Russia faces a slow motion bank run as war funding dries up

Liquidity crunch deepens as deposits vanish

The Russian banking sector is experiencing a rapid loss of private deposits. Since the start of the conflict, ordinary citizens have moved money out of banks at a rate that analysts describe as a slow motion bank run. The outflow is not driven by a single event but by a combination of sanctions, fear of asset freezes and the perception that the state may need to tap bank reserves to fund military operations.

Scale of the outflow

Official data from the Central Bank of Russia shows that total retail deposits fell by more than 2 trillion roubles between March 2022 and February 2024. In the most recent quarter, banks reported a net withdrawal of 350 billion roubles, a figure that represents roughly 4 percent of the sector’s total deposit base.

• Large state‑owned banks saw the biggest declines, losing up to 6 percent of their deposits.
• Regional banks, which rely heavily on local savings, reported outflows of 3 to 5 percent.
• Foreign‑currency accounts were hit hardest, with a 9 percent drop in dollar‑denominated balances.

These numbers translate into a liquidity shortfall that forces banks to sell securities, borrow from the central bank at higher rates, or curtail new lending. The resulting credit squeeze is already visible in reduced mortgage approvals and tighter corporate loan conditions.

Impact on war financing

The Kremlin’s war budget depends heavily on cash flow from the domestic economy. With banks losing cash, the state faces a dilemma: it can either raise taxes, issue more bonds, or draw directly on bank reserves. Each option carries political and economic risks.

State budget adjustments

In the latest fiscal plan, the Ministry of Finance announced a 12 percent increase in defense spending while simultaneously cutting non‑defense allocations. To cover the gap, the ministry plans to issue a new series of high‑yield bonds aimed at institutional investors. However, the appetite for such instruments is waning as foreign investors continue to withdraw from Russian markets.

1. Bond yields have risen to over 15 percent, reflecting heightened risk perception.
2. Domestic pension funds, a major buyer of government debt, are being asked to increase their holdings, raising concerns about future pension payouts.
3. Some analysts predict that the government may resort to a one‑off levy on bank profits, a measure that could further erode confidence in the financial system.

Potential policy responses

Faced with a tightening liquidity pool, Russian authorities have a limited set of tools. The central bank can lower the key interest rate, but doing so would also reduce the profitability of banks and could accelerate capital flight. Alternatively, the state could impose capital controls, limiting the amount of foreign currency that can be transferred abroad.

Possible forced conscription

One of the more unsettling rumors circulating in Moscow is that the government may broaden the pool of individuals eligible for military service if the war budget cannot be met through conventional means. Historically, Russia has used conscription as a way to supplement its armed forces during periods of intense conflict. A policy shift that expands the draft could be framed as a patriotic duty, but it would also signal a severe strain on state finances.

Legal scholars note that any such move would require an amendment to the current military service law, a process that could be expedited through a presidential decree. The public reaction to a broader draft is uncertain; while some segments of society may view it as necessary, others could see it as a sign that the war effort is faltering.

International perspective

Western governments have closely monitored the financial situation in Russia. The United States and European Union have imposed a series of sanctions that target both individuals and institutions, further limiting the ability of Russian banks to access foreign capital markets. According to a recent IMF analysis, the sanctions have reduced Russia’s external financing options by an estimated 30 percent.

Sanctions and financial isolation

Sanctions have also forced many multinational banks to exit the Russian market, leaving a smaller pool of lenders for domestic businesses. The Reuters report on Russian deposit outflows highlights that the loss of foreign banking partners has contributed to a rise in the cost of cross‑border transactions, making it more expensive for Russian firms to import essential goods.

Data from the World Bank shows that the country's foreign exchange reserves have declined by roughly 15 percent since the start of the conflict, limiting the central bank’s ability to defend the ruble. Meanwhile, the Ministry of Finance has warned that continued pressure on the banking sector could force the state to tap into emergency funds, a move that would further strain the national budget.

In summary, the combination of deposit withdrawals, sanctions and a growing war budget is creating a perfect storm for Russia’s financial system. While the government has several levers at its disposal, each carries the risk of deepening public discontent or accelerating economic isolation. The next few months will likely reveal whether the Kremlin can stabilize its banks without resorting to more drastic measures such as expanded conscription or severe fiscal tightening.