By Oleksandar Levchenko
Russia’s financial system is showing increasingly pronounced signs of structural imbalance. Although the banking sector continues to generate high overall profits, the number of credit institutions operating at a loss is rising sharply, while regional budgets are coming under growing pressure from high military spending, declining revenues and rising debt burdens.
According to Russian media reports citing data from the Central Bank of the Russian Federation, the number of loss-making credit institutions increased by 87% from the beginning of 2026. On average, such institutions accounted for 24.5% of the sector in the second quarter, compared with 18% a year earlier. Among Russian banks, 65 out of approximately 300 active institutions reported losses.
These trends contrast with the banking sector’s formally high aggregate profits, estimated at 3.9–4.4 trillion rubles. However, profits are becoming increasingly concentrated among the largest players: the ten largest banks account for approximately 75–76% of the sector’s total financial result. At the same time, smaller and regional banks are increasingly operating at a loss.
The combined losses of loss-making banks had declined slightly to 90.2 billion rubles by June 2026, but the number of troubled institutions continues to increase, including some relatively large banks. One factor was the change in the interest-rate environment following the Central Bank’s reduction of its key rate to 14.25%. For smaller banks, this means lower income from placing liquidity, while the costs of previously attracted expensive deposits remain high.
Additional pressure is coming from the deterioration in loan-portfolio quality. The share of non-performing corporate loans exceeded 11%, compared with 5.8% a year earlier. At the same time, the banking system’s liquidity deficit reached 2.7 trillion rubles in August, while the decline in the value of government bonds created additional risks for financial institutions.
Under these conditions, Russian analysts expect the number of banks to decline further—potentially by about half, to approximately 150. The process could accelerate after the Central Bank raises minimum capital requirements in 2028–2030. For banks holding a universal licence, minimum capital is expected to increase from 1 billion to 3 billion rubles, while institutions with a basic licence would face an increase from 300 million to 1 billion rubles. This would further drive consolidation in the sector, forcing a significant number of smaller banks to find buyers, merge with other institutions or change their business models.
War places growing pressure on regional budgets
Alongside problems in the banking sector, financial pressure on Russia’s regions is intensifying. Moscow is shifting an increasing share of the costs of the war onto the federal subjects, forcing them to cut or freeze social spending.
The situation in Yakutia provides an illustrative example. The regional authorities postponed the annual indexation of salaries for public-sector employees, including teachers, healthcare workers and researchers, citing rising unforeseen expenditures associated with financing the so-called “special military operation.”
According to information provided by regional lawmaker Nyurguyana Zamorshchikova, following numerous appeals from residents over the cancellation of the indexation, requests were submitted to the government of Yakutia and the prosecutor’s office. An official response from the republic’s Prime Minister, Kirill Bychkov, indicated that a planned 5.4% increase in public-sector salaries had been postponed until 1 September because funds were needed to ensure payments to contract soldiers.
One factor was a sharp increase in the region’s one-time payment to military recruits—from 2.1 million to 3 million rubles. This illustrates a broader trend: the rising costs of recruitment and maintaining military personnel are increasingly competing with funding for the regions’ basic social needs.
Similar decisions are being taken in other Russian federal subjects. In Rostov Oblast, a planned 4% indexation of public-sector salaries, scheduled for 1 October, was cancelled without explanation, while on Sakhalin, a planned increase in healthcare workers’ salaries was completely frozen for the entire year of 2026.
These decisions have not only a social but also a political dimension. Ahead of the parliamentary elections, cuts in social spending and public-sector incomes create an additional risk of growing public dissatisfaction, particularly in regions with chronic budget deficits.
Yakutia’s financial position is already under pressure. The republic’s 2026 budget was adopted with a deficit of 12.75 billion rubles, but by 1 April the deficit had already reached 9.47 billion rubles—approximately 75% of the planned annual figure.
The regional deficit is becoming a systemic problem
According to Alexander Isakov, Senior Executive Director and Head of the Centre for Macroeconomic Research at Sberbank, the financial position of Russian regions, which ended the previous year with a record local-budget deficit, continues to deteriorate. In 2026, the combined budget deficit of Russia’s federal subjects could reach 2 trillion rubles—approximately 500 billion rubles, or 33%, more than a year earlier. This would mean that the nominal size of the regional “hole” could reach a historic high for the second consecutive year.
One reason is slowing economic growth. The decline in profits in the Russian business sector, which began in 2025, is continuing and directly reducing corporate income-tax revenues, one of the key sources of regional budget income. According to Rosstat, in the first half of 2026, Russian companies’ profits fell by 13%, while in June they declined more than fivefold. The share of loss-making companies increased to 33.5%, compared with 30.4% a year earlier.
Additional pressure is being created by international sanctions imposed in response to Russia’s aggression against Ukraine. Restricted access to European financial markets, advanced technologies and imported components has forced Russian companies to redirect trade towards Asian and African markets. This has extended transport routes and delivery times while increasing logistics costs.
At the same time, companies have been forced to use more complex payment and import arrangements, paying intermediary fees and incurring additional transaction costs. All of this reduces business profitability and, consequently, the tax base of the regions. The consequences are already visible in cuts to social spending. In 2026, 19 Russian regions adopted decisions to reduce healthcare allocations. The cuts amounted to 39% in Vologda Oblast, 30% in Irkutsk and Kemerovo oblasts, and 25% in Moscow and Volgograd oblasts.
Moscow is tightening control over regional resources
The problem is also structural. Following the launch of the full-scale aggression against Ukraine in 2022, Moscow reorganised tax and budget mechanisms to increase the centralisation of resources and secure financing for the sharp rise in military spending.
The federal centre has intensified the redirection of the most liquid sources of revenue, particularly those linked to natural-resource extraction and excise duties, while introducing additional levies on large businesses. A growing share of revenues from the resource sector that previously remained in the regions is now being concentrated at the federal level.
At the same time, Moscow is transferring part of the costs associated with the war to the regions, including payments to military personnel and the financing of benefits and other war-related obligations, without providing corresponding stable sources of funding. As a result, the regions are caught between two opposing trends: their tax base is weakening while their budgetary obligations are increasing. This increases the dependence of Russia’s federal subjects on transfers from the federal budget while simultaneously encouraging cuts to social programmes.
High cost of borrowing intensifies debt pressure
Another risk factor remains the cost of borrowing. In an effort to contain inflation and stabilise an economy overheated by military spending, the Central Bank of Russia is maintaining interest rates at high levels. This significantly increases borrowing costs for the regions.
Russia’s federal subjects are being forced to take out commercial loans at interest rates of approximately 20–25% per year, including loans used to refinance existing obligations. As a result, the debt burden continues to rise, while resources that could otherwise be directed towards infrastructure, healthcare or education are being used to service debt.
The problems facing Russia’s financial system therefore increasingly appear not as isolated difficulties affecting individual banks or particular regions, but as an interconnected chain. High military spending keeps the economy overheated; restrictive monetary policy raises financing costs; weaker business profitability reduces tax revenues; and the centralisation of resources increases the regions’ dependence on the federal budget.
In the short term, Moscow will probably be able to maintain the appearance of formal financial stability by redistributing resources, cutting social spending and increasing borrowing. However, these mechanisms carry a cost. The longer military spending remains a federal policy priority, the greater the share of the financial burden will be shifted from the federal level onto banks, the business sector and the regions.
The key risk for the Kremlin is not an immediate financial collapse, but the gradual accumulation of structural imbalances. These imbalances could increasingly constrain the Russian state’s ability to finance the war, meet its social obligations and sustain economic activity across the regions simultaneously.
Oleksandr Levchenko is a Ukrainian diplomat, independent analyst and professor at the State Tax University in Ukraine. He served as Ukraine’s ambassador to Croatia and Bosnia and Herzegovina (2010–2017) and as a consul in the Federal Republic of Yugoslavia (1993–1997). During the war, he has written some 5,000 articles on Russia’s aggression against Ukraine for online media outlets in nine countries.
Written for CIVIL Today.