Lukashenko's Regime Is Heading Toward Default
- 26.07.2026, 16:06
The numbers don't add up.
On Monday, July 20, the Russian Ministry of Finance announced that it would temporarily suspend the issuance of federal bonds. Amid the smoke from the Wildberries warehouse fires, the news went almost unnoticed. And perhaps that was a mistake.
An Unexpected Decision
The Russian Ministry of Finance stated that the decision to suspend the sale of OFZs was made “to help stabilize the market situation.” The Ministry of Finance did not specify what exactly had happened to the market situation that caused it to suddenly become unstable. Although, in reality, there’s no secret to it. The Ministry of Finance stopped borrowing because no one is lending to it anymore.
A few days before this decision, the Ministry of Finance had to cancel an auction for the sale of OFZs because there were no buyers. Prior to that, auctions had been canceled twice since the beginning of June. According to its plan, the Ministry of Finance had expected to borrow 1.5 trillion Russian rubles on the domestic market in the third quarter. In reality, it managed to borrow less than a symbolic amount of 10 billion. Well, if you don’t get what you ask for, all you can do is pretend you didn’t really want it that much.
However, the question remains: “Where to get the money?” The war won’t fund itself. The budget deficit has already grown to nearly 6 trillion rubles. Not to mention that last week, without drawing too much attention, the Ministry of Finance increased its spending plan by another trillion. In other words, the budget deficit will be even larger.
It is precisely OFZs that have recently been the main source of financing for the budget deficit. This is because no one other than Russian banks was willing to lend to the Russian Ministry of Finance. However, even borrowing from its own banks was expensive. Interest rates on OFZs have risen to 13–17 percent.
As a result, debt service costs now account for about 9 percent of total budget expenditures. That’s more than spending on education and healthcare combined. So, in effect, the Russian Ministry of Finance has built a nearly classic Ponzi scheme—one where you take on new debt to pay off old debt.
But the scheme works as long as there is an inflow of fresh money. Moreover, the flow of money must constantly grow.
The Numbers Don’t Add Up
In 2023, Russia issued OFZ bonds worth 2.8 trillion rubles. In 2024, the figure had already reached 4.5 trillion. In 2025, the volume of placements totaled 7.2 trillion, although the initial plan was for 4.8 trillion.
For this year, the Ministry of Finance initially planned to borrow 6.5 trillion rubles, but something went wrong. In the first quarter, they actually managed to slightly exceed the target. In the second quarter, they fell just short of the target. And in the third quarter, it was a complete failure. Russian banks are, in principle, willing to lend to the Ministry of Finance, but only at interest rates the ministry cannot afford.
Therefore, there is only one major source left to finance the budget deficit—funds from the National Wealth Fund. But there are only 3.6 trillion rubles in liquid assets there. And the budget deficit is already nearly six trillion. At the same time, more than three trillion must be repaid on old debts. And there’s nowhere else to borrow money.
And if it’s not possible to take on new debt, the only option left is to stop paying on the old ones. Things can’t get any worse than they already are. Therefore, halting bond issuance could be the first step toward announcing a temporary suspension of payments on old debts “until the market situation stabilizes.” In other words, to induce a “soft default” for Russian banks. Fortunately, there’s experience with sudden defaults dating back to 1998.
The argument against such a “soft default” is that Russian banks are already in a precarious position. In the first two weeks of July, customers withdrew 0.5 trillion rubles from banks. In other words, banks were losing cash at a rate of 32 billion rubles per day. Compared to June, the rate of cash withdrawals more than doubled, even though people were already withdrawing far too much in June.
And a new problem
At the same time, the situation with loan repayments is deteriorating. The share of non-performing loans in Russian banks has risen to 11 percent.
Consequently, banks’ liquidity shortfall is growing. As of July 20, this shortfall stood at about 2.5 trillion rubles, a historic high since March 2022.
Well, it’s clear that the decision not to pay debts will, first of all, hit the banks directly. Second, it could lead to people withdrawing their money even more actively.
Of course, even if the Ministry of Finance were to completely halt payments, the scale of the crisis would not be as severe as it was in 1998. OFZs now account for a much smaller share of bank assets compared to how much Russian banks held in GKOs in 1998.
On the other hand, in 1998 there were none of the aggravating external circumstances that exist today. In 1998, Russia was not fighting a full-scale war; in 1998, no one was bombing Russian oil refineries; in 1998, Russian warehouses were not burning.
Alexey Mazartov, “Belarusians and the Market”