Russia’s federal budget deficit reached RUB4.3 trillion ($47.6bn), or 2% of GDP, in the first 11 months of 2025, according to the latest government data published last week. The shortfall is expected to grow to RUB5.7 trillion ($63.1bn), or 2.6% of GDP, by year-end, the Finance Ministry said.

At the same time, the level of non-performing loans (NPLs) in the banking system has risen from 4% to just under 7% as sky high interest rates continue to put pressure on small borrowers and bleed companies of cash. However, the regulator has successfully moved to reduce the level of borrowing. Banks have already provisioned for almost all of the bad debt on their books, as well as building up bigger capital buffers to deal with any shocks.

Much depends on the performance of the economy in 2026. Russia's economic problems are bad and got worse in 2025. Researchers suggest the true fiscal picture may be more difficult than the headline figures suggest.

“Based on historical data, the real [budget deficit] figure could be closer to 3.5%,” according to Janis Kluge, senior researcher at the German Institute for International and Security Affairs.

Oil and gas revenues, long a pillar of the Russian budget, have fallen sharply. According to the Finance Ministry, hydrocarbons-related income was down 22.4% compared to 2024. The economic slowdown to near no growth has also reduced VAT receipts which account for a bit less than 40% of federal budget reserves. At the same time, federal spending rose by 12.5%, driven in part by continued military expenditures and social payments.

NPLs on the rise

The pressure on the budget is raising broader concerns about the stability of Russia’s financial system. The quality of unsecured consumer loans issued at high interest rates in late 2023 and early 2024 and a boom in mortgage loans ahead of the end of a generous subsidy programme in July, is deteriorating.

In a recent report, the Kremlin-aligned Centre for Macroeconomic Analysis and Short-Term Forecasting (TsMAKP) warned that a growing debt crisis in the banking sector could spark a bank crisis in 2026. The true extent of the problem is masked as bank’s turn to their traditional strategy of simply restructuring problem loans and kicking repayments down the road so they don’t have to book the bad debt as a NPL.

Banks revised about RUB2.4 trillion ($30.96bn) of household loans between 2022 and 2025, equal to 6.2% of the retail portfolio as of October, according to TsMAKP. The CBR confirmed the rise in consumer bad debt, reporting that overdue unsecured consumer loans reached 12.9% over the first ten months of 2025, up 3.9 percentage points, but pointed out that thanks to its strict supervision, more than 90% of these NPLs were already provisioned for and covered by reserves, making a meltdown unlikely

The situation with corporate loans is similar: one-fifth of loans to small and medium-sized businesses have also been restructured by the end of the third quarter of 2025. However, the share of NPLs remains below a comfortable 5% of the corporate portfolio, and, like consumer loans, they are also almost fully backed by reserves and collateral, according to the CBR. Another 7% of loans are considered potentially risky but are under active management, including restructuring.

“As of November, the volume of non-performing loans in banks’ portfolios had reached RUB2.3 trillion ($25.5bn),” the think tank stated. It warned that if the share of bad assets exceeds 10%, the risk of a systemic banking crisis will increase significantly. The figure grew 1.6-times over the first nine months of the year, rising by RUB490bn ($6.32bn) compared with RUB302bn ($3.90bn) for all of 2024.

The growth in NPLs is a worrying sign. In a speech to the Duma in November CBR governor Elvia Nabiullina dismissed the growing fears of a looming banking crisis as unreal, pointing out that NLPs were still at 4% of loan book, but now the rising number is indicative of real pain starting to affect the sector. Nabiullina has ordered banks to recapitalise to prepare to absorb rising NPLs if the economy does not improve in 2026. Banks have built substantial buffers in recent years, with total capital above regulatory requirements estimated at around RUB8 trillion ($103.2bn).

Bank crisis on the cards?

Russia could face a systemic banking crisis by October 2026 if problem assets continue to rise and depositors start withdrawing funds en masse, TsMAKP warns. The risk of a crisis has risen to “medium” according to the centre which would cause restructuring or nationalisation at more than one in ten banks or require support equal to more than 2% of GDP.

Particular concern has emerged in the consumer credit segment, where defaults are climbing amid tightening household finances. The Central Bank of Russia has proposed stricter lending requirements in response, aiming to contain the build-up of risky debt.

For comparison, NPLs in the Ukrainian banking sector are over 50% of loan books, but thanks to a comprehensive clean-up of the sector (ironically modelled on the same clean up that Nabiullina launched on taking over as governor in 2013) nearly all the bad debt has been provisioned for. That has left the Ukrainian banking sector solid and very profitable. Banks have been used to write off bad loans that is slowly bringing the level of NPLs down from over 75% a few years ago when the clean-up began.

The main problem for both the Russian and Ukrainian banking sectors is not the threat of a bank crisis, but that they have too much capital tied up as provisions, which takes it out of circulation and is a drag on growth. This means that if the economy improves and the levels of NPLs start to fall, this extra cash is released and put back into circulation which supercharges profits and leads to a rapid improvement of the health of the sector that runs ahead of the economic recovery, creating a positive feedback loop.

CBR on the case

There is no sign of a bounce back yet. Russian banking sector profit declined in October, with the sector posting a combined net profit of RUB310 bn for the month (return on equity 19%), which is 15% lower month‑on‑month (m/m), according to the CBR data. Nevertheless, the Russian banking sector remains profitable on the back of the high yields the Ministry of Finance (MinFin) is paying on the Russian Finance Ministry’s OFZ treasury bills and cumulative profits continue to track the last few years of profits, well ahead of the general economic performance.

Indeed, the high yields of OFZs – around 11.9%-12.1% in November – is a problem as it is more attractive to simply invest in the super-safe treasury bills and earn decent profits than it is to lend to companies. This depresses investment activity and produces another drag on growth. With rates on corporate commercial loans running at 16.5% to 17.5% in November, borrowing is simply too expensive for companies on top of bank's reluctance to lend to them.

According to TsMAKP, “credit availability continues to decline, especially for small and medium-sized enterprises, while the cost of capital remains prohibitively high.” Interest rates on commercial loans, often exceeding 17%, have constrained investment plans and working capital availability, particularly in energy-intensive and export-dependent industries.

In the meantime, Nabiullina’s efforts to deal with the main problems and reduce inflationary consumer borrowing has been working to some extent: this year the net consumer credits have fallen for the first time. The regulator’s latest report on the banking sector reports found that in the first half of the year, the debt burden of Russians continued to decline. From January to June 2025, the number of borrowers from banks and microfinance organizations decreased by 200,000, reaching 49.7mn. Total household debt also decreased, to RUB37.8 trillion, according to the Bank of Russia.

According to the regulator, the number of citizens with three or more outstanding loans is declining, but this category accounts for almost half of all debt. At the same time, the behaviour of bank borrowers is changing: they are now repaying existing loans more often than taking out new ones. Nevertheless, those who still have debt are finding it increasingly difficult to pay off.

The regulator again sought to reassure markets and depositors with Nabiullina saying again she does “not see an immediate threat of bank runs,” BMB Russia reported, citing the Central Bank’s public communication on the matter.