Putin is sending his country broke
It’s easy to understand why Vladimir Putin would put an incredibly large investment opportunity in front of Donald Trump. Russia’s energy export lifeline is atrophying, threatening its ability to finance the war in Ukraine without lasting and serious damage to its economy and society.
As the fourth anniversary of his invasion of Ukraine approaches, there is a sense of urgency, even desperation, in Putin’s proposal for joint venture projects with the United States that he claims could be worth US$14 trillion (about US$20 trillion, or about eight times the size of Russia’s economy).
It also proposes to bring Russia back into the US dollar-based international financial system, which was frozen and hopelessly diversified at the start of the war as its foreign exchange reserves were seized and the dominance of the dollar was used to impose an increasing range of sanctions on its economy.
Trump wants a deal to end the war on his presidential resume out of ego, not strategy. The highly transactional, “America First” president loves business dealing, so the suggestion that there is a deal between Trump and Putin that would sacrifice Ukraine, or at least a slice of Ukraine, cannot be ignored.
Of course, it will have a different outcome than the peace talks between Ukraine and the European Union.
Behind Putin’s efforts to end the war on his own terms is an economy under pressure to levels that could condemn Russia to a permanent economic winter unless it can release the shackles imposed on it by Western sanctions. He needs a deal not just to collapse Ukraine’s defenses or for Putin to declare victory, but to give himself an economic future.
Russia’s economy was a petrodollar-based economy before it invaded Ukraine; oil and gas exports accounted for almost half of the government’s revenues.
According to the Center for Research on Energy and Clean Air (CREA), an independent research group, Russia’s revenues from crude oil exports have fallen by 18 percent, or about $143 billion, in the past 12 months and are now 27 percent below pre-invasion levels. There was also a six percent decrease in oil export volume.
The clampdown on Russia’s energy exports tightened significantly last year, with the United States imposing sanctions on the country’s two largest oil companies and threatening importers of Russian oil with financial sanctions; This caused refineries in India and, to a lesser extent, China, by far the largest buyer of Russia’s energy since the invasion, to significantly reduce their purchases.
The fact that Western sanctions lasted long enough to stifle Russia’s energy revenues is linked to how dependent Europe was on Russian energy, especially natural gas, when the invasion was launched. The European Union could not immediately end this dependence.
However, according to Helsinki-based CREA, the EU’s fossil fuel imports from Russia amounted to 14.5 billion euros ($24 billion) in the last 12 months. That’s still a significant amount, but it’s 36 percent less than what was purchased a year ago.
The sharp decline in oil export revenue is due to both lower volumes and lower prices; The G7’s floating cap on Russian oil and U.S. sanctions are combining to force Russia to offer significant discounts to a shrinking pool of buyers.
Last week the price of Russia’s flagship Ural was trading at just over $40 a barrel; This was a drop of over $26 per barrel from the price of Brent crude oil.
The decline in energy revenues is hitting government revenues hard, nearly halving them to about 24 percent of the overall revenue base and forcing a government whose fiscal management is generally quite conservative to run budget deficits.
Moscow is budgeting for a deficit of about 2.6 percent of GDP this year, but will likely need a rebound in global energy prices and increased production at oil fields and refineries currently targeted by the Ukrainians to avoid a major boom. Russia currently produces about 300,000 barrels per day less than the production ceiling allowed by the OPEC+ cartel.
Without access to international debt markets, Russia was forced to raise taxes and reduce the most liquid assets in its strategic reserves to continue financing the war. Spending on the military and security now accounts for nearly 40 percent of all government spending.
Russia’s sovereign wealth, or “rainy day” fund, held approximately $113 billion in liquid assets before the invasion. Despite the extraordinary rise in gold prices (Russia is selling a significant amount of its holdings to raise cash) these assets are currently only worth around $55 billion. Russian economic think tanks say that at current oil prices, these assets could run out in just over a year.
If Trump doesn’t throw Putin a lifeline and the West maintains (or hopefully tightens) its current sanctions network, the decline in incomes will steadily strangle Russia’s economy, which the International Monetary Fund predicts will grow only 0.8 percent this year.
This economy is now dedicated to the war effort, which consumes disproportionately large amounts of revenue, manpower, and capital, straining non-military sectors of the economy in the process.
The military and the businesses and people associated with it are doing relatively well, but they divert financial and human resources and cause inflation in wages and prices, which has unpleasant consequences for the rest of the economy. Almost all of the growth in the economy is related to the military; the rest of the economy is shrinking,
To keep the war-affected inflation rate around six percent, the central bank’s policy rate is 15.5 percent. Moscow has raised its value-added tax to 22 percent, increased taxes on small businesses, and is considering new wealth taxes to sustain a war effort whose output is now stable and able to keep up with losses of equipment (and personnel) in Ukraine.
Unless it wishes to maintain its wartime economy indefinitely, its capacity will be greatly diminished and diminished when Russia’s non-military economy ends at the end of the war.
The cost of the war and the dramatic structural changes it caused doom the country, whose population is aging and shrinking and losses in war are accelerating, to a stagnant future at best.
Meanwhile, bankruptcies are on the rise and non-military sector workers are experiencing income and job losses, with companies squeezed by high interest rates, rising labor costs, weakening domestic demand, and reduced access to foreign technology and capital. Financial stresses in the economy are increasing.
Four years ago, Putin thought the occupation would be a temporary process. Today, Ukraine maintains only EU support (the US under Trump has stopped its contribution), but pays a terrible price in lives and infrastructure for its resistance, while the longer the war drags on, the more and more lasting damage it inflicts on the aggressor.
The Business Briefing newsletter delivers big stories, exclusive news and expert insights. Sign up to receive it every weekday morning.
Stephen Bartholomeusz is one of Australia’s most respected business journalists. He was most recently co-founder and deputy editor of the Business Spectator website and associate editor and senior columnist at The Australian.Connect via email.
