Tanks vs. banks: Russia faces a financial crisis

Despite rumors to the contrary, Russia’s Central Bank is not planning to freeze citizens' deposits, says its head, Elvira Nabiullina. However, such reassurances only deepen public anxiety — if the financial system were stable, there would be no need for reassurance in the first place. Freezing deposits is just one of many possible responses to a looming banking crisis. Liquidity problems are mounting, and the number of unsecured and overdue loans is growing. For years, the government has encouraged borrowing over saving and discouraged early repayment. While ordinary depositors are not directly at risk, the more cautious among them will effectively pay an inflation tax to cover the losses of those who put their faith in unreliable banks.

• 1.Listen to the authorities — and do the opposite
• 2.Where the rumors come from
• 3.The threat of a banking crisis
• 4.The authorities pushed the banking system toward crisis
• 5.How a crisis might unfold

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Listen to the authorities — and do the opposite

The Bank of Russia has ruled out the possibility of freezing bank deposits.

“This idea is absurd,” the regulator explains. “Not only would it be a blatant violation of citizens’ and businesses’ right to freely dispose of their assets, but such a step would also undermine the foundations of the banking system and the country’s financial stability. Banks rely on funds from individuals and companies to function. Without these deposits, they wouldn’t be able to issue loans to borrowers.

If deposits were frozen and people and businesses lost control over their money, no one would trust banks with their savings. That would immediately put an end to banks' ability to lend to the economy. It’s obvious that in any market economy — where bank lending plays a key role — such a move is unthinkable.”

The problem is that statements like these often only increase public anxiety. Those who don’t remember then-president Boris Yeltsin’s famous 1998 assurance that “there will be no devaluation” have likely seen how, just a month before Russia’s full-scale invasion of Ukraine, Foreign Minister Sergey Lavrov insisted that his country had no intention of going on the attack: “You claim we are planning to invade Ukraine, even though we have repeatedly explained that this is not the case.” So why trust the Central Bank any more than the Foreign Ministry?

Economic theory also feeds these concerns. When monetary policy is predictable, businesses and individuals adjust their expectations and behavior accordingly, potentially canceling out its intended effects — a principle explored by economists Robert Lucas, Neil Wallace, Thomas Sargent, Finn Kydland, and Edward Prescott (four of whom are Nobel laureates).

In other words, if the government plans to boost revenue by printing money printing, and if enough major economic players see the move coming, then the currency will lose value before the printing presses are even turned on. Likewise, if depositors catch on in time that the authorities intend to confiscate deposits, the confiscation will fail. For a robbery to be effective, it must be unexpected. The more forcefully the government promises there will be no expropriation, the more cautious the public should be.

The more forcefully the government promises there will be no expropriation, the more cautious the public should be

Where the rumors come from

The idea of freezing Russians’ bank deposits first surfaced in early November 2024. It was proposed by Alexey Zubets, then the head of the Institute for Socio-Economic Research at the Financial University under the Russian government (his name has since disappeared from the university’s website).

Doctor of Economics Zubets said at the time:

“Deposits could be frozen. People have accumulated enormous sums in their accounts — tens of trillions of rubles. Meanwhile, there’s a decision to lower interest rates. Naturally, people will withdraw their money and bring it to the market. That would trigger runaway inflation. So the question arises: how to prevent this? One fairly obvious option is to allow people to withdraw only a limited amount from their bank accounts when rates are lowered, rather than all at once. Such a scenario is possible in order to avoid a flood of money hitting the consumer market and fueling inflation.”

This wasn’t the first time a statement by Zubets made headlines. Just a month earlier, he had suggested introducing a “childlessness tax” of 30,000–40,000 rubles per month. Like that earlier suggestion, his forecast about deposit freezes was dismissed by both the State Duma and the Central Bank as nonsensical, hostile, and absurd.

Yet doubts persisted. Two months later, the Central Bank was forced to issue another denial, and its chair, Elvira Nabiullina, had to address the issue during a press conference. Public anxiety only grew after law enforcement agencies proposed introducing a “cooling-off” period — not just for issuing loans, but also for withdrawing one’s own cash. Vadim Uvarov, director of the Central Bank’s Information Security Department, addressed the issue, saying:

Law enforcement agencies proposed introducing a “cooling-off” period for withdrawing cash

“Law enforcement officials were considering applying a ‘cooling-off’ procedure to cash withdrawals. But unfortunately, we couldn’t establish clear criteria. For example, under what conditions would a financial institution deny you access to your own money?”

The threat of a banking crisis

The Center for Macroeconomic Analysis and Short-Term Forecasting (CMASTF), founded by current Defense Minister Andrey Belousov and now headed by his brother Dmitry, had been predicting since late 2023 that a systemic banking crisis was highly likely by November 2024. By the end of that month, they admitted that a crisis had “formally not occurred,” but in their January review, they wrote:

“We are witnessing a unique situation where corporate lending growth has sharply slowed, and the current (as well as future) expansion of loan portfolios is insufficient to offset businesses’ massive interest payments on previously accumulated debt.” According to the analysts, this situation “both serves as a driver of a systemic banking crisis and, if it persists for long, could lead to a decline in production.”

The problem is that in November–December 2024, rising interest rates meant even fewer new loans were issued. As a result, debtors are now paying more on old loans than they are by borrowing anew. The strategy of refinancing old debt with new loans is no longer viable. This, in turn, makes it harder for banks to collect payments, leading to a decline in loan portfolio quality — a trend that will continue. Banks will need to increase reserves to cover these bad loans, but without government support, they have nowhere to get the money. All signs point to a systemic crisis.

Due to rising interest rates, debtors are now paying more on old loans than they are by taking out in new ones — refinancing is no longer an option

According to CMASTF’s model, the likelihood of a systemic banking crisis is not considered high, but it is still possible. However, as the analysts note, what matters now is not the indicator predicting whether a crisis will occur but the one showing how long it might continue. “If a systemic banking crisis does occur, it will not last more than a year,” experts predict.

As of Jan. 1, 2025, Russian banks held assets worth 199 trillion rubles ($2.3 trillion). The majority — 120 trillion rubles — was tied up in loans (including 87 trillion rubles to businesses and 36 trillion rubles to individuals). The rest consisted mainly of securities and loans to other banks, with only 15 trillion rubles in cash and 4.2 trillion rubles in deposits at the Central Bank.

Meanwhile, the total liabilities of Russian banks amounted to 182 trillion rubles, with capital at 17 trillion rubles. Of these liabilities, just over a third was owed to corporate clients, while a slightly smaller portion — 57 trillion rubles — was owed to individuals. Theoretically, if all individual depositors demanded their money at once, the sum would exceed what banks could immediately provide, as they only have 19 trillion rubles in liquid assets (cash and deposits at the Central Bank). The rest is tied up in loans, which must be repaid over time, and securities, which could lose value if sold under pressure. Banks remain solvent only because most customers are not rushing to withdraw their money. Meanwhile, an additional 34 trillion rubles is held in corporate accounts and short-term deposits.

If depositors were to demand all 57 trillion rubles, banks could immediately provide only 19 trillion

These risks are always present. The model in which bank reserves — assets held in risk-free and highly liquid forms — were at least equal to the amount clients could withdraw at any moment has not been common for centuries. Modern banking systems assume that demand deposits and current accounts are secure, but the money deposited need not be fully available for withdrawal at any given time. Instead, it is put to work as loans to various borrowers for different terms. Banks share the interest earned on these loans with their clients.

This is why banks cannot guarantee that every depositor wishing to withdraw cash will receive the full amount in the event that a mass “bank run” occurs. Central banks monitor their solvency and, in extreme cases, act as lenders of last resort — simply increasing the money supply as needed in order to provide banks with liquidity.

A banking crisis is always a potential threat in any modern financial system, and the potential triggers can be hard to neutralize: unforeseen events could cause securities to crash, spark panic among depositors, lead to mass loan defaults, or expose and worsen the fundamental insufficiency of banking reserves. The 2008 global financial crisis was a textbook example of this. And in today’s Russia, the warning signs for an impending crisis have already been accumulating.

The authorities pushed the banking system toward crisis

The quality of loan portfolios in Russia is declining, thereby increasing the risk that borrowers will struggle to repay their debts in the future. At the beginning of 2024, banks and microfinance organizations boasted 50 million borrowers, and over the course of the year, they received 4.1 million requests for payment deferrals — almost twice as many as in the previous year.

Last year, banks received 4.1 million requests for payment deferrals — almost twice as many as in the year before

The government itself has played a major role in weakening the credit portfolios of Russian banks. For years, the authorities subsidized various forms of lending. When the government wanted to support agriculture, it didn’t pay for tons of meat and grain directly. Instead, it funneled money to banks that then loaned it along to agricultural enterprises, lowering their interest rates. If an agribusiness chose to develop without loans by reinvesting its own profits, it received no support. Meanwhile, the major beneficiaries of the subsidies were loss-making farms, whose managers took on debt, spent the borrowed money, and then disappeared.

The same approach was applied to mortgages. Families who preferred to save up for housing before buying received no assistance. But those who wanted to purchase a home on credit had their borrowing costs drastically reduced — at the expense of other taxpayers. In other words, those who worked to save on their own were effectively subsidizing borrowers. The policy was essentially designed to push as many people as possible into debt.

The government's policy was essentially designed to push as many people as possible into debt

And for those already in debt, the authorities reduced incentives that would have pushed them to repay loans as quickly as possible. In 2020, as a “temporary measure during the pandemic,” credit holidays were introduced, allowing borrowers to delay debt payments. Officially, this temporary measure became permanent at the start of 2024. Moreover, it was extended to anyone whose income had dropped by 30% or who had been affected by an emergency.

Even earlier, in 2022, credit holidays were introduced for mobilized individuals, war participants, and even limited liability companies owned by a single servicemember. Now, there are credit holidays for those affected by sanctions. Since April 2023, the Bank of Russia has recommended holding off on debt collection efforts from small and medium-sized businesses in regions with a “medium response level” (Bryansk, Kursk, Belgorod, Voronezh, and Rostov regions, as well as Krasnodar Krai, Crimea, and Sevastopol).

In August 2024, credit holidays were introduced for debtors in the border regions of Kursk, Belgorod, and Bryansk. This means that a person with an outstanding loan receives more support than someone in the same situation who has already repaid their debt. The system incentivizes debt accumulation among those facing hardship. In the long run, this benefits neither borrowers nor banks.

For years, the Russian state has pushed its largest state-controlled banks to issue politically motivated loans that were economically questionable. These included subsidized investment projects, state-promoted innovations, special economic zones, priority programs, and other initiatives designed to appear economically viable, but which were ultimately destined to be unprofitable.

Deputy Chairman of Sberbank Alexander Vedyakhin stated that the country's largest bank had allocated 6.4 trillion rubles to small business support programs and another 4.8 trillion to the national “Housing and Urban Environment” project. If these investments had been commercially sound, they would have been undertaken as private initiatives without state involvement.

The high key interest rate set by the Central Bank represents another risk. Eventually, it will have to be lowered, at which point banks will face an outflow of funds from deposits that had attracted savers via the high rates.

A stronger ruble is also not in the banks' interest. “All else being equal, it limits the price competitiveness of domestic goods, which in the long run may lead to a decline in the solvency of manufacturing companies,” the CMASTF states.

How a crisis might unfold

A classic banking crisis occurs when clients and depositors rush to withdraw a portion of their funds so substantial that banks, unable to handle the demand, either go bankrupt or freeze deposits. However, this is not the only possible scenario. A crisis can also be defined as a situation in which the proportion of bad assets in the overall banking system exceeds 10%, or when, to prevent the first two scenarios, authorities are either forced to reorganize or nationalize over 10% of banks, or else to inject capital amounting to more than 2% of GDP. This definition, formulated by the IMF, means that any of these three scenarios could be considered the onset of a crisis.

In Russia, the first scenario would likely unfold relatively smoothly for the public. A significant portion of deposits in Russia is insured: by 2024, the total insured amount reached 76 trillion rubles, 25% more than the previous year, marking the highest growth in 14 years according to the Deposit Insurance Agency. The insurance covers deposits up to 1.4 million rubles, while the average deposit per person stands at 386,000 rubles. This means that if a bank's situation deteriorates to the point where the Central Bank revokes its license, the Deposit Insurance Agency will compensate depositors within a few weeks.

As for the second possibility, there are no solid grounds to believe that the crisis will take the form of a mass freezing of deposits.

The third scenario is more plausible. Russian banks have been steadily growing their profits, paying dividends, increasing interest income, and building reserves. When problems arise, the Central Bank will likely resolve them in its usual way — through monetary issuance. This will result in partial devaluation of the ruble, which will affect even those holding cash.

In essence, cautious individuals will bear the brunt of an inflation tax, subsidizing those who trusted unreliable banks. This is why inflation in the 20th and 21st centuries has been higher than in the 19th: the central banking system, which has expanded globally over the last hundred years, inherently relies on monetary issuance. For Russia, this means the ruble will lose value, credit will become expensive and scarce, the civilian sector of the economy will continue to stagnate, and GDP growth will likely turn negative again. These are the financial costs of a war whose full economic consequences are yet to be fully realized.