The Kremlin is increasingly financing its war through covert money creation, using state-owned banks to purchase federal loan bonds. Although formally presented as ordinary government borrowing, the banking system is effectively being used as a channel for creating new rubles.
This was reported by the Foreign Intelligence Service of Ukraine.
According to the agency, the Russian government can no longer raise the required funds on the market and is therefore forcing state-owned banks to buy federal loan bonds. The Central Bank of Russia provides the liquidity needed for these operations.
The mechanism works as follows: Russia’s Finance Ministry issues government bonds, state banks purchase them, and the Central Bank supplies the banks with additional resources. As a result, government debt effectively becomes an instrument of indirect money creation.
The budget receives additional funds, but at the cost of making the economy more dependent on printing rubles and increasing inflation risks.
New bond issues worth billions of dollars
To raise funds, Russia’s Finance Ministry registered two new issues of floating-rate federal loan bonds.
The first issue is worth $6.4 billion and matures in 2037, while the second is worth $12.8 billion and matures in 2042.
As of July 1, Russian banks held $248.1 billion in government bonds, equivalent to about 9% of the banking sector’s total assets.
Since the beginning of the year, their government securities portfolio has grown by another $6.5 billion.
Budget deficit reaches nearly $77 billion
Ukraine’s Foreign Intelligence Service attributed the move to the rapid growth of Russia’s budget deficit.
In the first half of 2026, the deficit reached nearly $77 billion, with military spending remaining the main factor.
Additional war-related expenditure may exceed the approved plan by another $51.3–64.1 billion. The Kremlin intends to cover part of this amount through new borrowing.
The Central Bank of Russia forecasts that the annual budget deficit could rise to $105.1 billion.
Investors unwilling to finance Russia’s budget
The market is no longer prepared to finance the Russian government on its preferred terms. Because of high interest rates and weak demand, the Finance Ministry cannot raise the required sums at an acceptable cost.
In June and July, the ministry cancelled at least three government bond auctions after investors demanded higher yields.
The Ukrainian intelligence service stressed that the forced use of state banks’ resources does not solve the budget deficit but merely conceals it.
This model concentrates government debt within the banking system, increases the budget’s dependence on the Central Bank and intensifies inflationary pressure. In effect, the Kremlin is increasingly financing its war through money creation rather than market-based borrowing.
