Can Putin carry on? How Russia finances the war amidst the West's economic response.

Since the beginning of the war, Russia’s defence budget has ballooned to a bloated $300 million per day [1], but this drastically understates the real economic costs of the war. In a study run by CIVITA, they estimated that if you include losses of personnel, military equipment, and other resources the daily cost swells to over $20 billion [2] per day. However, even this figure fails to encompass the effect of unprecedented sanctions from the West. Knowing this, can Putin continue to finance his war? To answer this, we first need to analyse Russia’s pre-war preparations.


Putin has been sanction-proofing his economy since 2014 in response to the West’s reaction to his annexation of Crimea. Putin has used Russia’s consistent trade and current account surpluses to pay off foreign debt and amass a war chest of over $600 billion in foreign reserves [3], making Russia more financially independent. But was this enough?

The West responded to the war with drastic sanctions. These sanctions targeted two areas, the ability of Putin to finance the war and to cripple Russia’s domestic and international economy. The West attacked Putin’s finances by banning the purchase of Russian government bonds [4] in some markets, banning certain Russian banks from SWIFT, and freezing a significant chunk of Putin’s war chest.


Although sanctions of these sorts are unheard-of, they have proven to be nothing but a splinter in Putin’s hand as he reaches into his wallet. A vast majority of Russia’s debt is domestic so banning Russia from foreign debt markets will have a negligible effect. The banning of 7 Russian banks from the banking group SWIFT has proven to have been an expensive inconvenience. Although the banks affected cannot facilitate international transactions anymore, others still can. As a result, transactions have just been wired through them, only reducing the efficiency of the banned banks. The most significant effect arguably has come from the freezing of over 60% of Putin’s war chest [5] severely limiting the Kremlin’s capacity to rescue the Ruble and the economy.


These sanctions pose two main threats to the Russian economy: the Ruble crashing and a sovereign debt crisis. During the first month of the invasion, the Russian Ruble lost almost 45% of its value, making the value of imports and foreign debt payments almost double. This would have been disastrous for Putin if it weren’t for the Russian central bank. The Russian central bank raised interest rates, used its limited war chest to buy Rubles, restricted the selling of Russian assets by foreigners, and forced exports to be bought in Rubles. This artificially increased the demand. As a result, the Ruble is at a 4-year high and is the best-performing currency this year [6] and inflation has begun to decrease.


Despite narrowly avoiding a currency crash, on June 27th Russia defaulted on its foreign debt for the first time since 1998. They failed to make overdue interest payments, not because of a lack of cash, but because Western sanctions have blocked cash from getting to creditors. However, because Russia doesn’t need to borrow internationally this will impact its reputation more than its economics.


Since the invasion began, the wider economy has been crippled by the West’s response. For example, the top 10 Russian companies have lost 32% of their market capitalisation [7]. Furthermore, the World Bank expects output to plummet by 11.2% [8] in 2022 with the Head of Russia’s largest bank expecting Russia to face 10 years of recession if sanctions continue [9]. The EU has managed to cripple the Russian technology manufacturing and aviation industries by banning the export of semiconductors, and technologies linked with aviation. With high inflation increasing and the subsequent high interest rate, local businesses are starting to struggle.


The voluntary mass exodus of companies and talented individuals from Russia has had a similar effect. Over 1000 companies have curtailed operations in Russia, with the likes of Nike, Starbucks, and McDonald’s withdrawing completely [10]. This has left a gap in the goods and service market which Russian equivalents are struggling to fill, resulting in increasing unemployment and decreasing tax revenue. We have already seen how “Tasty and that’s It”, the Russian McDonald’s replacement has taken fries off its menu due to its inability to deal with the demand [11].


To rescue the economy, the Kremlin has made commitments to propping up the aviation industry and has nationalised the assets of some foreign companies attempting to leave, such as a Renault factory. However, we are yet to see if this will be enough. Despite this, Russia has one saving grace: oil and gas. Last year oil and gas revenues made up 45% of Russia’s Federal Budget. With soaring oil prices, tax revenue is set to increase as well. In April Russia doubled its total tax revenue collection in only one month from $79 billion to $153 billion [12]. Coupled with decreasing imports, Russia has more than tripled its January to May current account surplus to $96 billion [13] compared to last year. Despite the efforts of the West, Putin’s purse has continued to grow.


But this is not the be-all and end-all. The EU will ban seaborne imports of Russian crude oil in December and petroleum products as of February 2023 and the G7 have proposed an oil price cap, hitting Putin where it will hurt. As well as this, we have yet to see the full effect of economic sanctions in the long term. Even if Russia continues to be able to finance the war it means nothing if no one is willing to sell to them. On June 27th, the White House made a statement claiming G7 leaders will continue to strangle military supply chains with sanctions and block access to major state-owned defence enterprises [14]. How successful the G7 is, depends on whether non-western countries, such as China and India, will be able to accommodate Russia’s increasing demand for military goods or not.

[1] https://www.themoscowtimes.com/2022/05/18/russian-defense-spending-surges-to-300m-per-day-amid-ukraine-war-a77712 [2] https://en.calameo.com/read/005151365f835f7261566 [3] https://www.bbc.co.uk/news/uk-60997622 [4] https://www.ft.com/content/7d4c53b9-3424-4abe-a8eb-179d7328ad5a [5] https://www.bbc.co.uk/news/uk-60997622 [6] https://www.bloomberg.com/news/articles/2022-05-11/russian-ruble-surpasses-brazilian-real-as-world-s-best-currency#xj4y7vzkg [7] https://en.calameo.com/read/005151365f835f7261566 [8] https://www.worldbank.org/en/news/press-release/2022/04/10/russian-invasion-to-shrink-ukraine-economy-by-45-percent-this-year [9] https://www.themoscowtimes.com/2022/06/17/russian-economy-faces-10-years-of-recession-without-reforms-sberbank-ceo-a78031 [10] https://som.yale.edu/story/2022/over-1000-companies-have-curtailed-operations-russia-some-remain [11] https://www.bbc.co.uk/news/world-europe-62103506 [12] https://www.ceicdata.com/en/indicator/russia/tax-revenue#:~:text=Russia%20Tax%20Revenue%20was%20reported,Apr%202022%2C%20with%20316%20observations. [13] https://markets.businessinsider.com/news/commodities/russian-oil-gas-prices-exports-triple-current-account-surplus-2022-5#:~:text=Russia%20has%20a%20current%20account%20surplus%20of%20%2495.8%20billion%20so,is%20the%20highest%20since%201994. [14] https://www.whitehouse.gov/briefing-room/statements-releases/2022/06/27/fact-sheet-the-united-states-and-g7-to-take-further-action-to-support-ukraine-and-hold-the-russian-federation-accountable/

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