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

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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 an all-time low.

The military cost of the war has been 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 or Starbucks, are not authorized to convert the money they have in rubles into foreign currencies. According to the most optimistic analyses, the Russian economy will contract by 7% this year, instead of the 2% growth forecast before the invasion. Others estimate that the drop could reach 15%.

Such a fall would be greater than that caused by the Russian stock market crash of 1998. It would be a major shock to an economy that has seen virtually no growth over the past decade and failed to diversify enough to no longer depend heavily on oil and gas exports. However, the European Union plans to drastically reduce its energy dependence on Russia, while the United States and the United Kingdom have launched a process to completely eliminate their own, more limited imports of Russian hydrocarbons. .

The long-term outlook is bleak. If the sanctions are maintained, Russia will be cut off from its main trading partners, with the exception of China and Belarus. Rating agencies now predict that Moscow will soon be unable to repay its creditors, which will have colossal long-term repercussions for the country’s economy. Due to its reputation as an unsavory borrower, it will be difficult for Russia to attract foreign investment without offering them massive guarantees, which could make it entirely dependent on China.

The immense cost of a possible Russian victory

Paradoxically, the economic situation could experience an even more disastrous development if Vladimir Putin manages to achieve victory in Ukraine. The occupation of the country and the installation of a puppet government would certainly imply, for Russia, the obligation to rebuild the destroyed infrastructures. And knowing that, even before the war, Ukrainian citizens were increasingly favorable to the EU, maintaining peace in such a hostile environment would force Putin to devote colossal resources to Ukraine… which will then have to be taken from the Russian budget.

To get an idea of ​​the consequences of such a scenario, it is useful to examine a relatively comparable precedent. Since the end of the second war in Chechnya, which notably saw the almost total destruction of the capital Grozny in 1999-2000, Russia has been spending up to 3.8 billion dollars a year to maintain its hold on this republic. Any decrease in cash transfers would put Moscow at risk of another uprising. And since its annexation in 2014, Crimea has cost it a comparable amount.

Ukraine’s population of around 40 million is almost forty times larger than that of Chechnya and twenty times larger than that of the Crimean peninsula. Ukraine is the second largest country in Europe by area (after Russia): maintaining a lasting occupation there will be extremely costly.

Finally, Russian losses are covered by military secrecy, but Ukrainian authorities estimate that the destruction of its tanks, planes and other military equipment during the first two days of the war cost Russia around $5 billion. Since then, the quantity of this material destroyed has obviously increased significantly.

The ultimate price

But it’s not just military hardware that costs money. It may sound strange, even disturbing, but governments and economists assign a monetary value to every human life. It is, for example, calculations of this type that determine which medicines or medical treatments the British health insurance system provides with its limited budget.

So far, according to various estimates, between 7,000 and 12,000 Russian soldiers have already been killed in Ukraine since the start of the conflict on February 24 – Russia announced the figure of 498 dead on March 2 and has not communicated any further on the subject since. For comparison, around 15,000 soldiers died in the Soviet invasion of Afghanistan, 8,000 in the first Chechen war and a slightly larger (but uncertain) number 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 correspond to a cost of more than 4 billion dollars. To this should be added the enormous consequences on the mental health of their families and of all the soldiers who took part in the war. In the days and weeks to come, the answers to two crucial 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 Western countries? Second, will the impact of sanctions and casualties be enough to shift public opinion to the point that the power of the Kremlin would be threatened? Russia’s other economic difficulties will only have an impact on the aftermath of the conflict if the leader really cares about the long-term impact 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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