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Russia is losing the economic war: the West must not lose its nerve now

Despite a whiff of 1938 defeatism in Munich, nobody should be fooled by Putin’s fantasies.

Russia is running a ‘hot’ war economy.

Defence spending in all forms has tripled since the invasion of Ukraine and is approaching 8pc of national output, roughly what it was under the Soviet Union.

Military Keynesianism flatters GDP figures, never reliable anywhere, but particularly useless in Russia where data is manipulated.

An estimated 800,000 of the young and the brightest have left the country. Another 300,000 have been slaughtered or maimed in the meat grinder. The mobilisation net keeps widening, in a society already facing a demographic crisis.

Yet the alchemy of statistics has turned Russia into the macro-superstar of Europe. The International Monetary Fund has pencilled in growth of 3pc in 2023 and 2.6pc in 2024. “Our economy, unlike the others, is growing and has become the largest in Europe,” said Vladimir Putin at the ‘Everything For Victory’ forum in Tula.

This apparent resilience has confused many, leading to a pervasive sense of despair at the Munich Security Conference over the weekend.

In reality, Putin is losing the economic war, and he is not winning the military war fast enough to compensate. The fall of the Avdiivka salient changes nothing. He is wasting his armies, and two thirds of his tanks, on microscopic gains.

“The limits of growth have already been reached,” said Professor Pavel Baev from the Peace Research Institute in Oslo. “Industrial production is stagnating. The Russian energy sector suffers from declining revenues and delayed projects. Sanctions loopholes are being closed.”

Rosstat data shows that the rearmament boom stalled last summer, plateauing at levels far short of what the Kremlin would need to prevail against even a fraction of the West’s technological might.

“Ukraine is not a success story for Putin. We are two years from the invasion and it’s a disaster from his perspective. We should not talk ourselves into the illusion that our alliance is about to break,” said Norway’s unflappable premier, Jonas Gahr Støre.

Russia’s GDP figures are a red herring. A labour shortage and capacity constraints have fueled overheating, pushing interest rates to 16pc, while what remains of the consumption economy atrophies. The liquid assets of the National Wealth Fund have fallen from 6.6pc to 2.7pc of GDP since the war began.

IMF chief Kristalina Georgieva, who grew up under Communism in Bulgaria, said the deformed economy is looking ever more like the Soviet system, dysfunctional and brittle behind the façade. “I actually think that the Russian economy is in for very tough times,” she said.

Three of five of the most-read stories in the Russian version of the Moscow Times last Friday were about shortages. One quoted Mobius Technologies and others flagging an acute lack of spare parts for hard drives, controllers, motherboards, and data storage.

The reserve of spares built up at the beginning of the war is exhausted. Components are trading at prohibitive prices.

A second story was about the lack of engines for shipbuilding. A third was about “empty shelves” in supermarkets, partly because Turkish and Chinese banks have been blocking payments from Russia.

A Vedomosti article quoted Russian businessmen lamenting that they can no longer clear transactions in yuan through Chinese banks – including the Big Four state banks – due to stringent audits to comply with tighter US sanctions.

Payments were stopped regardless of whether or not they were in dollars, and even when using the Russian SPFS and Chinese CIPS systems, intended to circumvent Western control of the SWIFT nexus. The Sino-Russian treaty of “friendship without limits” does in fact have limits.

Banks in Dubai are closing the accounts of Russians with “opaque” sources of funding, fearing the long arm of the US Treasury.

The EU is drawing up plans to sanction companies in China, India, Turkey, Sri Linka, Serbia, Thailand, and Kazakhstan for helping the Kremlin to circumvent curbs on dual use technology.

Russia will find ways to evade the latest curbs. But it cannot switch easily to semiconductors from China because its systems are configured for US chips, which must be bought at a stiff premium on the black market.

Oil, gas, and coal revenues are still flowing but the sums are modest. They have dropped from $40bn (£32bn) a month in early 2022 to $23bn this January. That is not enough to cover a 65pc rise in the budget over the last year.

The Kremlin is casting around for funds, imposing a war surcharge on the coal industry, and drawing up a list of 30 state companies for privatisation.

India and China have been buying Russian oil, but not at the world market price. The International Energy Agency says Urals crude is selling at $66 a barrel, above the G7 cap of $60, but at a 20pc discount to Brent.

The noose is tightening on Putin’s shadow fleet. The US Treasury has targeted 50 tankers for violating the cap. Bloomberg reports that half have not yet dared to leave port, and 14 tankers carrying crude to India have been stranded at anchor.

An oil price spike may yet rescue the Kremlin but the IEA has just lowered its forecast for global oil demand for the third month in a row. Surging supply from US shale keeps overwhelming OPEC cuts.

None of this changes the fact that Russia can produce enough artillery shells to rain down 3,000 a day on Ukraine – with help from North Korea – while the West cannot do so, and has depleted most of its safely available stocks.

 “You win wars with weapons, and the West doesn’t make enough weapons,” said Republican Senator JD Vance, laying out the ‘Trump view’ in Munich.

Ukraine is using more Patriot interceptors each month than the US makes in a year, and there is a five-year backlog of orders. Ditto for 155mm artillery shells.

“We don’t make enough munitions to support a war in Eastern Europe, a war in the Middle East, and potentially a contingency in East Asia. The US is fundamentally limited,” he said.

He exposed the rhetorical waffle of the Europeans. They invoke an existential threat yet struggle to reach the very minimalist defence target of 2pc of GDP. “Those ideas are very much in tension.”

Indeed. Europe thought that transferring old stocks of weapons, on the cheap and at a glacial pace, would be enough. It has not mobilised its military-industrial base a full two years into what is already a shadow Third World War with the autocracies.

But Mr Vance slips into his own self-deception, or evasion, and confirms what is in store under a Trump administration. “I think Russia has an incentive to come to the table right now… This will end in a negotiated peace,” he said. What he means is letting Putin have the four annexed territories, which he does not yet control.

Mr Vance has the logic backwards. Putin has no incentive to talk as long as he thinks he can outlast a faint-hearted West.

Furthermore, if the greater imperative is dealing with Xi Jinping, as the senator says, then the first critical line of defence is on the Dnipro River.

Military guru François Heisbourg said it was the most depressing Munich conference in 60 years. One might almost say it had a whiff of 1938.

No doubt the pendulum of war psychology has swung in Putin’s favour lately – and he assiduously propagates the narrative of an invincible Russia – but he has not in fact made a major breakthrough and nobody should be fooled by his GDP fantasies.

Russia is moving ineluctably towards economic exhaustion. It would be a monumental error for the West to lose its nerve now.


By Ambrose Evans-Pritchard, The Telegraph. Prepared for publication by volunteers from the Res Publica - The Center for Civil Resistance.


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