News headlines are replete with stories about negotiations starting in the coming months to end Russia’s brutal war against Ukraine, especially since Donald Trump’s US election victory. Both sides are reportedly scrambling to obtain leverage and a position of strength for the coming talks. But an implicit building block in these reports is that President Vladimir Putin has the upper hand across the board.
It is said that Russia’s troops are moving forward on the battlefield. Putin is viewed as willing to sacrifice countless Russian soldiers to secure victory, and the Russian people have a long history of bearing inordinate suffering. Meanwhile, the thinking goes, President-elect Trump will be averse to continued funding for Ukraine. He reveres Putin and not Volodymyr Zelensky and wants a deal fast. He isn’t keen on Nato.
European nations, especially amid a weakened Germany and France, are at odds with one another and unable to show leadership. Ukraine is tired of war.
But caution may be warranted in buying into this narrative.
Russia is not as strong as it seems
The past decades were filled with geopolitical surprises in part triggered by weakened economies and corruption that caught intelligence officials off guard – including the fall of the Berlin Wall and the collapse of the Soviet Union.
In 1993, visiting Russia for the first time, I looked out the window of my swanky Moscow hotel and saw a few beaten-up old cars traversing the streets. Was this the powerhouse that had so intimidated the West for decades – admittedly more for its nukes than economic might? James Carville was largely right: ‘it’s the economy, stupid’.
Russia’s ‘fortress’ economic policies and national wealth helped build strong buffers in past years, giving the country the ability to finance an extended war. But, as many others have written, its economy is weak and faces increasingly large unsustainable burdens.
Surging defence spending and manpower shortages may be boosting real wages and providing jobs for now. But such largesse cannot be carried on indefinitely, and there is much evidence of economic difficulties.
Major macro indicators are deteriorating. Inflation is ticking up towards 9%, the ruble is plummeting and the official interest rate is 21%, crimping investment. Capital controls abound. Supercharged defence spending means resources for social services, infrastructure and education are being squeezed.
Western sanctions are biting. They have blocked Russia’s patrimony, threatening to take away the country’s past earnings of some $300bn and even give them to Ukraine for reconstruction.
Even if Russian energy earnings remain large, the latest sanctions involving Gazprombank have further hit Russia’s ability to sell oil, reportedly even to some Chinese entities. More western sanctions are likely in the coming weeks.
Softer global demand means softer oil prices, which are already well below the level Russia assumed for its budget. While a falling ruble helps the budget, it cannot make up for the losses, and it is a highly visible and transparent barometer of Russia’s woes.
Western firms have left Russia (or are trying to) – with little prospect of a return. Russian access to western technology is being lost despite efforts to circumvent sanctions via transshipments through other countries. One often hears Russia is facing challenges in acquiring spare parts, not only for its war machine but also increasingly civil aviation.
Russia is facing a massive brain drain (some estimates exceed 800,000) in addition to lost and injured soldiers on the battlefield (some estimates exceed 700,000).
Don’t overestimate Putin’s position
As diplomats in the US, Europe and Ukraine begin seeking pathways to a negotiated outcome, they should not presume that Putin’s position is as strong as news reports might suggest or that the Russian people may have unlimited tolerance for the war.
Even if sanctions and blocked Russian assets are not going to bring Russia’s economy to its knees in one fell swoop, they remain powerful leverage and can be used more forcefully in any agreement to end the fighting and secure Ukraine’s future. Putin understands that one of his lasting legacies will be a Russian economy decimated by war and isolation for years to come. Whenever talk of a settlement arises, Putin’s first demand is an end to western sanctions.
Western negotiators will have to decide if the terms Russia offers in military or territorial concessions are worth removing some or all sanctions, whether Russian assets should be unfrozen or if Putin can avoid paying any reparations for the damage to Ukraine.
But they should remember that history has shown a remarkable tendency to discount the impact that economic failure can have in upending societies and fomenting upheaval.
Given Russia’s teetering economy, its diplomatic hand may be nowhere near as strong as it might seem.
Mark Sobel is US Chair of OMFIF.
This article featured in the ‘Leading Thoughts’ Substack, written by Christopher Smart.
