Economic crisis in Russia: The cost of war: How the Russian economy will struggle to pay the price of invading Ukraine
The military costs of the war have been exacerbated by an unprecedented level of international sanctions, backed by a broad coalition of countries. Russian citizens, now unable to spend at IKEA, McDonald’s or Starbucks, are not allowed to convert the money they have into foreign currencies.
Generous estimates suggest that the Russian economy could shrink by 7% next year, instead of the 2% growth predicted before the invasion. Others say the drop could be as much as 15%.
Such a fall would be bigger than the Russian stock market crash of 1998 – a major shock to an economy that has seen little growth over the past decade and failed to diversify away from exports. of oil and gas. Meanwhile, the European Union plans to drastically reduce its energy dependence on Russia, while the United States and the United Kingdom have begun to phase out their own, more limited imports.
The long-term outlook is dire. If the sanctions are maintained, Russia will be cut off from its main trading partners except China and Belarus. Rating agencies are now predicting that Russia will soon be unable to repay its creditors, again with colossal long-term impacts on the economy. Its reputation as an unsavory borrower will make it difficult to attract foreign investment without massive collateral, potentially making it entirely dependent on China.
The economic scenario actually looks even worse if Putin reaches a point where he claims victory in Ukraine. Occupying the country and installing a puppet government would surely mean taking responsibility for rebuilding the destroyed infrastructure. And with Ukraine’s citizens increasingly pro-European, maintaining peace in such a hostile environment would force Putin to divert a huge amount of resources from the Russian budget.
To get an idea of what this would entail, we can look at what happened before. After two wars and the destruction of Grozny, Chechnya, in 1999-2000, Russia is spending up to US$3.8bn (£2.9bn) a year to maintain its rule in the country. Any decrease in cash transfers would expose Russia to the risk of another insurgency, and Crimea costs Russia a comparable amount.
Ukraine’s population of about 40 million is about 40 times larger than that of Chechnya and 20 times that of the Crimean peninsula. The second largest country in Europe by area (after Russia), it will be a very expensive place to maintain an occupation.
Today, although Russian losses are a military secret, Ukrainian estimates put the material cost to Putin of destroying tanks, planes and weapons at around $5 billion for the first two days of the war. .
The ultimate price
But it’s not just military hardware that costs money. It may sound strange, even unpleasant, but governments and economists place a monetary value on every human life. It’s calculations like these that decide which drugs or medical treatments the NHS provides with its limited budget.
So far in Ukraine it is estimated that up to 12,000 Russian soldiers have been killed. By comparison, around 15,000 soldiers died in the Soviet invasion of Afghanistan, 8,000 in the first Chechen war, and a slightly higher (but uncertain) number in the second.
A rough estimate based on life expectancy and GDP per capita suggests that a death toll of 10,000 Russian soldiers would correspond to a cost of over US$4 billion. To this should be added the enormous mental health toll of their families and of all the soldiers who took part in an active war.
However, these costs are not immediately relevant for the state budget. The same goes for the meager compensation announced by Putin to the families of dead soldiers, which will be paid in local currency, which means that its real value could soon be close to zero. Most material and human losses can effectively be listed under the description of “existing assets”, and the cost of replacing them will only be incurred in the future.
In the days and weeks ahead, whether the cost of war is too high for Putin will depend on two things. Can the Russian military and defense industry survive without technological imports such as electronics and industrial robots from the West?
And will the impact of sanctions and casualties be enough to shift public opinion in ways that threaten the Kremlin? The rest of the very dark economic warning clouds gathering over Russia will only matter to a leader who cares about the long-term impact of war on his fellow citizens.
(The author is from Lancaster University. Opinions are personal. This article is syndicated by PTI from The Conversation)