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Ukraine’s best hope may be a faltering Russian economy
Russian gas giant Gazprom has been a money-making machine for the past two decades, enriching many of its members and helping to keep Vladimir Putin’s government afloat. But that race ended, with Gazprom recently announced that it lost US$6.9 billion in 2023mainly because of Russia’s war in Ukraine and sanctions that hurt Gazprom’s sales.
Like Gazprom, the entire Russian economy is beginning to collapse under the double pressure of enormous wartime spending and withering sanctions. Since invading Ukraine in February 2022, Russia held up better than many Westerners expected or expected. This was mainly due to the central bank’s skillful management of the economy and robust oil and gas revenues.
But U.S.-led sanctions, however imperfect, are slowly strangling Russia’s economy, and the Biden administration suggests more are to come. Russia’s war production may be peaking now, with possibly severe equipment shortages looming in 2025 and beyond.
“The Soviet Union was a war machine and it lost strength,” Fiona Hill, a Russia expert at the Brookings Institution, said at an event. May 28 Brookings Conference. “This will also end up having considerable consequences. Putin wants us all to think he cannot be defeated. He knows it can be. And he is genuinely concerned at this particular time.”
The biggest news about Russia’s war in Ukraine this year was the poor conditions of Ukrainian frontline troopsthat went unarmed, overcome, and slowly losing territory. A six-month delay in vital U.S. military aid, combined with manpower shortages and other problems, allowed Russia to exploit weaknesses, attack Ukrainian infrastructure with bombs and missiles, and threaten Kharkiv, the second-largest city in Ukraine.
But Russia is also on borrowed time, and the real test may be whether its economy can hold out long enough to exhaust Ukrainians and their sometimes weird allies.
On the surface, Russia’s economy looks good, with the International Monetary Fund GDP growth forecast of 3.2% this year. This is better than the 2.7% GDP growth forecast for the United States.
But some analysts think the GDP outlook masks so many underlying problems that it is almost meaningless. Putin “still has some ability to finance the war, but it is running out very quickly,” said Vladimir Milov, a Russian economist who led some reforms in the late 1990s and has since left Russia, said in a recent podcast for the UK’s Royal United Services Institute. “The signs that sanctions are working are there, but in reality it takes longer. Putin’s economy is a big beast. It takes time to strangle.
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Among Russia’s problems: its national wealth fund, a pool of reserves that Putin uses to finance the war, has fallen from $113 billion before the war to about $56 billion now. Not all of the $56 billion is liquid and Russia needs to keep some cash on hand for a genuine emergency.
“Their reserves are running out quickly,” said Agathe Demarais of the European Council on Foreign Relations at the May 28 Brookings event. Gazprom’s losses, she said, “will be a problem for replenishing reserves. We are talking about really big numbers. I don’t think there is an easy way out for Russia.”
Analysts think Gazprom will continue to lose money until at least 2025, particularly as European countries that used to be the company’s biggest customers have moved away from Russian energy. The easiest way to transport gas is by pipeline, and although other countries buy Russian gas, they are not connected by pipes.
Oil is easier to transport, and oil revenues continue to provide Russia with desperately needed cash. However, it is also more expensive for Russia to ship oil to Asian buyers who have replaced European ones, causing another crisis.
Russian President Vladimir Putin attends a meeting with Orenburg Region Governor Denis Pasler at the Kremlin in Moscow, Russia, Wednesday, May 29, 2024. (Alexander Kazakov, Sputnik, Kremlin Pool Photo via AP) (ASSOCIATED PRESS)
However, sanctions have weakened the value of the ruble and increased the cost of goods, especially imports. Russia’s central bank tried to compensate for these problems by raising interest rates, with short-term rates currently set at 16%.
However, difficulties persist. Russia’s official inflation rate is an uncomfortable 7.8%, and Russian research firm Romir reports that global price levels for common consumer goods have nearly doubled since the 2022 invasion. Vegetables, for example , skyrocketed in price due to sanctions imposed on Western supplies of seeds, fertilizers and other basic products of agricultural production.
To fill some holes, Putin is planning tax increases on corporations and the rich, but this can backfire. Foreign investment in Russia has plummeted and most companies are unable to repay loans at double-digit interest rates. Therefore, the only source of investment is the companies’ own profits, of which the new taxes will further undermine, discouraging investment. The entire cycle is a recipe for a collapse in production, similar to what caused the dissolution of the USSR in the late 1980s.
China is helping in several ways, selling Russia many of the products that Western sanctions seek to limit. But China is exploiting Russia’s weakness more than helping it regain its economic position, according to a report. recent article Milov wrote for the Wilfried Martens Center for European Studies in Brussels.
Chinese suppliers are raising prices on cars, electronics, industrial products and almost everything Russia needs, in some cases charging even more than the American and European suppliers they are replacing. This is contributing to Russian inflation.
When purchasing Russian oil and gas, China demands discounts ranging between 20% and 50% on the market price. At the same time, there is almost no new Chinese investment in Russia or any sign that China is taking long-term economic risks for Russia’s sake.
“Russia is learning the hard way that China is not interested in being a donor to Russia,” says the Milov report. “China is only economically interested in Russia as a supplier of cheap raw materials at considerable discounts, as a market for Chinese finished products sold at premium prices, and is not interested in investing to see Russia emerge as a competitor in international manufactured goods markets. . ”
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Sanctions were never intended to unilaterally end Russia’s barbarism in Ukraine, and no one thinks they will now. What they intend to do is increase the price Russia pays for invading a peaceful neighbor and perhaps contribute to an outcome that looks like a victory for Ukraine.
Ukraine is not close to winning and much depends on future events, starting with this year’s US presidential elections. If Donald Trump wins, it is likely to ease pressure on Putin, whom he has publicly admired, possibly opening the door to a Russian victory. If Biden wins, however, a more aggressive effort to defeat Putin will be possible.
The Biden administration gave Ukraine increasingly sophisticated weapons and has now changed its policy to allow Ukraine to use some of them for attack military targets inside Russiawhich has been taboo until now.
Congress recently passed a law that allows the US government to seize about $6 billion in Russian assets in the United States and turn them over to Ukraine. The Biden administration is trying to persuade European nations to do the same with up to $300 billion in Russian assets parked there.
Another big step Biden could take would be to lower the price cap on Russian oil sales – currently at $60 per barrel – and better enforce it. Russia has found several ways to escape the limit and has sold oil at higher prices when market conditions allow. Biden, for his part, has been reluctant to impose any sanctions on Russia that could increase prices in global markets and, especially during an election year, in domestic markets.
That could change if Biden wins a second term, which would definitely be a disappointment for Putin, who is hoping for friendlier governments in Washington and other capitals. If he does not run for re-election, Biden will have more freedom to make the decisions he deems necessary, even if they are not popular. There could be many more of them before Russia’s war in Ukraine ends.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman.
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