Vladimir Putin is intransigent in not ending his barbaric war against Ukraine.
Most analysts rightly focus on geopolitical explanations. Humiliated by the demise of the Soviet Union and the loss of the cold war, Putin wants to restore the ‘Russian Empire’ and bolster his country’s greatness. But he can hardly do that after four years of battling a country he said could be taken in two weeks.
Beyond geopolitical explanations, perhaps economics is reinforcing Putin’s unwillingness to stop the fighting. The Russian economy already faces dire straits. Ending the war will only bring the ruin out into the open.
So Russia fights on. Otherwise, Putin will lose face for himself, his regime and his perceived place in history. But the Russian people will not be fooled.
Dire straits
For years, Russia pursued extremely orthodox ‘Fortress Russia’ stabilisation policies, enforcing strict budget discipline, building up assets for a rainy-day fund and maintaining low inflation and interest rates.
The war is reversing these policies. Russia spends massively to sustain the war – reportedly some 30% to 40% of budget spending and 7% to 8% of gross domestic product. Official reports point to modest budget deficits and the government is boosting taxes and putting an increased onus on small businesses to keep fiscal accounts in check. Inflation and interest rates are elevated.
The economy labours under sanctions and low oil prices, curbing the government’s revenue. Analysts estimate Russia may only be earning $40 per barrel of oil. Central bank and oligarch assets are frozen. The national patrimony is being spent down. The populace well knows the economic, let alone human, costs of corruption and the kleptocratic state.
Wartime spending is admittedly driving the unemployment rate down and boosting real incomes in the short term, especially for skilled workers in the defence sector. But on top of the strain, Russia’s longer-term demographic trends, the loss of lives on the battlefield and the brain drain since the start of the war impose a huge burden on the economy. The outlook for real GDP growth is tepid, hovering around 1%.
Ending the war will expose the ruin
In the first half of the 1990s, Soviet GDP collapsed – 40% by some estimates – amid ‘transition output’ losses. In effect, the Soviet economy was a large military industrial complex, commanding resources at artificial prices to support production of armaments and the like. With the collapse of this complex and price liberalisation, military manufacturing plummeted and economic agents reallocated resources away from production mandated by state controls to the marketplace.
The Russian economy after the Ukraine war could face somewhat analogous problems. Citizens will demand butter, not guns. One would expect that decommissioning the military industrial complex means returning soldiers to their homes – and most likely unemployment – ceasing much armaments production and the associated high wages for skilled labour.
Further, western firms will take a long time to return to Russia – if at all – unwilling to trust property rights absent a fundamental change in governance, notwithstanding President Donald Trump’s belief that Russia’s economy offers great opportunities. Sanctions are likely to be lifted only gradually in response to specific benchmarks and conditions. Few analysts project a significant turnaround in oil prices. It is unlikely Russia will regain full control of blocked central bank and oligarch assets.
What does this mean for Putin?
On its face, the prospect for deepened economic ruin should provide an incentive to end the war and forestall greater hardship for Russia’s people. But that may not be Putin’s incentive structure. Regardless of geopolitical considerations, ending Russia’s militarisation would most likely impose a huge negative shock on the economy, one which could cause deep tremors for the Putin regime.
How might this economic future play into Putin’s mind?
Putin might accept a ceasefire or end to the war and declare victory for Russia as a kind of fig leaf, notwithstanding the economic consequences of doing so. Perhaps winning complete control of Donbas would provide such a fig leaf in his assessment, as unlikely as that now appears.
Or, even in the case of a ceasefire or end to the war, Putin could maintain Russia’s wartime footing, at first to restock armaments depleted by the fighting. Later, he could continue militarisation and rearmament to foster the impression of a strong Russia. That might be associated with belligerently rattling threats at Europe.
But notwithstanding that geopolitical issues are uppermost for Putin, the dreary post-war economic outlook may buttress his incentives for playing the Russian greatness card and continuing the war, in his mind hopefully allowing him to muddle through and stay in power.
John McCain famously called Russia a kleptocratic gas station masquerading as a country. Those words ring even truer today. Putin and his regime don’t want to face the music of that sad truth, fearing their own demise. That may only reinforce the truculence and resistance to ending the war.
Mark Sobel is US Chair of OMFIF.
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