According to data from the central bank this week, GDP contracted 0.5% year over year in the first quarter, far below projections for 1.6% growth, due in part to an increase in the value-added tax the Kremlin imposed to pay for its war on Ukraine.

That’s despite a series of rate cuts from the central bank, which has kept borrowing costs relatively high to fight war-related inflation.

With economic activity slowing and rates still high, more Russian companies have missed debt payments. There were 11 technical defaults in 2024, 24 in 2025, and already 11 in just the first three months of 2026, according to Izvestia.

Sources told the Russian newspaper that nearly 25% of the bond market is now at risk of default as businesses that borrowed at low rates must refinance at much higher ones.

The volume of debt that needs to be rolled over this year is about double from last year, adding pressure on cash flows and raising competition for liquidity, according to the report, which cited a source that called the default problem a systemic trend.

At the same time, the U.S.-Israeli war on Iran has increased logistics costs for Russian companies and stoked more inflation, reducing the central bank’s scope to lower rates further.

Warnings have been building for months. Last June, Russian banks raised red flags on a potential debt crisis as high interest rates weighed on borrowers’ ability to pay off loans. Also that month, the head of the Russian Union of Industrialists and Entrepreneurs warned many companies were in “a pre-default situation.”

The Center for Macroeconomic Analysis and Short-Term Forecasting, a state-backed Russian think tank, said in December the country could face a banking crisis by October if loan troubles worsen and depositors pull out their funds.

Earlier this year, Russian officials told Putin that a financial crisis could hit by the summer amid spiraling inflation. In fact, Russian statistics show that nonpayments of commercial bills hit a record high of $109 billion in January.

It’s the economy, stupid

But President Vladimir Putin has largely been missing in action on the economic front. While he scolded ministers on TV last month about shrinking GDP and appeared at the annual Victory Day parade on Saturday, he has been spending less time in public view.

Instead, Putin spends more time in underground bunkers micromanaging his war, paranoid about a coup or an assassination attempt by Ukrainian drones, sources told the Financial Times.

The Kremlin’s internet blackouts, which have raised howls among ordinary Russians, are due in part to Putin’s security concerns and anti-drone measures.

“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,” one person who knows him told the FT, adding that the only way to get more access is by “doing more war.”

With Western military aid and innovations from Ukraine’s now-thriving domestic defense industry, Kyiv has weakened Russia’s economy and military. Long-range drone strikes deep into Russian territory have damaged key oil-export hubs and “shadow fleet” tankers transporting sanctioned crude. 

At the same time, new drone technology is also giving Ukraine a battlefield advantage, helping to roll back Russian troops, who have also been cut off from Starlink internet connections that were vital to their own drones.

The quagmire in Ukraine and persistent inflation have weighed on sentiment. Even a survey from Russia’s state-owned pollster showed Putin’s approval rate has fallen to 65.6% from 77.8% at the start of the year and prewar levels 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.”