Russia's Deficit Swells as War Spending Surges and Drone Strikes Disrupt Economy
The refinery losses are the binding constraint here, not sanctions or asset freezes. Ukraine's drone campaign has permanently taken offline 30-45% of Russia's refinery capacity, which means the Kremlin cannot restore export volumes even if oil prices hold—it lacks the physical capacity to load tankers.
This forces Russia to sell crude at a discount to refineries outside its control, compressing margins further. The CBR's ten consecutive rate cuts despite rising inflation is a tell: the central bank is accommodating the Kremlin's cheap-lending pressure to keep war production moving, which means monetary policy is now subordinated to fiscal necessity.
The Central Bank of Russia is trapped between inflation and stagnation, unable to cut rates further without reigniting price pressures, while the Kremlin's fiscal gap widens faster than oil-price gains can close it.
War spending is now consuming fiscal space at a rate that forces the state to squeeze non-military sectors and pressure banks into cheap lending to defense industries—a dynamic that is already accumulating bad loans on balance sheets and raising the risk of a banking crisis. Watch whether the CBR halts rate cuts at the September meeting; if inflation resurges while growth remains negative, the Kremlin will have to choose between currency stability and industrial credit availability, a choice it cannot win.
What is the actual bad-loan ratio in Russian banks' war-linked portfolios, and at what threshold does the CBR trigger a sector bailout that further crowds out civilian lending?
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