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What will Putin do when the penny drops that he cannot win his war in Ukraine?


Paul De Grauwe is Chair of European Political Economy for the European Institute at the London School of Economics.

To be sure, Russia’s government could free up resources for military expenditure by rolling back spending in other areas. But most Russians are already living in relative poverty.

Looking at a map, Russia, sprawling across 11 time zones, might seem destined to crush its much smaller neighbour, Ukraine. But, as the world has seen over the last three weeks, the fight is not nearly as lopsided as Russian President Vladimir Putin probably assumed it would be. In fact, there is good reason to think that, in the end, Russia will lose the war Putin has unleashed.

This is largely because, from an economic perspective, Russia is not a big country at all. According to the International Monetary Fund, the country’s GDP amounted to $1.7-trillion in 2021. That is barely 10% of the European Union’s GDP, or roughly the combined output of Belgium ($620-billion) and the Netherlands ($1.1-trillion).

With such a small economy, Russia is hardly equipped to win a war against a country that is fighting its forces tooth and nail, let alone to occupy that country – and face a determined insurgency – for an extended period. Russia today spends about $62-billion annually (about 4% of its GDP) on its military. That’s just 8% of what the US spends – and not nearly enough to sustain an intense and protracted war effort.

But increasing military expenditure is not a good option for Russia, because such spending is not economically productive. Buying tanks and combat aircraft will not lead to one extra rouble of production in the future and is likely to crowd out productive investment, such as in machinery. The more Russia spends on its war, the smaller its economy is likely to be in the future.

It does not help that Russia’s economy is also underdeveloped, with a structure that one is most likely to find in the developing world. Manufactured goods – machinery, transport equipment, electronics, chemicals, and pharmaceuticals – comprise about two-thirds of Russia’s imports, whereas raw materials and energy (gas and crude oil) account for 80% of its exports.

Because earnings from commodity exports are subject to large fluctuations, this leaves Russia in an economically vulnerable position. True, prior to the invasion, high energy and commodity prices enabled Russia to accumulate more than $600-billion in international reserves (in US dollars, euros, British pounds, and gold), and bolstered the government’s budgetary revenues. But eventually prices will fall again, squeezing Russia’s budget.

In the meantime, Western countries have frozen about half of Russia’s international reserves. This points to another source of Russian economic fragility: the US and Europe, not underdeveloped economies like Russia, control the global financial system. As a result, the reserves that were supposed to sustain Putin’s war have become a liability.

To be sure, Russia’s government could free up resources for military expenditure by rolling back spending in other areas. But most Russians are already living in relative poverty. After all, given Russia’s much larger population, per capita GDP is only about one-fifth the level in Belgium and the Netherlands. If Putin plunges Russians even further into poverty in pursuit of his imperial ambitions, popular sentiment could turn against him, weakening his dictatorship.

Already, Western sanctions are taking a toll on ordinary Russians. And with consumer goods in short supply, inflation is set to rise sharply, raising the temptation to introduce price controls. But the result of such a move would be scarcity and rationing – a feature of life in the Soviet Union that Putin has no interest in reviving.

While Russia is a small, underdeveloped, and fragile economy, it retains two important sources of power. Those same hydrocarbon and commodity exports that leave Russia’s budget vulnerable to price shocks give the country significant political leverage over importing countries, including countries across Europe. If Russia cut off gas deliveries to Europe today, some countries would suffer mightily in the short term. For example, Russian gas accounted for about 65% of all of Germany’s gas imports, and 45% of Italy’s, in 2020.

In the longer run, however, Russia would suffer the most from such a move. Already, the war in Ukraine has spurred the EU to unveil a plan to end its dependence on Russian gas, both by finding new sources of imports and advancing the clean-energy transition. With that, the main source of Russia’s foreign revenues will be drastically diminished.

The second source of Russian power is of course the world’s largest nuclear arsenal. Nuclear weapons would not deliver victory in a conventional war, but they could destroy a country in the blink of an eye. This brings us to a terrifying question: What will Putin do when he realises that he cannot win his war in Ukraine by conventional means? DM/BM

Copyright: Project Syndicate, 2022.


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