Russian economy in meltdown but ‘Putin can’t afford for Ukraine war to end’

Tyler Mitchell By Tyler Mitchell Dec8,2024

Russia war factory

Workers assemble self-propelled artillery systems at a factory in Ekaterinburg, Russia. (Image: Russian defence ministry press service/EPA)

Russia has become so reliant on its war economy that Vladimir Putin is unlikely to accept a full-scale peace deal in Ukraine, experts warned last night.

It follows the announcement last week of a record £100bn defence budget for next year -worth around 40% of Russia’s total economy and an increase of more than £40bn since 2023.

This means that more will be spent on Russia‘s military and security forces than on health care, education, and social services combined.

Russia simply cannot afford for this war to end unless it wants to be a vassal of China – the consquences to its economy would be catastrophic ,” said economist Dr Renaud Foucart, of Lancaster University last night.

Regional expert Prof Mark Galeotti added: “We should expect any deal brokered by Presidents Trump and Zelensky with Putin to amount to little more than a ceasefire. Putin will use this time to continue to crank up his war machine because he needs to build up his devastated armed forces.”

Putin has cited his transition to a wartime economy as a sanction-busting success story, with arms factories across the country working non-stop to support Russia’s war machine in Ukraine.

In reality, Russia‘s economy is fragile, too reliant on volatile energy exports and at dire risk of overheating.

Russia’s currency, the ruble, continued its plummet last week, dropping to 110 against the US dollar, its lowest level since the start of the war in Ukraine.

Its initial collapse was caused by the flight of capital from the country following the February 2022 invasion.

Russia’s central bank responded by ordering all exports to convert 80% of their foreign currency to roubles and limiting individual foreign currency withdrawals to just £7,900.

Russia also found ways to bypass weak sanctions and take advantage of high energy prices in its exports to China and India.

However, this was offset last year by the tightening of sanctions and a decision by G7 nations to cap the price of Russian oil, limiting foreign currency flows into the country.

Now, new US sanctions have added to Moscow’s worries by targeting major lender Gazprombank for the first time, as well as 50 small- to medium-sized Russian banks which have been cut off from doing business with the US and its allies.

The slide of the ruble will once again persuade people to move any remaining capital out of Russia and force the central bank to use its reserves while increasing the cost of imports—increases that can’t realistically be passed on to Russia‘s struggling consumers.

Already, Russia’s annual rate of inflation has hit 8.4% – twice the target- while moves by the central bank to increase interest rates to 21% will only slow down the economy further.

Spiralling food inflation has already led to a spate of food robberies. Egg thefts last year have given way to butter thefts this year, with the price of butter – £1.50p per 200 grammes (a 30% hike from 12 month ago) “now like gold”, according to the owner of a store in Yekaterinburg who was targeted.

Russia’s nominal GDP sits at just £1.6 trillion, compared with the US GDP of £23 trillion.

FILES-US-RUSSIA-VOTE-DIPLOMACY-TRUMP-PUTIN

Putin is unlikely to view any peace deal brokered by Trump as permanent (Image: AFP via Getty Images)

RUSSIA-POLITICS-ARMS

Putin tours a Russian tank factory. (Image: Getty)

Russia was already dedicating 10% of that GDP on military spending last year. The new budget will see this increase – and it bodes badly for the long-term economic prospects.

Ammunition production, military equipment, pay for soldiers, wages, and compensation delivered to the families of wounded or dead troops all contribute to this amount -meaning Russia‘s wart meme economy is paying the wages of tens of thousands of people inside the country.

Russia’s war economy means that every embryo of existing industry in Russia that was not for the war and that was not for oil and gas has been steered towards war production,” said Dr Foucart, last night.

“Food inflation is really what matters for ordinary people, so this is the moment of overheating. There was a plan for several years of subsidising mortgages. This is gone because it has created a bubble in real estate.

Russia would have to reinvent itself from a position of big weakness.”

Putin is placing a lot of hope in the BRICS group of nations – Brazil, Russia, India, China, South Africa, Iran, Egypt, Ethiopia, and the United Arab Emirates – developing their own currency to bypass the dollar.

This has already proved a challenging prospect, and we must now contend with President-elect Trump’s vow to impose 100% tariffs on BRICS exports into the US should this happen.

“In any case, this doesn’t work for promised secondary sanctions – and Chinese banks are super worried about being hit by secondary sanctions. This will affect Russia energy exports to China, a main source of revenue,“ said Dr Foucart.

“So, whichever way you look at it, I think it’s very hard for Putin to end the war because it means becoming more of a vassal state of China. That’s the only way Russia will be able to exist.”

The end of the war will see real incomes drop for all but Russia’s elite families just as 300,000 battle-hardened veterans – many released from long prison terms to “volunteer” for the front – return home.

Putin’s only levers to deal with the ensuing social instability are a dwindling national welfare fund against which promises of pension reform and higher salaries have already been made, as well as a bolstered police force.

“Something we know from the history of the two Chechen Wars is that it’s not easy to reintegrate people who have been at war into Russian society,” said Dr Foucart.

Russian butter

Butter has become so expensive that it is kept in anti-theft boxes. (Image: Pravda)

Russian conscription

Russian law enforcement use unprecedented brutality in Moscow and St Petersburg during mass raids. (Image: social media; E2W news)

Dr Renaud Foucart

Dr Renaud Foucart: Russia cannot afford to end war with Ukraine. (Image: Dr Renaud Foucart)

Following the war in Afghanistan, 150,000 Russian veterans were distributed among the Soviet Union – which was twice the size of current Russia.

“What’s really striking about Ukraine, as opposed to Afghanistan, is that a decision has clearly been made that there’s not going to be any kind of high-profile heroes from this war. The people who get feted are either very junior, ordinary soldiers, sergeants maybe, up to a captain,“ said Prof Mark Galeotti, author of the new book ‘Forged in War: A Military History of Russia‘.

“A certain number of veterans will want the regime to fall because a true parliamentary democracy wouldn’t have this kind of stupid war in the future.

“But you will also have the turbo patriots who will say it was a stupid war because ‘we didn’t fight it right – because our fat-cat politicians were out of touch’.

“After Afghanistan, veterans formed something of a sort of a turbulent political force in their own right. Many also drifted into organised crime. We’ve already seen that the organised crime rate has doubled since February.”

It would be a mistake to think any peace deal would shut down Putin’s war machine, however.

Russia’s military has been decimated. It’s now using trucks with armour plates stuck on them, or Chinese-made ATVs. So there’s going to be an extended period of rebuilding militarily. And that means continued high spending on armaments,” said Prof Galeotti.

“What we will probably see is a slackening, but not a cliff edge which would, indeed, be catastrophic for the economy.”

It means Putin may end up finding a pretext to resume hostilities, albeit at a gentler level.

“He might decide that keeping the war going on a low simmer is less dangerous for him than forging a peace deal, added Prof Galeotti.

Russia expert Keir Giles, author of ‘Who Will Defend Europe? An Awakened Russia and a Sleeping Continent,’ echoed this view.

“This is a war to correct what he sees as the historical mistakes of 100 years ago when so many countries of Eastern Europe were, in Putin’s view., created mistakenly. So there’s no reason to think that if major combat operations in Ukraine come to an end, Russia would have any incentive to stop the building up of its armed forces and the transformation of its economy into a war economy.

“It needs to be ready for the next phase of the fighting in Ukraine, which will follow shortly, and for the subsequent assault on Europe.”

Tyler Mitchell

By Tyler Mitchell

Tyler is a renowned journalist with years of experience covering a wide range of topics including politics, entertainment, and technology. His insightful analysis and compelling storytelling have made him a trusted source for breaking news and expert commentary.

Related Post