Why Putin is finally negotiating

Agathe Demarais is a senior policy fellow at the European Council on Foreign Relations (ECFR).

As U.S. President Donald Trump and Russian President Vladimir Putin consider meeting in the coming weeks, it may be useful to ask why it is that Moscow now appears inclined to end the war in Ukraine.

Three years into the conflict, Putin has shown the world he doesn’t care about bloodshed. And if his goal was to install a Russia-friendly government in Kyiv, he remains far from achieving it. However, there is a third, less explored hypothesis that explains why the Russian president might finally be coming to the negotiating table:

Moscow could soon struggle to finance the war.

The usual narrative about Moscow’s fiscal situation tends to note that Russia records a small budget deficit and that Russian public debt is low (at about 20 percent of GDP), which makes for sound fiscal metrics. This analysis holds true for most economies, but in Russia’s case, there’s an important catch: With Western sanctions constraining Moscow’s ability to tap into international debt markets, the Kremlin has limited room for maneuver to finance its small — but nonetheless real — fiscal deficit.

With external debt out of the equation, Moscow’s initial plan B was to get Russian banks to buy sovereign debt. This strategy worked reasonably well in 2022 and 2023, but cracks started to emerge last year. Faced with competing pressures from the Kremlin to extend hundreds of billions in cheap loans to defense firms while also buying huge amounts of sovereign bonds, domestic banks have become so cash-strapped that they’re now reluctant to pile on more debt. Late last year, the Kremlin had to cancel several auctions for domestic debt issuance because there were no buyers.

So, with domestic borrowing increasingly out of the equation, Moscow has turned to plan C: tapping into the reserves of the Russian National Welfare Fund (NWF).

On paper, this looks like a reasonable strategy. Totaling nearly 10 trillion rubles (about $110 billion) in early 2022, the liquid portion of these reserves initially looked sufficient to cover the war-fueled budget deficit for several years. However, even the largest of savings eventually dries up, and three years into the conflict, the NWF’s liquid reserves have already shrunk by around 60 percent. 

For the Kremlin, it thus looks like this year is set to be difficult on the fiscal front. In January, the country’s monthly budget deficit was about 45 percent higher than the full-year target for 2025.

Seen from Moscow, this data probably looks alarming: If fiscal expenses remain at their January levels throughout the remainder of the year, the NWF reserves could vanish in just three months. And even if they don’t — as is more likely — 2025 is probably the last year Moscow will be able to fully cover its fiscal deficit by tapping into those savings.

This begs the question, what would happen if Russia ran out of money to finance its budget shortfall?

With domestic banks choking on debt, a sovereign default could well trigger a full-blown financial crisis. If that happened, the Kremlin would be hard pressed to support its banking sector. With the NWF reserves running low, there would be no pot of money available to proceed with recapitalizations. The house of cards that the Russian economy has become would quickly start shaking.

Fiscally speaking, Russia is running out of time. The Kremlin has no plan D to finance its budget deficit, raising questions about its ability to fund the war. From this perspective, fiscal breathing room could well be what Putin is really looking for in his talks with the U.S., whether through sanctions relief (for instance, relaxing U.S. restrictions on Russia’s ability to place external debt) or a pause in the conflict (which would allow Moscow to replenish its coffers via a reduction in defense spending).

Back in September 2024, Kyrylo Budanov, Ukraine’s defense intelligence chief, predicted that mired in economic problems, Moscow would try to force an end to the war in 2025. These words may now be proving prescient.

The reason Putin might finally be ready to negotiate seems to be remarkably simple: He wants to avoid a humiliating bankruptcy.