RUSSIA'S SHAKY WAR ECONOMY

So the decline in deposits that we've been seeing this summer is part of a broader decline in confidence in the banking crisis that we're seeing not only among regular depositors, but it looks like by the banks themselves.

And I think it's important to step back for a moment and look at the Russian banking system within a broader context.

So Russia is now well into its fourth year of the largest war that we've had in Europe since the Second World War.

It's a very expensive war.

And in modern warfare, when you have a long, protracted war like this, states have to find a way to finance that.

And invariably, because war is an extraordinary cost...

They resort to debt because what debt does effectively is it helps you spread out the cost to taxpayers over time.

It's generally seen as a better option than simply going right to the taxpayers and saying, I need you to pay for everything now today with higher taxes.

The problem with debt, though, is that you need a well-functioning financial system and a robust financial system to make that work.

And financial systems are not Russia's strong suit historically.

They have worked very hard over the last 20 years to clean up the banking system, and they have done a fairly good job of creating a set of banks that are being fairly well regulated, at least up until the war.

And that's been able to mobilize a lot of people's savings so that that money is available not only for investment in the economy, but also to help the government finance the war.

But what has happened over the last four plus years is that the government has put too much strain on the banking system itself.

to fund the war.

And because of sanctions, it's very isolated and it can only rely on domestic resources as opposed to international capital flows to fund the war.

I'll give you an example.

Take a country like Germany.

Germany has around over 70% of its sovereign debt funded by non-Germans.

In other words, it's a very global flow of capital that comes into Germany to buy their debt.

It used to be before 2022, Russia had access to very much the same marketplace that Germany did for funding its debt.

But since 2022, because of sanctions, Russia's been cut off and almost nobody from abroad wants to buy Russia's bonds.

So Russia has to rely almost entirely on its own resources.

And that largely means the banks.

So the banks are already under a lot of strain to begin with to fund this very expensive war.

But then policymakers did two other things that have created even more stress.