Russia's Regional Budgets Strain as War Economy Shows Cracks
Deep within the machinery of Vladimir Putin's war effort, significant economic strain is becoming increasingly apparent. Across Russia's vast territory, encompassing over 80 regions, budget shortfalls are widening dramatically, forcing local governments to depend more heavily on Kremlin funding to maintain operations.
Industrial Heartland Faces Mounting Pressure
Even regions that have benefited from substantial increases in military spending are now experiencing economic distress. In the Nizhny Novgorod region, an important industrial center since Soviet times with major defense factories and automotive plants, the economic situation is causing "serious concern" according to internal documents reviewed by Bloomberg News.
The local industrialists' association recently outlined a litany of troubles facing companies in a letter to top regional officials. The association highlighted sharp declines in investment, profits, orders, and production over the past year in this region of approximately 3 million people located about 500 kilometers east of Moscow.
Payment Delays Signal Broader Financial Stress
The industrial association has urged local authorities to raise their concerns with Putin's government in Moscow, appealing for renewed investments, the return of preferential loan rates, and faster settlement of invoices. The letter specifically pointed to giant state enterprises including the United Shipbuilding Corporation, Roscosmos, Rosatom, and Rostec as primary contributors to overdue payments that now exceed 100 billion rubles (approximately US$1.3 billion).
These payment delays indicate that financial stresses are spreading throughout Russia's economy, forcing contractors to deplete their reserves to meet running costs or turn to expensive borrowing that further erodes profitability. This situation persists despite state spending on defense jumping about 30 percent last year, with projections showing largely flat defense spending in 2026.
Borrowing Costs Skyrocket as Subsidies Disappear
Borrowing costs have ballooned dramatically as subsidized loans have dried up, compelling companies to pay commercial interest rates exceeding 20 percent. An assessment accompanying the industrialists' letter warns that approximately 20,000 people may lose their jobs in the Nizhny Novgorod region during the second half of the year unless the economic situation improves substantially.
Several major companies, including firms considered systemically important to Russia's economy, have already reduced working hours to cut costs. This deterioration represents a sharp contrast to last year when Nizhny Novgorod had practically no unemployment according to Federal Statistics Service data, and wages grew strongly according to regional officials.
Broader Economic Challenges Across Russia
The difficulties in Nizhny Novgorod reflect broader challenges across the world's largest country by area as Russia's economy cooled sharply last year following the imposition of record-high interest rates. The Bank of Russia increased the key interest rate to 21 percent in October 2024 and maintained it there until June to curb inflation and economic overheating after years of massive state spending on military needs and business support following sanctions.
While predictions of Russia's complete economic collapse "are not without grounds," Putin's war in Ukraine continues to be driven by profound mistrust of Western nations and shows no signs of abating until that fundamental issue is resolved. The economic pain now emerging in Russia's industrial regions suggests that even areas benefiting from military spending are not immune to the broader consequences of prolonged conflict and international isolation.
The Nizhny Novgorod regional government and the industrialists' association did not respond to requests for comment regarding these economic challenges. As regional budgets face increasing pressure and businesses struggle with mounting financial difficulties, Russia's economic resilience continues to be tested by the ongoing demands of its military campaign in Ukraine.
