Agathe Demarais is a senior policy fellow at the European Council on Foreign Relations (ECFR).
As U.S. President Donald Trump and Russian President Vladimir Putin consider negotiations in the coming weeks, it is worth examining why Moscow seems inclined to end the ongoing war in Ukraine.
Three years into the conflict, Putin has demonstrated a disregard for bloodshed. If his objective was to establish a Russia-friendly government in Kyiv, he is still far from achieving that aim. However, there exists a third, less-discussed possibility explaining why the Kremlin might finally be open to negotiations: Moscow could soon face significant challenges in financing the war.
The prevailing narrative regarding Moscow’s fiscal situation often highlights a small budget deficit and low public debt, approximately 20 percent of GDP. While this analysis may hold true for many economies, Russia’s circumstances present a crucial caveat: Western sanctions have severely restricted Moscow’s access to international debt markets, limiting its options to finance its budget deficit.
With external debt off the table, Moscow’s initial strategy was to encourage Russian banks to purchase sovereign debt. This approach saw relative success in 2022 and 2023, but fissures began to appear last year. Domestic banks, pressured by the Kremlin to extend significant loans to defense contractors while simultaneously buying a large amount of sovereign bonds, have become cash-strapped and reluctant to take on additional debt. Consequently, the Kremlin was forced to cancel several domestic debt issuance auctions last year due to a lack of buyers.
As domestic borrowing becomes increasingly untenable, Moscow has moved to plan C: tapping into the reserves of the Russian National Welfare Fund (NWF).
On paper, this strategy appears sound. The reserves totaled nearly 10 trillion rubles (approximately $110 billion) in early 2022, which initially seemed sufficient to cover the war-induced budget deficit for several years. However, even the most substantial savings can be depleted, and after three years of conflict, the NWF’s liquid reserves have diminished by around 60 percent.
This year is shaping up to be particularly challenging for the Kremlin’s fiscal strategy. In January, the country’s monthly budget deficit was about 45 percent higher than the full-year target for 2025.
From Moscow’s perspective, this data is likely alarming: If fiscal expenditures remain at January levels, the NWF reserves could be exhausted within just three months. Even if they last longer—likely the case—2025 might represent the final year Moscow can fully cover its fiscal deficit using those savings.
This raises the critical question: What would occur if Russia could no longer finance its budget shortfall?
With domestic banks overwhelmed by debt, a sovereign default could trigger a severe financial crisis. If such a scenario unfolds, the Kremlin would struggle to support its banking sector. With NWF reserves depleting, there would be no available funds for recapitalizations, potentially destabilizing the fragile structure of the Russian economy.
From a fiscal standpoint, Russia is running out of time. The Kremlin currently lacks a plan D to address its budget deficit, raising significant concerns about its capacity to finance the ongoing war. In this context, fiscal breathing room may be what Putin is truly seeking in his discussions with the U.S., whether through easing sanctions (for example, relaxing U.S. restrictions on Russia’s ability to issue external debt) or pausing the conflict to allow Moscow to replenish its resources by reducing defense expenditures.
In September 2024, Kyrylo Budanov, Ukraine’s defense intelligence chief, predicted that amid economic strife, Moscow would seek to force an end to the war in 2025. These insights may now prove prophetic.
The underlying reason Putin might finally be prepared to negotiate is strikingly straightforward: He wishes to avert a humiliating bankruptcy.
