The Russian central bank is making constant liquidity injections, but this isn’t quite the harbinger of doom some Western analysts would like to think
Western pundits have developed a pastime for predicting the collapse of the Russian economy, particularly since 2022. Alas, prognosticating success has so far eluded them.
But as the old disclaimer states, past performance does not guarantee future results. Being wrong ten times in a row does not ensure they’ll be wrong the 11th. The arguments have to be evaluated on their own merits.
Generating a bit of attention on social media is a thread by analyst Oliver Alexander that paints a dire picture of the Russian economy. It starts with the assertion that “Russia’s economy hasn’t collapsed, but it is suffering immensely. It still runs, but only because the central bank keeps it alive with constant repo liquidity. What was once emergency support is now the daily operating system.”
The author goes on to assert that “repo usage shows the stress clearly. Trillions of rubles are borrowed week after week by the banks with no unwind. Banks aren’t smoothing short-term shocks anymore. They are refinancing theirs and the economy’s survival on a rolling basis.”
Let’s stop and understand the claim being made. Repo, short for repurchase agreement, is part of the plumbing of any modern financial system and is usually a tool to manage liquidity. It entails selling securities (such as government bonds) with a promise to buy them back later at a slightly higher price.
There is nothing unusual about banks using repo, which they do for various reasons: to smooth short-term liquidity mismatches, deal with temporary payment flows, or even to arbitrage small rate differentials. However, what Russian banks are doing is using repo not to smooth funding but as a core source of liquidity. The banks just don’t have much free cash lying around.
Facilitating this is a tool called monthly repo auctions, which were reintroduced after a hiatus in November 2024 and moved to a weekly basis the following April, clearly a sign that liquidity pressures were growing. These auctions are not about smoothing funding gaps but are a policy of direct and structural liquidity management (rather than ad-hoc crisis lending to banks). Use of this facility has been very high of late. For example, the Russian central bank (CBR) allotted a record 3.6 trillion rubles (about $46 billion) in repo on December 23.
What this means in practice is that there is a closed loop. The Finance Ministry issues government bonds (called OFZs), which are bought (primarily) by large Russian banks, which are essentially compelled to buy these bonds whether they want to or not. But the banks do not hold all of these OFZs as investments but rather ship many of them off to the CBR in exchange for ruble liquidity.
The rubles they get in return are what keeps the lights on at the banks and provides liquidity to the economy. Normally, repo deals mature and are unwound, thus draining liquidity out of the system. But in Russia, this repo is constantly being rolled over and volumes are rising.
Separately, and not to be confused with liquidity management, OFZ-to-repo schemes have also been used on a couple of occasions to ensure absorption of fiscal deficits (in 2022 and 2024). Because Russia has no access to foreign borrowing and selling government bonds at scale into the market is not viable given current interest rates, this is a key channel where the gap can be covered.
This may all sound ominous – and that is clearly the impression Alexander is trying to convey – as if Russia is resorting to desperate and unprecedented financial engineering. But is it really so exotic? It’s actually just a harsher, more concentrated version of the same playbook that has been widely used across the G7 – but without the reckless speculation that has made these regimes so hard to exit elsewhere. Russia’s policy mix of high rates but regular liquidity provision through repo is unusual, but in its essentials it is not fundamentally different from the frameworks we have seen in developed economies.
There is a technical difference between repo-based liquidity provision and the G7-style central-bank bond purchases (known by the fancy name of quantitative easing, or QE). Repo is formally a loan against collateral and is typically a liquidity-management tool. QE involves the central bank buying government bonds outright, removing them from the market, and injecting reserves directly into the banking system.
QE is framed as stimulus, while Russia’s repo is framed as plumbing support under tight policy. QE in the G7 was designed to lower long-term yields and encourage risk-taking, whereas Russia is explicitly not trying to lower rates through its repo operations. But in Russia’s case, the repo scheme is now semi-permanent and structural, and is often being rolled over rather than unwound, so the line is a bit blurred. Russia is not doing QE, but at scale the economic effect is functionally similar.
In both cases, the state comes to rely on the domestic banking system, banks become structurally dependent on central-bank liquidity, and public debt is absorbed within a more or less closed financial circuit under the long shadow of the central bank. The plumbing shifts from decentralized private intermediation toward central-bank balance sheets. Both regimes are inflationary.
This arrangement can’t be called healthy and has its own risks, but it is not necessarily unstable – as long as inflation remains under control. Furthermore, for all of the imbalances being created, Russia may actually have an easier time later unwinding it because it hasn’t resorted to inflating asset prices as a transmission mechanism (a classic QE pathology). It is thus avoiding the large speculative asset bubbles that later have to be protected or managed during normalization.
This is one reason why G7-style QE has proven so hard to exit. The US has failed at quantitative tightening and is now quietly restarting QE (though not calling it that). By maintaining high interest rates and discouraging speculative risk-taking, Russia trades the asset-price excesses typical of QE regimes for a system that is more insulated from external shocks.
Skeptics will argue that Russia’s isolation concentrates the risk in particularly dangerous ways. Alexander says as much: “Russia is funding its budget almost entirely from inside its own financial system, with no external shock absorber left.” This is true to an extent: in the unlikely event the CBR mismanages policy or if some unforeseen shock occurs, things could go south real quick. But the exact opposite is also true: Russia’s enclosed system takes a whole host of risks off the table.
And this leads us to an aspect of the situation that often goes overlooked. Because Russia has almost no foreign debt, the Russian state and banking system owe almost everything in rubles, to themselves. All liabilities can be serviced in a currency controlled by the Russian state. There is no forced interaction with global capital markets and no immediate rollover risk tied to exchange rates (think debt crises in Türkiye or Argentina). The main “textbook” crisis channels are neutralized: Russia owes almost everything in rubles, and can compel banks to absorb debt rather than rely on finicky foreign investors not to fire-sale the stuff; it can roll over repo indefinitely; and it controls capital flows. Russia’s commodity exports, even sold at discounts, also serve as a backstop. Those hoping for a big 1998-style meltdown are bound to be sorely disappointed.
In general, financial systems heavy on central-bank involvement can be stable for far longer than critics expect. Just look at Japan, the inventor of QE, which has been keeping the jig going for decades. The Bank of Japan has long been the dominant buyer of government bonds, while in the 1990s, following the asset bubble collapse, many banks were structurally reliant on the BoJ to maintain liquidity. A similar circular loop emerged, complete with chronic deficits and enormous debt. This regime has done little to revive growth, but it has proven remarkably stable and durable.
Europe followed a similar path after the sovereign debt crisis. For years, the European Central Bank was the largest buyer of euro-area government bonds, at times holding roughly a third of outstanding sovereign debt. Interbank markets fragmented, particularly in the southern periphery, and banks relied heavily on ECB liquidity. The system functioned – awkwardly and imperfectly – but it did not collapse.
Russia’s situation is obviously not an exact parallel. Capital controls stabilize liquidity but mute price signals, while sanctions shut off access to foreign capital. Wartime spending compresses time horizons. As a result, the central bank’s role is more explicit and more direct. Yet the underlying logic is not alien. The financial system pivots around the central bank and liquidity is continuously backstopped.
There’s another important point to be made. Russia is basically running a war economy. Western analysts love to needle the Russian government about calling its actions a “special military operation” and not a “war” but then proceed to analyze the Russian economy by peacetime standards. To be fair, Russia has tried to have it both ways and has actually been quite successful in that regard. It is running a war economy that maintains much market flexibility.
But hybrid or not, it’s still fundamentally on a war footing. And war is inflationary. War explodes government spending and changes time priorities – resources are needed now. Yes, war-relevant sectors of the economy become politically protected and overfunded, while civilian sectors get the short end of the stick (temporarily). There is nothing shocking about this, nor are the excess demand and labor shortages that Russia is facing somehow abnormal.
Debt issuance becomes less about price and more about absorption capacity. Banks stop looking to maximize profits and become allocation channels instead. When Alexander pointed out that the Finance Ministry “quietly changed OFZ targets” to emphasize not “how many bonds are placed,” but “how much cash is raised,” he was merely stating the obvious for any country at war.
If anything, Russia has engaged in less financial repression than might have been expected and certainly far less than has been seen in the past. In 1942, the US Treasury needed to finance deficits exceeding 25% of GDP. The Federal Reserve agreed to cap Treasury yields and buy unlimited amounts of government debt. This was pure money printing. Like Russia, the US imposed capital controls and forced banks to hold government debt. But it also set ceilings on deposit rates, preventing banks from competing for funds and effectively forcing savers into government bonds – all to keep borrowing costs down.
Those bondholders then watched as the real value of their holdings went up in smoke due to inflation (remember: war means inflation) and they got little more than a pat on the back and a “thank you for taking one on the chin for your country.”
None of this means that the Russian economy isn’t in a state of stress. The OFZ-repo loop isn’t the precipice it is being portrayed as, but it isn’t free and, ultimately, isn’t sustainable. The main outlet is inflation, which is what absorbs the shocks and what remains the biggest risk. I live in Russia and I can confirm that inflation is real. But it’s not out of control and even subsided later in 2025. Moreover, rising wages are offsetting some of the pain.
The high interest rates necessary to keep inflation subdued are clearly hurting businesses. This is no secret and it is widely admitted that rates need to come down for investment to recover. Germany, meanwhile, which isn’t fighting a war, is facing 24,000 company bankruptcies in 2025.
The Russian economy has been remarkably resilient, but it is clearly operating under strain and with heavy government intervention. However, the conditions that typically trigger a sudden, acute crisis are nowhere to be found, and people who think otherwise misunderstand what actually causes financial crises.
Those still hoping to impose a strategic defeat on Russia look with expectant eyes upon the tantalizing signs of strain in the Russian economy. But this mirage always ends up being just a bit too far over the horizon.
