The end of Putin’s regime will spring from war spending chaos, former central bank advisor says, amid military mutiny threat and fuel-shortage brawls

Russia’s budget deficit hit 2.6% of GDP through May, already double the full-year 2025 level, while the sovereign wealth fund is being rapidly depleted and fiscal discipline is breaking down. The war is intensifying domestic strain through inflation, high interest rates, fuel shortages, and rising military losses, even as Ukraine’s drone strikes hit refineries and the defense base. The article argues these pressures are weakening Kremlin stability and could raise escalation risks in Ukraine and Europe.

Analysis

The market is underpricing how war finance stress tends to migrate from the sovereign to the currency and banking system before it reaches the leadership structure. When a state starts monetizing conflict costs through off-budget spending, suppressed transparency, and quasi-fiscal borrowing, the first tradable symptom is usually not default but a combination of higher inflation expectations, weaker domestic confidence, and a forced tightening bias that crimps private credit. That creates a negative feedback loop: higher rates hurt consumption and SME balance sheets, which in turn raises the fiscal burden and amplifies social strain.

The second-order effect for Europe is not a clean “Russia risk-off” catalyst so much as a more erratic externality profile. A regime facing internal fiscal and social pressure often becomes more willing to use energy infrastructure, cyber, and border provocation as asymmetric leverage, especially when conventional battlefield momentum deteriorates. That means the near-term trade is less about a neat change in the front line and more about volatility in gas, refined products, and defense procurement premia over the next 1-3 months.

The contrarian point is that fiscal exhaustion does not automatically mean imminent regime change; it can just as easily produce a longer period of harsher repression and higher external aggression. For investors, that argues against outright “peace dividend” positioning and toward owning volatility where escalation risk is underpriced. The most attractive setup is in assets that benefit from sustained European rearmament and from higher security capex, while fading any assumption that Russian economic weakness quickly translates into de-escalation.

Key Decisions for Investors

• Add to European defense beneficiaries on weakness for a 3-12 month horizon: long RHM.DE / LDO.MI or U.S. proxy LHX, with the thesis that fiscal stress in Russia extends procurement urgency even if front-line gains stall. Risk/reward: upside from order-book revisions and margin durability; risk is a ceasefire headline-driven multiple reset.
• Buy 1-3 month upside volatility in European gas exposure via call spreads on TTF-linked proxies or clean-energy utility hedges; the best payoff comes from a 2-4 week spike in infrastructure or refinery disruption risk rather than a structural commodity rerating.
• Pair trade: long defense names, short European industrial cyclicals sensitive to energy and rates over the next 1-2 quarters. If inflation expectations re-accelerate from energy shocks, cyclicals should underperform while defense capex remains insulated.
• Avoid initiating aggressive short Russia-beta or Europe peace-trade positions here; instead use any rally in risk assets to fade complacency with downside hedges on STOXX Europe 600 via puts, since escalation risk is asymmetrically skewed to the upside in volatility.