Russia is running out of money. President Vladimir Putin is taking a strategic gamble, depleting the Kremlin's last reserve funds to cover the budget and to pay for an escalating war in Syria at the same time.

The three big rating agencies have all issued alerts over recent days, warning that the country's public finances are deteriorating fast and furiously. There is no prospect of an oil revival as long as Saudi Arabia continues to flood the market. Russia cannot borrow abroad at a viable cost.

Standard & Poor's says the budget deficit will balloon to 4.4pc of GDP this year, including short-falls in local government spending and social security. The government has committed a further $40bn to bailing out the banking system.

Deficits on this scale are manageable for rich economies with deep capital markets. It is another story for Russia in the midst of a commodity slump and a geopolitical showdown with the West. Oil and gas revenues cover half the budget.

"They can't afford to run deficits at all. By the end of next year there won’t be any money left in the oil reserve fund," said Lubomir Mitov from Unicredit. The finance ministry admits that the funds will be exhausted within sixteen months on current policies.

Alexei Kudrin, the former finance minister, said the Kremlin has no means of raising large loans to ride out the oil bust. The pool of internal savings is pitifully small.

Any attempt to raise funds from the banking system would aggravate the credit crunch. He described the latest efforts to squeeze more money out of Russia's energy companies as the "end of the road".

Mr Kudrin resigned in 2011 in protest over Russia's military build-up, fearing that it would test public finances to breaking point. Events are unfolding much as he suggested.

Russia is pressing ahead with massive rearmament, pushing defence spending towards 5pc of GDP and risking the sort of military overstretch that bankrupted the Soviet Union.

The Stockholm International Peace Research Institute said the military budget for 2014 rose 8.1pc in real terms to $84bn as the Kremlin took delivery of new Su-34 long-range combat aircraft and S-400 surface-to-air missile systems.

It is to rise by another 15pc this year, led by a 60pc surge in arms procurement. This is an astonishing ambition at a time when the economy is in deep crisis, contracting by 4.6pc over the last twelve months.

David Fuller's view

Here is a PDF of Ambrose Evans-Pritchard's column.

Vladimir Putin has a penchant for reckless aggression.  His massive increase in military spending is reminiscent of the old Soviet Union under the eventually fossilized Leonid Brezhnev, briefly followed by the prematurely geriatric Yuri Andropov and then Konstantin Chernenko.  The USSR was in a state of economic collapse when Mikhail Gorbachev took over in 1985, eventually as President before resigning on 25^th December 1991.  The Soviet Union was formally dissolved the following day.   

Putin will certainly know this history, and is probably aware that his military spending is rapidly bankrupting Russia.  He can hope that the oil price somehow recovers, or he can try to influence that outcome.  A military move against US fracking would be suicidal, so his course of action may be to foment further tensions in the Middle East war, not least in a covert attempt to create problems for the Saudis.  Keep an eye on SASEIDX which continues to underperform.   

 (See also: Saudi Arabia’s Oil War With Russia, by Leonid Bershidsky for Bloomberg, and Putin’s Syria Play Demands a U.S. Response, a Bloomberg Editorial)