Behind the facade of western-style accounting and international credit ratings, the bank’s decisions were often driven more by politics than business, officials now admit.

“The bank, because of its status, took on certain tasks that can at times hurt its balance sheet,” VEB chief Vladimir Dmitriev said Dec. 22. “We’re talking about the so-called special projects.” Neither VEB nor a Kremlin spokesman responded to requests for comment for this article.

Starting in 2009, VEB spent $8 billion to finance deals allowing unnamed Russian investors to buy up steel plants in eastern Ukraine and keep them running. For several years, VEB carried the holdings in its records under code names -- “Lily of the Valley” and “Iris” -- to conceal the extent of its exposure, according to two people familiar with VEB’s finances. Dmitriev disclosed the lending in an interview with Russian state TV in 2013, saying the bank was a “savior” for the vital Ukrainian metals sector.

Since then, fighting between Ukrainian forces and Russian-backed separatists in the region has damaged many of the plants VEB paid for. A senior Russian official said it’s not even clear whether VEB has any claims to the assets now because the transactions were conducted offshore.

The legacy of the 2014 Sochi Winter Olympics, which at about $50 billion were the most expensive such games ever, is another big burden on VEB. Initially, the Kremlin said the projects would be paid for mainly by private business, but as the true cost of turning the down-at-the-heels Soviet city into a modern resort became clear, VEB wound up taking control of more than 200 billion rubles of money-losing hotels, ski resorts and other projects. Provisions for losses there have been big contributors to VEB’s losses in the last year, according to analysts.

“Step by step, control over loan issuance was weakened,” said Kudrin, the former finance minister. By this year, VEB’s assets had grown to about 9 percent of GDP.

David Fuller's view

Governance is everything, as we never tire of saying at Fuller Treacy Money. 

How will Putin respond to VEB’s spiralling debts?  The easiest thing for him to do, while still in charge, would be to print more rubles for a bailout, further weakening the currency (RUB/USD) in the process.  However, he is unlikely to stop there.

Putin has an old Cold War mentality and weapons are now his main strength.  He will be under pressure to take more risks, as we have seen in Syria recently.  This is an ongoing concern for Europe and probably beyond.