Will the war in Ukraine lead to the collapse of the Russian economy?

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The invasion of Ukraine brought Russia to the brink of bankruptcy. Interest rates have doubledthe stock market closed, and the ruble fell to an all-time low.

The military cost of the war has been exacerbated by unprecedented international sanctions, backed by a broad coalition of countries. Russian citizens, who have witnessed the rapid closure of many foreign brands such as Ikea, McDonald’s or even Starbucks, are not not allowed to convert the money they have in roubles into foreign currencies. According to the most optimistic analyzes, the Russian economy will contract by 7% this year, instead of the 2% growth forecast before the invasion. Others believe that the decline could reach 15%.

Such a fall would be greater than that caused by the 1998 Russian stock market crash. This would be a major shock to an economy that has seen virtually no growth over the past decade and has failed to diversify enough to no longer be heavily dependent on oil and gas exports. However, the European Union plans to drastically reduce its energy dependence on Russia, while the United States and the United Kingdom have launched a process to completely eliminate their own, more limited imports of Russian hydrocarbons. .

The long-term outlook is bleak. If the sanctions are maintained, Russia will be cut off from its main trading partners, with the exception of China and Belarus. Rating agencies now predict that Moscow will soon be unable to repay creditors, which will have colossal long-term repercussions on the country’s economy. Due to its reputation as an unsavory borrower, it will be difficult for Russia to attract foreign investment without offering them massive guarantees, which could make it entirely dependent on China.

The immense cost of a possible Russian victory

Paradoxically, the economic situation could experience an even more disastrous development if Vladimir Putin manages to achieve victory in Ukraine. The occupation of the country and installation of a puppet government would certainly imply, for Russia, the obligation to rebuild destroyed infrastructure. And knowing that, even before the war, Ukrainian citizens showed increasingly favorable to the EUmaintaining peace in such a hostile environment would force Putin to devote colossal resources to Ukraine… which would then have to be taken from the Russian budget.

To get an idea of ​​the consequences of such a scenario, it is useful to examine a relatively comparable precedent. Since the end of the second Chechen war, which notably saw the near total destruction of the capital Grozny in 1999-2000, Russia has spent up to 3.8 billion dollars a year on maintain its hold on this republic. Any decrease in cash transfers would put Moscow at risk of another uprising. And since its annexation in 2014, Crimea has cost it one comparable amount.

Ukraine’s population of around 40 million is almost forty times greater than that of Chechnya and twenty times greater than that of the Crimean peninsula. Ukraine is the second largest country in Europe by area (after Russia): maintaining a lasting occupation there will be extremely costly.

Finally, Russian losses are covered by military secrecy, but the Ukrainian authorities believe that the destruction of its tanks, planes and other military equipment during the first two days of the war cost Russia about $5 billion. Since then, the quantity of this material destroyed has obviously increased significantly.

The ultimate prize

But it’s not just military hardware that costs money. It may sound strange, even disturbing, but governments and economists assign a monetary value to every human life. It is, for example, calculations of this type that determine which drugs or medical treatments the UK health cover scheme provides with its limited budget.

So far, according to various estimates, between 7,000 and 12,000 Russian soldiers have already been killed in Ukraine since the start of the conflict on February 24 – Russia announced the figure of 498 dead on March 2 and has not communicated any further on the subject since. For comparison, approximately 15,000 soldiers died during the Soviet invasion of Afghanistan, 8,000 during the first Chechen war and a number slightly more important (but uncertain) during the second war.

A rough estimation based on life expectancy and GDP per capita suggests that the death of 10,000 Russian soldiers would correspond to a cost of more than 4 billion dollars. To this should be added the enormous consequences on mental health of their families and of all the soldiers who took part in the war. In the days and weeks to come, the answers to two crucial questions will determine whether the cost of war is too high for Putin.

First, can the Russian military and defense industry subsist without technological imports such as electronics and industrial robots from Western countries? Next, will the impact of sanctions and human losses be sufficient to change public opinion to the point that the power of the Kremlin would be threatened? Russia’s other economic difficulties will only have an impact on the aftermath of the conflict if the leader really cares about the long-term impact that the war will have on his fellow citizens…

This article is republished from The Conversation under Creative Commons license. Read theoriginal article.