An energy crisis is already ravaging Russia’s economy, and a banking crisis may soon erupt as a mountain of debt weighs on consumers and businesses.

According to a European intelligence report seen by Reuters, the Kremlin has relied on banks to pump up the economy with massive liquidity, as its own budget comes under growing strain from Vladimir Putin’s war on Ukraine.

State programs even encouraged millions of Russians to take out three or more loans simultaneously. But lenders are now vulnerable amid the soaring indebtedness and deteriorating loans, while consumers buckle under high inflation.

The June report, which was prepared as the European Union eyes another round of Russia sanctions, estimated that 10% of corporate ⁠loans may not be repaid, up sharply from 2024, while 15% of retail loans at some top banks may be non-performing.

In addition, the number of Russians who declared bankruptcy last year jumped by almost a third to more than 500,000. But state-backed credit programs, loan restructurings and government aid ‌are obscuring how bad conditions are.

“The situation creates the illusion of a dynamic economy ⁠that, in reality, conceals an explosive situation which an economic shock, such as an ambitious package of sanctions against banks … could trigger,” the report said, according to Reuters.

The worsening state of Russia’s financial sector mirrors its performance on the battlefield. New Ukrainian tactics and drones have halted Russia’s advance, pushed casualties above the replacement rate, and decimated the country’s oil infrastructure.

Damage to Russian refineries has created dire fuel shortages across the countries. Meanwhile, lower oil prices and Ukrainian attacks on exports have slashed the Kremlin’s energy revenue.

As a result, Russia’s federal budget deficit ballooned to 6 trillion rubles ($83 billion) by the end of May, more than double 2025’s level, blowing past the 3.8 trillion rubles that was projected for all of this year.

The government has been drawing down reserves in its sovereign wealth fund to close the gap, but that well is almost dry.

With few other sources to tap to pay for the Ukraine war, the Kremlin could set its sights on the general population’s nest eggs.

The finance ministry is preparing legislation that could let it gain access to $40 billion in pension savings held in privately managed funds.

Similarly, the leader of Russia’s Communist Party told parliament recently that 130 trillion rubles held in bank accounts should be “mobilized” to address the country’s economic and budget woes.

Such talk has sparked panic in Russia’s business community, which is already grappling with onerous interest rates and expansive Western sanctions.

“The government could try to take money by any means,” a Moscow executive told the Washington Post. “Everyone is thinking about how to get their money out and leave.”

Warnings about Russia’s finances 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 $109 billion in January.

And in May, sources told the Russian newspaper Izvestia 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.