Is Putin winning the economic war over Ukraine?

There’s an idea that Vladimir Putin’s botched military campaign in Ukraine – and the crushing economic costs that come with it – is part of an historical pattern that’s been playing out for centuries. The dictator, surrounded by yes men and buoyed by a sequence of military and diplomatic coups – in this case Chechnya, Crimea, Syria – overplays his hand, engages in over-reach, triggering his and the regime’s downfall.

It’s an attractive endgame for Putin’s enemies. And there’s precedence for it in Russia. Tsar Nicholas II’s ill-thought-out military campaigns in Asia, culminating in the disastrous Russo-Japan war of 1904-1905 activated conditions for the Russian Revolution of 1917, which toppled the tsarist regime.

The Soviet Union’s 1979 invasion of Afghanistan similarly resulted in a humiliating climbdown and eventually the collapse of the regime in 1989.

So might Putin have signed his own political death warrant with this latest military misadventure?

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It’s impossible to gauge the current political temperature in Russia given regime’s stranglehold on power and the Kremlin’s near complete control of the media

It’s impossible to gauge the current political temperature in Russia given regime’s stranglehold on power and the Kremlin’s near complete control of the media. Anti-war protests are isolated and sporadic. Is this because they don’t have popular support or because of the government’s ability to swiftly quash dissent? We don’t know.

[ EU must stop paying Putin billions daily for energy resources, says Ukrainian MP ]

Just how vulnerable Putin has made himself by invading Ukraine is an unknown. Most revolutions tend to happen inside the palace gates, meaning leaders are more likely to be overthrown by insiders or by former allies than by a popular storming of the Bastille.

And deciphering what’s going on inside the Kremlin, as Churchill famously put it, is like watching two dogs fighting under a carpet: you know there’s a fight, you just don’t know who is winning.

Then there is the question of the parallel economic war that Russia is engaged in with the West. If military action in Ukraine has proved a national humiliation – with the initial objectives downgraded in face of reversals on the battlefield and mounting casualties – it’s not obvious the economic war is going the same way.

The European Union’s gradual embargo of Russian energy – the latest round of which saw Brussels announce a partial oil embargo – has some big omissions and some big carve-outs. Apart from its avoidance of natural gas, a mainstay of the German and Italian economies, the sanctions exempt – for the time being – piped oil and cover just two-thirds of Russian oil imports. Hungary has also been exempted.

It has taken the EU six rounds of sanctions to imperfectly ban Russian oil and we’re still not there yet. A ban on natural gas looks even more problematic and even more remote. Ukraine says the latest sanctions are “not enough” and the pace of deployment too slow.

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And Russia isn’t exactly snookered in terms of its customer base either with China and India gorging on cheap Russian energy. Russian exports of oil and gas to China in April were up more than 50 per cent year on year.

More importantly each round of sanctions seems to trigger a spike in energy prices, which delivers further financial resources to the Kremlin. In the first four months of 2022, Putin could boast a current-account surplus of $96 billion (€90 billion) – more than treble the figure for the same period of 2021 – primarily because of surging oil and gas revenues and a decline in imports. The surplus was the highest since 1994.

[ Russia says it destroyed tanks in Kyiv sent by European countries — RIA ]

The proceeds are a critical source of hard currency for Russia, enabling the regime to pay for imports while supporting the economy and the rouble.

Russia said last month that half of gas giant Gazprom’s 54 clients had opened accounts at Gazprombank ahead of deadlines to pay for their gas supplies.

As an indicator of an economy’s health, investors often look at the currency, mindful that in Russia’s case, the rouble isn’t allowed to trade freely.

Nonetheless it appears remarkably untrammeled by sanctions and the country’s growing economic isolation. Last month, it rallied to its strongest level against the euro in four years and against the dollar in seven years, which analysts attributed to EU countries preparing to pay Russia for gas and to capital controls imposed by Moscow.

That’s not to say Russia’s economy isn’t feeling the ill-effects of sanctions and a growing corporate boycott. The International Monetary Fund believes the economy will slump into a deep recession this year, shrinking by as much as 8.5 per cent. Inflation is also running a two-decade high of 17.8 per cent.

Weaponising energy has always been Putin’s trump card. And while western leaders are united in their condemnation of Moscow’s military aggression, the build-up of inflationary pressure internationally and the strain on household budgets has changed the political landscape and is threatening their resolve. Hungary’s point-blank refusal to partake in the EU’s latest sanctions round is a case in point.

The problems facing the world’s poorer countries are even more severe. The blockade of wheat supplies from Ukraine’s Black Sea ports is threatening to result in food shortages across the developing world.

And as the war threatens to become a more attritional, drawn-out affair the potential for a more severe economic fallout increases. Putin is presumably banking on this working in his favour.