Russian bond market faces 25% default risk as economy shrinks and Putin focuses on war over economic management

(SeaPRwire) –   The Russian economy is experiencing a downturn, with businesses facing increasing difficulties in meeting their debt obligations, posing a potential systemic risk to the nation’s bond market.

Central bank data released this week indicates that GDP contracted by 0.5% year-over-year in the first quarter, falling short of projections for 1.6% growth. This contraction is partly attributed to an increase in the value-added tax implemented by the Kremlin to fund its military operations in Ukraine.

This economic slowdown has occurred despite a series of interest rate cuts by the central bank, which has maintained relatively high borrowing costs to combat war-related inflation.

With economic activity decelerating and interest rates remaining elevated, a growing number of Russian companies are defaulting on their debt payments. According to Izvestia, there were 11 technical defaults in 2024, 24 in 2025, and already 11 in the first three months of 2026.

Sources cited by the Russian newspaper suggest that approximately 25% of the bond market is now at risk of default, as companies that previously borrowed at lower rates are now facing the necessity of refinancing at significantly higher costs.

The volume of debt requiring rollover this year is reportedly double that of the previous year, intensifying pressure on cash flows and increasing competition for liquidity. A source described this default situation as a systemic trend.

Concurrently, the U.S.-Israeli conflict with Iran has escalated logistics expenses for Russian businesses and fueled further inflation, thereby limiting the central bank’s capacity to reduce interest rates.

Concerns about this situation have been mounting for months. In June of last year, Russian banks signaled a potential debt crisis due to high interest rates impacting borrowers’ repayment abilities. In the same month, the head of the Russian Union of Industrialists and Entrepreneurs warned that many companies were in a “pre-default situation.”

The Center for Macroeconomic Analysis and Short-Term Forecasting, a state-affiliated Russian think tank, projected in December that the country could confront a banking crisis by October if loan issues intensify and depositors withdraw their funds.

Earlier this year, Russian officials informed President Putin that a financial crisis could emerge by the summer due to spiraling inflation. Russian statistics reveal that nonpayments on commercial bills reached a record high of $109 billion in January.

It’s the economy, stupid

However, President Vladimir Putin has largely been absent from addressing economic challenges. While he publicly criticized ministers last month regarding the shrinking GDP and attended the annual Victory Day parade on Saturday, his public appearances have become less frequent.

Sources have informed the Financial Times that Putin is dedicating more time to managing the war from underground bunkers, driven by concerns about a coup or assassination attempts via Ukrainian drones.

The Kremlin’s internet blackouts, which have drawn significant criticism from ordinary Russians, are partly a consequence of Putin’s security measures and anti-drone efforts.

“Putin spends 70% of his time running the war and the other 30% meeting [someone like] the president of Indonesia or dealing with the economy,” stated an individual familiar with him to the FT, adding that increased access to him is contingent on “doing more war.”

With Western military assistance and advancements from Ukraine’s now-robust domestic defense industry, Kyiv has weakened both Russia’s economy and military. Long-range drone strikes deep within Russian territory have impacted crucial oil export terminals and “shadow fleet” tankers transporting sanctioned crude oil.

Simultaneously, new drone technology is providing Ukraine with a battlefield advantage, contributing to the rollback of Russian forces, who have also been deprived of Starlink internet connections that were essential for their own drone operations.

The protracted conflict in Ukraine and persistent inflation have negatively affected public sentiment. A survey conducted by Russia’s state-owned polling agency indicates that Putin’s approval rating has declined to 65.6% from 77.8% at the beginning of the year, and significantly lower than pre-war levels, which were well above 80%.

“The overall mood is that’s enough already; you’ve been fighting for long enough,” a Russian official told the Washington Post recently on condition of anonymity. “It seems to everyone that it’s been going on for longer than World War II, the Great Patriotic War—and at the same time we can’t even take one region.”