Four years after Vladimir Putin ordered the invasion of Ukraine, Russia’s economy has entered a “death zone,” said Alexandra Prokopenko of the Carnegie Russia Eurasia Center.
recently Economist columnThe former Russian central bank advisor drew on a term from mountain climbing, where high altitude forces the body to exhaust itself faster than it can repair.
“Russia’s economy is stuck in what can be described as a negative equilibrium: It is steadily destroying its own future capacity while holding itself together,” he wrote.
The economy isn’t heading for a collapse anytime soon, but GDP has stagnated, oil revenues have halved due to Western sanctions, and the government’s budget deficit is rapidly depleting reserves.
At the same time, two economic systems emerged. One consists of military and related industries, which receive priority from the Kremlin. Prokopenko also explained that “everything else was left out in the cold.”
“The most dangerous feature of this new structure is the fuel it burns,” he added. “Russia’s economy now runs on what might be called ‘military rent’: budget transfers to defense enterprises that generate wages and economic activity.”
However, Prokopenko stated that the transfers targeted assets designed to be destroyed. In other words, the money that keeps Russia’s factories running pays for tanks, armored vehicles and other weapons that are eventually destroyed or damaged, rendering them useless for future economic growth.
Similarly, the money spent attracting new recruits to Russia’s military does not retrain them to be more productive. Instead, many people die or return home permanently injured. The Center for Strategic and International Studies estimates Russian military losses at 1.2 million, including 325,000 dead.
“The body metabolizes its own muscle tissue for energy,” Prokopenko said.
He wrote that Russia’s economic situation cannot be solved by monetary or fiscal policies, as the central bank cuts interest rates to support growth and the Kremlin takes steps to rein in the budget deficit.
In fact, interest payments on government debt this year are set to exceed combined spending on education and health care.
Unlike a cyclical downturn such as an economic recession, Prokopenko argued that what Russia was experiencing was more like altitude sickness; “The longer you stay, the worse the condition gets, regardless of rest.”
But Putin cannot afford to climb down the mountain, as military demobilization would likely trigger an economic crisis as the economy becomes increasingly dependent on the defense sector. Rather than ending the war, Putin insists on continuing, waiting to see whether Ukraine or its Western backers crack up first.
“Russia could probably continue the war for the foreseeable future,” he predicted. “But no climber can survive in the death zone forever, and not all climbers who descend can survive there either.”
Alarm bells regarding the economy They have been coming from within Russia in recent months. Russian officials warned Putin that a financial crisis could occur in the summer. sources told Washington Post earlier this month.
They pointed to weak oil revenues, which fell 50 percent in January from the previous year, and a budget deficit that continued to grow even after Putin increased taxes on consumers.
A Moscow business manager also said: to mail He said that in an environment where inflation is spiraling, the crisis could come in “three or four months”, adding that restaurants were closed and thousands of workers were laid off.
Economic tensions date back to Russia’s invasion of Ukraine four years ago. When sanctions came into effect and Putin mobilized the economy for a protracted war, the tight labor market and high inflation forced the central bank to keep interest rates high. The recent expansion has failed to prevent spending declines across several consumer categories.
As companies feel the pressure of higher rates and weak consumption, more workers are taking unpaid leave, unpaid leave or having their hours cut. As a result, consumers are having difficulty paying their loans. Concerns about a collapse in the financial sector are growing.
“Banking crisis is possible” Russian official told to mail In December, on condition of anonymity. “A non-payment crisis is possible. I don’t want to think about the continuation or escalation of the war.”
At the same time, Western officials are trying to dispel the idea that Russia won. Ukraine has even launched a counter-offensive in recent weeks to take advantage of Russian soldiers’ disruption of SpaceX’s Starlink internet service.
The Institute for the Study of War estimates that Ukraine has liberated at least 168.9 square kilometers of territory in the southern part of the country since January 1.
Russia’s military is now suffering more casualties than it can recruit, according to Christina Harward, deputy head of the Russia team at the Institute for the Study of War.
He wrote: New York Post Putin may even have to launch a limited, sustained military call to continue his war, he said on Sunday, adding that his bravado in the negotiations was actually a bluff.
“With hiring rates falling, inflation rates rising, and the ability of his troops to effectively seize that much-desired territory, it won’t be long before Putin is subjecting his people to economic hardship and death,” Harward said.
This story first appeared on: Fortune.com
