Can the Russian Economy Survive
Russian dictator Vladmir Putin famously though that the "Special Military Operation" in Ukraine would only last three days. Russian forces would occupy Kyiv an, we can assume, execute Volodymyr Zelenskyy. Things did not turn out that way. The Ukranians destroyed the armored column sent against Kyiv. Three years later the Ukranians continue to fight for their freedom.
This is Putin's war and it looks like it will not end until he manages to force the Ukrainians to capitulate or is forced to leave Ukraine either because of military or economic collapse.
There is no question that the war with Ukraine has put serious strain on the Russian economy. Can the Russian economy survive the war in Ukraine?
War is the most wasteful endeavor that humans engage in. War takes material and men, metaphorically piles them up and incinerates them. Unlike an investment in production capacity, like steel mills, roads, bridges or solar panel factories, war consumes without yielding anything back, at least in the modern world.
The Russian economy is often compared in size to Italy. The Russian economy is smaller than Germany, France and the UK. And much smaller than the US and the EU as a whole.
The Russian economy has been moved to war production, with the production of material for the Ukraine war consuming a significant amount of Russian output. This is combined with sanctions that make inputs like semiconductors and precision ball bearings difficult to come by since they must be imported from China or by covert means from the west.
Russia exports natural resource: oil, gas, minerals. In the past, before Russia invaded Crimea, Russia did have some exports outside of natural resources.
Russia exported military equipment, but this market has dried up because they no longer have a surplus. Potential customers can see how Russian armament has performed in Ukraine and may decide to buy elsewhere.
Before 2014 Russia had a developing software industry. Kaspersky Labs sold computer security software. Kaspersky is largely banned in the United States and Europe because of concerns about their ties to Russian intelligence.
Companies like JetBrains that makes the widely used IntelliJ programming environment have moved out of Russia.
Russia no longer exports gas to Germany. There remain some countries in the EU that use Russia gas because they can’t use liquified natural gas (LNG). Most of Russia’s gas customers are gone and are not likely to return for the foreseeable future.
Russia still exports petroleum and petroleum products, but these exports are down as well. Their main customers are China and India, which are paying lower prices than Russia was getting, often paying in Yuan and Rupees.
The problems in the oil industry are combined with the Ukraine damaging or destroying Russian oil refineries with drone strikes.
An assessment of the Russian economy is difficult because they no longer publishe reliable statistics on the economy. The official line is that the economy is doing great and growing. Any quotes on economic output must be suspect.
Setting this aside, we can ask: where would the quoted economic growth come from? Growth in manufacturing of war material that will be incinerated on the Ukrainian battlefield? Obviously this is not a long term strategy, especially for a country that has a relatively small economy and many challenges.
Among these challenges are the number of men that have died or been seriously wounded on the Ukrainian battlefield. The dead no longer produce anything for the economy and the badly wounded must be cared for (or perhaps not).
Someday the war in Ukraine will come to an end. All of the men who are in Ukraine will return. What will they return to? What jobs will be available?
The experience the United States has had when wars end is that economic recession follows. The United States has always had a much bigger economy so it has been better able to weather the end of wars.
There are other issues as well. The war in Ukraine has reminded European countries that Russia is a threat. Sweden and Finland joining NATO are examples. They are rearming with both conventional weapons and, possibly, nuclear weapons in the future.
Lenin famously said that capitalists will sell you the rope to hang them with. While there is some truth in this, European countries may be reluctant to support any economic development in Russia because it would fuel Russia’s military rearmament which would threaten them.
As Elon Musk is discovering with it comes to Tesla, you actually need customers. If your customers refuse to buy from you because of your actions, it will hurt your markets.
Speaking for myself, I will not buy from Russia companies (I’ll note that I do buy from Russians like the JetBrains folk who have left Russia). There are a lot of people in Europe and the US who may share this view.
All this suggest that Russia’s future is pretty dark. Whatever the economic forecast is for 2025 and whether the economy will collapse forcing an end to the Ukraine war, the long term prospects are not good.
