Agathe Demarais writes:

As U.S. President Donald Trump and Russian President Vladimir Putin consider meeting in the coming weeks, it may be useful to ask why it is that Moscow now appears inclined to end the war in Ukraine.

Three years into the conflict, Putin has shown the world he doesn’t care about bloodshed. And if his goal was to install a Russia-friendly government in Kyiv, he remains far from achieving it. However, there is a third, less explored hypothesis that explains why the Russian president might finally be coming to the negotiating table:

Moscow could soon struggle to finance the war.

The usual narrative about Moscow’s fiscal situation tends to note that Russia records a small budget deficit and that Russian public debt is low (at about 20 percent of GDP), which makes for sound fiscal metrics. This analysis holds true for most economies, but in Russia’s case, there’s an important catch: With Western sanctions constraining Moscow’s ability to tap into international debt markets, the Kremlin has limited room for maneuver to finance its small — but nonetheless real — fiscal deficit.

With external debt out of the equation, Moscow’s initial plan B was to get Russian banks to buy sovereign debt. This strategy worked reasonably well in 2022 and 2023, but cracks started to emerge last year. Faced with competing pressures from the Kremlin to extend hundreds of billions in cheap loans to defense firms while also buying huge amounts of sovereign bonds, domestic banks have become so cash-strapped that they’re now reluctant to pile on more debt. Late last year, the Kremlin had to cancel several auctions for domestic debt issuance because there were no buyers.

So, with domestic borrowing increasingly out of the equation, Moscow has turned to plan C: tapping into the reserves of the Russian National Welfare Fund (NWF). [Continue reading…]