Ukrainian drone strikes and war costs squeeze Russian economy

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Russia’s economy is creaking ever more loudly as the cost of financing a fifth year of war continues to mount.

The latest sign of strain is a standoff between the Ministry of Finance, which has to raise the money to pay for the war, and the country’s largest banks, which are demanding ever-higher rates to finance it.

The Ministry of Finance said on Monday it would suspend bond sales after a series of auctions failed to attract buyers at the yields local banks were willing to offer. Government bond yields range between 13 and 17 percent currently, but may fall a little next week if the Central Bank of the Russian Federation cuts its key rate when it meets on Friday.

The central bank has had to keep interest rates painfully high to keep a lid on inflation, at a time when the budget deficit is widening sharply. Its key rate currently stands at 14.25 percent.

Businesses typically have to pay well above that rate for credit, and things aren’t made easier by the Kremlin competing for the same, limited pool of savings.

Moscow had originally budgeted to cut military spending this year, Janis Kluge, an analyst with the German Institute for International and Security Affairs, said. Instead, it has ballooned and accounted for nearly half of government spending in the second quarter, he estimates.

Kluge said the bond market standoff doesn’t herald any imminent collapse, but is consistent with other signs of strain in Russia’s financial markets. The benchmark stock index , dominated for years by the oil and gas industry, has fallen 30 percent in the last two months as Ukraine has shown its ability to hit important economic infrastructure as far afield as Omsk in Siberia.

Ukraine has broadened its drone offensive in spectacular fashion during that time. In addition to the refinery attacks that have caused long lines for fuel up and down the country, its armed forces claim to have struck 183 ships in the Black Sea and the Sea of Azov, severely disrupting Russia’s attempts to resupply a beleaguered Crimea with fuel, as well as hampering its exports of grain to world markets.

Wild fires

But even that has been overshadowed by attacks in recent days on the fulfillment centers of Wildberries , Russia’s biggest e-commerce company and an essential part of the supply chain for thousands of small businesses.

The attacks destroyed hundreds of millions of dollars’ worth of goods temporarily held in two warehouses, one outside Moscow and another near Tambov, unleashing a flood of emotional posts on social media from entrepreneurs whose businesses depended on them. POLITICO was unable to independently verify the videos.

“The Wildberries warehouse at Elektrostal has burned down, and we’ve suffered enormous losses,” said one. A single mother currently temporarily saddled with both rent and mortgage obligations as she waits for builders to hand over the apartment she has paid for, she added that she would now struggle to meet accommodation costs of over $3,000 a month.

For Ukrainian drone forces commander Robert Brovdi, the value of goods destroyed wasn’t the key issue. “It’s about shattering, in a single moment, the illusion of a comfortable, peaceful life for the obedient biomass of the aggressor state,” Brovdi said via X . “A delicious punch right into the most sensitive comfort zone of the average bearer of the ‘traditional values’ and Putin lover.”

While Wildberries is overwhelmingly a civilian operation, its online marketplace has listed various dual-use items such as body armor, drones and night vision equipment. As such, Ukraine’s government deemed it a legitimate target — all the more so since Russia has been targeting similar logistic centers in Ukraine for months.