Putin Takes Control of Russia’s Central Bank as Wartime Economy Strains

Since Elvira Nabiullina became governor in 2013, the Bank of Russia has built its credibility around inflation targeting. High interest rates often drew criticism from business groups, but the central bank retained the authority to prioritise price stability over political convenience. Putin generally shielded that approach, resisting calls to pressure monetary policymakers.

July marked a break with that precedent.

Pressure no longer came only from corporate lobbyists. Finance Minister Anton Siluanov and Russian Union of Industrialists and Entrepreneurs president Alexander Shokhin openly argued for lower rates, warning of corporate failures in the autumn. Putin then publicly reinforced those demands.

Inside the central bank, policymakers reportedly reached the decision only after intense internal disagreement, with advocates of easier monetary policy prevailing by a narrow margin. The institution departed from another long-established practice by publishing its decision without forward guidance for the first time during Nabiullina's tenure.

That omission may prove almost as important as the rate cut itself.

Forward guidance provides markets with a framework for anticipating future policy. Removing it introduces uncertainty precisely when inflation is exceeding target, and economic forecasts are deteriorating. Instead of relying primarily on current macroeconomic indicators, policymakers justified the decision partly through expectations that damage to oil refineries caused by Ukrainian drone strikes would prove temporary and through increasingly weak business sentiment surveys, despite persistent consumer spending and elevated inflation expectations.

The result is a central bank that appears increasingly reactive rather than predictably rule-based.

The Return of Cash

The monetary shift coincides with another development that is placing growing strain on Russia's financial system: an accelerating migration from bank deposits into physical cash.

According to Bank of Russia data, cash in circulation is expanding at its fastest pace since autumn 2023. Sberbank estimates total cash withdrawals from banks could reach 3.8 trillion roubles during 2026, with July recording the largest monthly outflow in six years. Demand is expected to remain elevated through autumn, reaching between 650 and 700 billion roubles each month.

Cash withdrawals on this scale are more than a behavioural curiosity. They remove liquidity from commercial banks at precisely the moment the state increasingly depends on those institutions to finance expanding wartime expenditure.

Russia's commercial banking sector has already experienced record shortages of liquid funds since late 2025. Those shortages have reduced banks' ability both to extend commercial credit, including mortgages, and to purchase government bonds needed to finance widening budget deficits.

The financial architecture that helped Russia absorb repeated external shocks since 2022 depends on functioning domestic banks. Every rouble leaving deposits weakens that mechanism.

Why Businesses Are Leaving the Formal Economy

Several forces are pushing businesses and households towards cash simultaneously.

The increase in value-added tax from 20% to 22% in 2026 has squeezed companies already operating outside the military-industrial sector. As margins narrow, more firms are shifting wages into off-the-books cash payments and conducting transactions outside formal banking channels to reduce tax liabilities.

The expansion of the shadow economy, already estimated at roughly 10–12% of GDP, therefore reflects more than tax avoidance. It represents an adjustment to mounting economic pressure.

Infrastructure disruptions linked directly to the war have accelerated the same trend.

Since spring 2025, widespread mobile internet shutdowns introduced in response to Ukrainian drone threats have repeatedly interrupted digital payment systems. For consumers and businesses alike, cash has become not merely a tax tool but an operational necessity whenever electronic payments become unreliable.

Capital controls have reinforced the preference for holding physical currency. Since April 2026, legal entities and sole proprietors have been prohibited from exporting cash roubles to Eurasian Economic Union countries except through international airports, while individuals face a limit equivalent to $100,000.

Public anxieties have added another layer. Concerns over possible mobilisation, accelerating inflation and recurring speculation about future restrictions on deposits or compulsory investment in state or military bonds have encouraged precautionary withdrawals from the banking system.

Each factor alone might have been manageable.

Combined, they create persistent structural demand for cash.

The Fiscal Paradox

The Kremlin's response exposes an increasingly difficult trade-off.

Lower interest rates ease financing costs for indebted state enterprises and companies connected to the defence sector. They also reduce pressure on civilian businesses struggling under high borrowing costs and weakening demand.

Yet those same policies undermine the very institutions needed to finance government spending.

Commercial banks purchase government debt using deposits and available liquidity. When deposits migrate into cash while interest rates are pushed lower despite inflation, banks become less capable of absorbing new bond issuance. The Ministry of Finance therefore faces greater difficulty financing budget deficits just as military expenditure continues to expand.

In effect, monetary easing designed to support the wartime economy risks weakening one of its principal funding channels.

The dilemma is becoming increasingly circular. High rates threaten bankruptcies and stagnation. Lower rates weaken monetary credibility, encourage inflation to remain above target and coincide with a banking system already losing liquidity.

Neither outcome offers an obvious route back to stability.

From Market Management to Command Economics

The deeper story is not a single interest-rate decision but a broader institutional transition.

For years, Russia's economic resilience rested partly on a technocratic framework capable of insulating monetary policy from day-to-day political demands. That framework helped maintain investor confidence even during periods of sanctions and geopolitical upheaval.

Its boundaries now appear less secure.

Political priorities are increasingly overriding monetary discipline, while civilian businesses respond by moving activity into cash and informal networks rather than deeper participation in the regulated financial system. War-related disruptions, fiscal tightening and declining confidence in formal banking reinforce one another instead of offsetting each other.

The immediate beneficiaries are heavily indebted state enterprises, defence manufacturers and firms able to operate within the expanding cash economy. The costs fall elsewhere: on commercial banks facing worsening liquidity shortages, on households whose savings lose purchasing power as inflation remains above target, and on a central bank whose credibility increasingly depends not on its own judgments but on political tolerance.