Will the war in Ukraine cause the collapse of the Russian economy?

The Ukrainian invasion put Russia on the verge of bankruptcy. Interest rates have doubled, the stock market has closed and the ruble has fallen to its lowest ever.

Military spending in the war was exacerbated by unprecedented international sanctions, supported by a wide coalition of countries. Russian citizens who have witnessed the rapid closure of many foreign brands such as Ikea, McDonald’s and Starbucks are not allowed to convert the money they have in the ruble into foreign currency.

Significant recession

According to the most optimistic analysis, Russia’s economy will shrink by 7% this year instead of the 2% growth forecast before the invasion. Others estimate that the decline can reach 15%.

Such a dip would be greater than that caused by the 1998 Russian stock market plunge. Oil and gas exports with virtually no growth over the last decade. However, the European Union plans to significantly reduce its energy dependence on Russia, and the United States and the United Kingdom have begun a process to completely eliminate the more limited imports of Russian hydrocarbons.

The long-term outlook is bleak. If sanctions are maintained, Russia will be separated from its major trading partners except China and Belarus. Rating agencies now predict that Moscow will soon be unable to repay creditors, which will have enormous long-term implications for the country’s economy. Due to its reputation as an unpleasant borrower, it is difficult for Russia to attract foreign investment without providing a large guarantee, which can be entirely dependent on China.

Huge cost of Russia’s chance of victory

Paradoxically, if Vladimir Putin can win in Ukraine, the economic situation could be even more dire. The occupation of the country and the establishment of a puppet government will certainly mean Russia’s obligation to rebuild the destroyed infrastructure. And even before the war, Ukrainian citizens are increasingly favored by the EU, and maintaining peace in such a hostile environment will force Putin to devote enormous resources to Ukraine .. It must be taken from the Russian budget.

It is useful to look at relatively comparable precedents to get an idea of ​​the outcome of such a scenario. Since the end of the Second Chechen War in Chechnya, where the capital Grozny was almost completely destroyed between 1999 and 2000, Russia has spent up to $ 3.8 billion annually to maintain control of the republic. The reduction in cash transfers puts Moscow at risk of another uprising. And since the annexation in 2014, Crimean has spent a comparable amount.

Ukraine has a population of about 40 million, almost 40 times that of Chechnya and 20 times that of the Crimean Peninsula. Ukraine is the second largest country in Europe in terms of area (after Russia). Maintaining a permanent occupation is very costly.

Finally, Russia’s losses are covered by military secrets, but Ukrainian officials said the destruction of tanks, planes and other military equipment during the first two days of the war cost Russia about $ 5 billion. I’m estimating. Since then, the amount of this substance destroyed has clearly increased significantly.

Ultimate award

But military hardware isn’t the only thing that costs money. It may sound strange, but governments and economists assign monetary value to the lives of all human beings. For example, it is this type of calculation that determines the medicines and treatments that the UK health insurance system offers on a limited budget.

So far, according to various estimates, 7,000 to 12,000 Russian soldiers have already been killed in Ukraine since the start of the conflict on February 24 (Russia killed 498 on March 2). We have announced and have not contacted you further on this topic since then.) For comparison, about 15,000 soldiers died in the Soviet invasion of Afghanistan, 8,000 died in the First Chechen War, and a slightly higher (but uncertain) number died in the Second Chechen War. ..

Estimates based on life expectancy and GDP per capita suggest that the death of 10,000 Russian soldiers is worth more than $ 4 billion. This needs to have a significant impact on the mental health of their families and all soldiers who participated in the war.

In the coming days and weeks, the answers to two important questions will determine if the cost of war is too high for Putin.

First, can Russia’s military and defense industry survive without technological imports of electronic devices and industrial robots from Western countries? Second, are the effects of sanctions and casualties sufficient to shift public opinion to the threat of the Kremlin’s power? Other economic difficulties in Russia will only affect the aftermath of the conflict if the leader really cares about the long-term effects of the war on his fellow citizens …

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To Renault HoukartSenior Lecturer of Economics, Lancaster University, Lancaster University Management School, Lancaster University.

The original version of this article was published in The Conversation.