Will the war in Ukraine lead to the collapse of the Russian economy?

The invasion of Ukraine brought Russia to the brink of bankruptcy. Interest rates doubled, the stock market closed, and the ruble fell to historic lows.

The military costs of the war are exacerbated by unprecedented international sanctions backed by a broad coalition of countries. Russian citizens, who have witnessed the rapid closure of many foreign brands such as Ikea, McDonald’s and Starbucks, are not allowed to convert their ruble money into foreign currency. According to the most optimistic forecasts, the Russian economy will shrink by 7% this year instead of the 2% growth predicted before the invasion. According to other estimates, the fall could reach 15%.

Such a fall would have been larger than the fall caused by the Russian stock market crash in 1998. This would be a major shock to an economy that has barely grown over the past decade and failed to diversify enough to no longer depend heavily on oil and oil. gas export. However, the European Union plans to drastically reduce its energy dependence on Russia, while the US and the UK have launched the process of completely eliminating their own, more limited imports of Russian hydrocarbons.

Long-term prospects are bleak. If sanctions are maintained, Russia will be cut off from its main trading partners, with the exception of China and Belarus. Now rating agencies are predicting that Moscow will soon be unable to repay its creditors, with enormous long-term consequences for the country’s economy. Its reputation as a dubious borrower will make it difficult for Russia to attract foreign investment without offering them massive guarantees, which could make it completely dependent on China.

The huge cost of a possible Russian victory

Paradoxically, the economic situation could develop even more catastrophically if Vladimir Putin manages to achieve victory in Ukraine. The occupation of the country and the establishment of a puppet government would certainly mean for Russia an obligation to restore the destroyed infrastructure. And knowing that even before the war, Ukrainian citizens were increasingly sympathetic to the EU, keeping the peace in such a hostile environment will force Putin to allocate colossal resources to Ukraine … which then will have to be taken from the Russian budget.

To get an idea of ​​the implications of such a scenario, it is useful to examine a relatively comparable precedent. Since the end of the second war in Chechnya, during which the capital Grozny was almost completely destroyed in 1999-2000, Russia has spent up to $3.8 billion a year to maintain its power in the republic. Any reduction in remittances would expose Moscow to the risk of a new uprising. And since his annexation in 2014, Crimea has cost him a comparable amount.

Ukraine’s population of about 40 million is almost forty times that of Chechnya and twenty times that of the Crimean peninsula. Ukraine is the second largest country in Europe (after Russia): maintaining a long-term occupation there will be extremely expensive.

Finally, Russian losses are shrouded in military secrecy, but Ukrainian authorities have estimated that the destruction of its tanks, aircraft and other military equipment during the first two days of the war cost Russia about $5 billion. Since then, the amount of material destroyed has obviously increased significantly.

Grand Prize

But not only military equipment costs money. It may seem strange and even disturbing, but governments and economists value every human life in terms of money. For example, this type of calculation determines which medicines or treatments the UK health insurance system provides with its limited budget.

At the moment, according to various estimates, between 7,000 and 12,000 Russian soldiers have already been killed in Ukraine since the beginning of the conflict on February 24 – Russia announced the figure of 498 dead on March 2 and has not reported on this issue since. . By comparison, about 15,000 soldiers died during the Soviet invasion of Afghanistan, 8,000 in the first Chechen war, and slightly more (but inaccurately) in the second war.

A rough estimate based on life expectancy and GDP per capita suggests that the death of 10,000 Russian soldiers would cost more than $4 billion. To this must be added the enormous consequences for the mental health of their families and all the soldiers who took part in the war. In the coming days and weeks, answers to two critical questions will determine whether the cost of war is too high for Putin.

First, can the Russian military and defense industry survive without technological imports such as electronics and industrial robots from the West? Second, will the impact of sanctions and casualties be enough to change public opinion to the point where the Kremlin’s power is threatened? Russia’s other economic difficulties will only have an impact on the consequences of the conflict if the leader truly cares about the long-term consequences that the war will have on his fellow citizens…

This article is republished from The Conversation under a Creative Commons license. Read the original article.


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