 percent of medium and large companies and 25 percent of small companies in default.

The central bank was also under pressure to possibly further increase the key interest rate, which was 21 percent at the end of December 2024 and was already considered too high. Experts warn of the possible consequences of further interest rate increases, while inflation was last at 9.5 percent in December 2024. Forecasts suggest inflation could fall to 4 percent per year in 2025.

Current economic challenges and the central bank's strategy could have profound implications for Russia's future. Concerns about loan defaults and consumer restraint point to a worrying economic situation that could require further measures and possibly bailouts.