Putin’s hooked on warfare and a Nato nation may properly be his subsequent sufferer
Within days of Russia launching its invasion of Ukraine on February 24, 2022, its economy went into meltdown.
The rouble plunged to an all-time low against the dollar and would have dropped even further if the central bank had not spent billions on propping up the currency.
The country’s main stock exchange lost a third of its value and the MSCI index of shares in Russian companies traded in London and New York dropped by 45 per cent.
As the months went by, Western companies pulled out of Russia and, by the end of the year, this capital flight totalled a whopping £239billion.
And in December 2022, the G7 nations and the EU imposed a $60-per-barrel price cap on sales of Russian oil in a bid to starve its war chest.
Vladimir Putin put nuclear missile launchers on display in Red Square at the Victory Day military parade last week
Ukrainian firefighters attempt to extinguish a blaze after a Russian missile strike in Kyiv
Putin proposed replacing Sergei Shoigu and appointed him as secretary of Russia’s national security council
Which makes it all the more extraordinary that, today, Russia’s economy appears to be, at first glance, in rude health.
The rouble, which at one point fell as low as 133 to the dollar, is now at 92, not far off its pre-war rate of 77.
Thanks, in part, to sanctions-dodging exports it’s still making hundreds of billions of dollars a year from sales of oil and gas.
The unemployment rate is at an all-time low of 2.8 per cent and, in January, GDP was up 4.6 per cent year on year.
Much of this extraordinary turnaround can be attributed to Russia’s switch to a war economy, fuelled by a military budget that has been tripled to $100billion, or 6 per cent of GDP.
The scale of this effort was highlighted only yesterday in reports that Russia is massing more than half a million troops on the front line with Ukraine.
And the bad news for the West is that if Russia is to continue to prosper, Putin needs to make more war not less.
And here’s why. The Russian economy of 2021 no longer exists. Instead of graduates, cars and refrigerators, the country turns out conscripts, artillery shells and drones. As the real economy shrinks, the slack is taken up by state spending on war.
Reports say Putin has proposed little-known Andrey Belousov, 65, to replace Shoigu as defense minister in his new government
Ukrainian soldiers fire anti-tank missile system in Donetsk Oblast
The problem is that, without conflict, the bounce-back outlined above cannot be sustained.
For his regime to retain legitimacy and prevent mass unrest, Putin must have war. And the more war there is, the more militarisation occurs. This creates a vicious circle, the logical outcome of which is the invasion of a Nato state.
Fresh evidence of this shift was provided earlier this week, with the replacement of defence minister, Sergei Shoigu, by deputy prime minister Andrei Belousov, an economist by background.
To me, this is a clear sign that Putin is seeking to align the Russian economy more closely with the war effort, professionalise its management and reduce rampant corruption.
On Tuesday, Yuri Kuznetsov, the defence ministry’s head of personnel, was detained on bribery charges. His detention follows the April 23 arrest of deputy defence minister Timur Ivanov, who is accused of taking bribes worth $11million in the form of property services from a construction company in return for military contracts.
The militarisation of the economy is already well underway. According to the Financial Times, the number of military industrial enterprises has increased from 2,000 pre-war to 6,000 today.
These include Uralvagonzavod, the world’s largest tank manufacturer, which has no fewer than 30,000 employees.
Devastation to houses seen in Vovchansk, Kharkiv region, following Russian attacks this week
A Minuteman III ICBM is pictured in its silo prior to launch
It is based in the city of Nizhny Tagil, 1,000 miles east of Moscow, which is producing around 1,500 main battle tanks and double that number of armoured fighting vehicles every year.
Russia’s munitions industry, meanwhile, which manufactures about 250,000 artillery shells per month — 3million a year — is running at almost triple Western defence production.
Long-range missile production has also been stepped up dramatically, with up to 130 missiles with a range of 200 miles or more produced every month.
And the Shahed drone system, initially imported from Iran, is now made in Russia.
In all, Moscow’s military manufacturers are believed to employ 3.5million people, with millions more employed in feeder businesses such as steel mills, component makers and chemical plants. Civilian employers are struggling to find staff, as a result.
But without war, Russia’s economy risks collapse. And if that happens, the Putin regime will fall too.
As a result, regardless of whether the Russian army is winning in Ukraine, all the rhetoric from Moscow will focus increasingly on fake ‘foreign threats’.
Nato is being portrayed on Russian media as a threat to the country’s very existence. We can expect to see an increase in border skirmishes, fabricated espionage cases and ‘false flag’ atrocities against Russian civilians, all orchestrated by the Kremlin.
In the West, we’ll see more disruption, with pervasive online interference in our elections, floods of disinformation and fake news on social media, financial support for extremist parties on both the Far Right and the Hard Left, the manipulation of migrant flows, and vast money-laundering enterprises.
One of Putin’s most urgent priorities is helping ‘useful idiots’ to get elected at all levels of politics, from local government to national parliaments. This was already an overt policy before February 2022 and the bungled blitzkrieg on Ukraine. Now the Russian president has no choice but to double down.
The invasion of Ukraine has given Putin’s cronies the excuse for a series of corporate raids, with more than 180 private companies seized from allegedly ‘unpatriotic’ owners. These include the Chelyabinsk Iron and Steel Works Group, worth an estimated one billion euros (£850million).
As we have seen, Western sanctions have not had the impact that was hoped. While, the Kremlin saw oil revenues fall by 40 per cent in 2022, its exporters have since adapted, using a ‘shadow fleet’ of tankers, whose ownership is obscured.
Other consignments reach foreign markets via clandestine tactics such as ship-to-ship cargo transfers conducted at sea, with GPS trackers switched off.
Gas exports were also badly hit as Europe turned to other suppliers and the Nordstream pipeline was sabotaged. But US intelligence suggests last year Russia was still the second largest supplier of liquified natural gas to Europe.
This helps to explain why the International Monetary Fund [IMF] predicts 3 per cent growth for the Russian economy in 2024, ahead of the US at 2.1 per cent and far better than the Eurozone at 0.9 per cent.
For Vladimir Putin, defeat in Ukraine is unthinkable. But as Russian troops surge back to the besieged Ukrainian city of Kharkiv, victory will also not be enough.
For Putin’s dictatorship to survive, nothing less than continuous war is essential. The alternative is total economic chaos, popular unrest, and clan warfare over far-flung regions and assets.
That would be like The Sopranos with nuclear weapons.
And that means, if Ukrainian resistance does fail and president Volodymyr Zelenskyy’s government in Kyiv is overthrown, the Kremlin will need to find another war to fight in short order.
Russia is now a ‘war society’. The political machine and the commanding heights of the economy are increasingly geared to sustaining a war without end, through mass conscription, switching factories to military production and viciously repressive laws.
It’s an ugly outlook but we are far from helpless. If the UK and Europe ramp up their defence spending and demonstrate that they have the will to fight back, it is the men in the Kremlin who will begin to fear the future.
