Russia on the brink as Putin’s war chest empties

Akash Arjun
Akash Arjun

Global Courant

Ordinary Russians are suffering the effects of suffering that President Vladimir Putin is unlikely to feel – Alexander Demianchuk/Pool Sputnik Kremlin

Even as a flurry of oligarchs unceremoniously seized their superyachts last year, Russia’s economy appeared to be defying the impact of Western sanctions.

President Vladimir Putin had built up a so-called a “fortress balance” with huge cash reserves that helped the Kremlin weather the loss of foreign investment.

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Meanwhile, the ensuing energy crisis boosted Russian oil and gas revenues by 144 percent to $349 billion by 2022. Departing Western brands were replaced. Life in Moscow remained largely unchanged.

At least initially.

Today cash reserves are dwindling. Oil revenues have nearly halved. Russia is losing its workforce as thousands flee conscription, are sent to fight or die on the front lines. Foreign investment has disappeared and the ruble has plummeted. Inflation is accelerating.

“The situation is changing quite quickly and in the negative direction,” geopolitical risk adviser Oksana Antonenko said at an event at Chatham House.

“At the end of this year, it is very clear that Russia will be in a much worse macroeconomic situation than last year, and this will be a continuing trend.”

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While Putin was clearly prepared for the initial economic fallout from the war in Ukraine, the conflict has dragged on for much longer than he expected. The result is that the economy is increasingly exposed to the ongoing fighting and Putin is running out of options.

“He built their defenses really well. They had a lot of reserves and their debt ratios were very low. They had fiscal surpluses and current account surpluses and the energy crisis helped them,” said Timothy Ash, an associate fellow at Chatham House’s Russia and Eurasia Program. “That’s worn away now.”

Last summer, in the early months of the war, the Kremlin ran a $28 billion budget surplus, according to the Kyiv School of Economics. Last month, the national account showed a deficit of $1.4 billion.

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“It’s a slow burn,” says Ash. “As time passes, it becomes more difficult for them. They will have to make choices, guns versus butter.”

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The energy market was key to the collapse of public finances. After peaking at $120 last summer, oil now trades at around $80 a barrel and a price cap introduced by the West has limited how much the Kremlin can make from the sale. The European Union introduced an embargo on Russian crude oil in December and on oil products in February 2023.

The Saudi Arabian-led Opec bloc and its allies, including Russia tried to drive up oil prices by cutting production, but the Western cap on oil prices has limited the impact of these actions on the Kremlin’s finances.

According to the Kyiv School of Economics, Russian oil and gas revenues will fall by 43 percent this year. At $198 billion, fossil fuel revenues will still be above pre-war levels. however, the The cost of the war in Ukraine is more than absorbing the extra revenue.

“We’ve seen a huge increase in spending likely related to the war,” said Elina Ribakova, a nonresident senior fellow at the Peterson Institute for International Economics. “They pretty much filled the entire shortfall they had planned for the year.”

Sanctions and the exodus of Western companies have cut Russian export revenues by a third in the first six months of the year and the trade balance has plummeted by 70 percent.

The fall in exports has hammered the value of the ruble. It has lost 39 percent of its value against the dollar and 47 percent against the euro so far this year.

“For me, the currency is the most important metric,” says Ash.

In the early stages of the war, the Russian government intervened to strengthen the ruble.

“They were eager to have a strong coin to suggest that sanctions weren’t working,” says Ash. “Now they need a little help. They are trying to strengthen their own currency reserves. That suggests they don’t have as much liquidity as people think they could have. It is clearly a sign that things are not going well.”

A tumbling ruble fuels inflation. The Bank of Russia raised interest rates by 1 percentage point to 8.5 percent on Friday as policymakers warned that underlying inflation had “exceeded 4 percent year-on-year and was still rising.”

The central bank said inflation was caused in part by “the limited availability of labor”.

Just as Russia loses money, it loses its workforce. This is happening on several fronts – not alone men are summoned and sent off to fight, large parts of the working population have left for fear of being sent to war.

“The lowest estimate from the demographers I’ve seen is that 500,000 people left. Our own estimate is one million,” says Ribakova.

“Any conversation about diversification or creating a higher quality of life, that’s all out the window,” she adds.

Putin, of course, is reluctant to admit any of this and there is strong suspicion that official data on the health of the Russian economy is being massaged to paint a rosier picture.

Suggest alternative measures Russia is doing worse than official statistics show.

Adrian Schmith and Hanna Sakho, economists at the European Central Bank, independently from Kremlin data agency Rosstat, have put together an economic tracker that uses 15 indicators. These include financial transaction data, entries, real estate listings and prices, job market sentiment, and retail sales.

The alternate tracker correlates with official data, but has been consistently lower since the outbreak of war.

For example, while official figures from Rosstat said the economy contracted by 0.4 percent, the ECB’s alternative measure pointed to a slump of 3.2 percent.

Similarly, while official data shows that unemployment in Russia is remarkably low, the German Council for Foreign Relations believes that hidden unemployment – a measure that includes unpaid leave and partial employment – actually hit an all-time high of 4.66 million last summer.

Still, economists are careful not to exaggerate the magnitude of Russia’s economic decline.

“It’s a slow grind, but unfortunately there’s a lot of durability,” says Ash. “They can survive for a long time.”

According to the Kyiv School of Economics, Russia still earns about $425 million a day from oil.

Ribakova, of the Peterson Institute for International Economics, believes the West needs to further tighten sanctions to turn what is currently a slow and painful economic burn into a blazing fire that will force change.

Still, officials can hold back: At this stage in the war, the effects of tougher sanctions are likely to be felt not so much by Putin and his allies as by ordinary Russians, many of whom do not support the war.

Ash says, “The longer it takes, the more difficult choices are made, the more the population will suffer.”

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Russia on the brink as Putin’s war chest empties

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