The main driving force behind any war between one country and another is the economy. The current aggressive war of Russia against Ukraine, which has been ongoing for the third year, is no exception. The material gains from the war in Ukraine form the primary motivation for the rulers in the Kremlin to maintain a high level of military tension, pushing Russia to conquer new territorial gains in Ukraine, regardless of human casualties, material losses, or international reputation.
The scale of coordinated economic restrictions imposed on Russia by Western countries has reached an unprecedented level. However, all these sanctions have not achieved their goal of preventing the financing and continuation of the Russian war against Ukraine. If we are to believe the official Russian statistics, and there is little to indicate that they are widely falsified, the Russian economy has quickly recovered from a minor decline at the beginning of the war and is now growing faster than before. However, one should not expect that the destructive war against Ukraine can strengthen Russia in the medium term. There are several reasons for this:
- Russia’s return to a planned economy: The transition to a war economy is fraught with hidden problems for the state. Not all of the country is militarized, and consumer goods are still not being rationed. However, increasing pressure is being placed on the private sector, which is struggling for survival in Russia, while the influence of a corrupt bureaucracy continues to grow.
- Import substitution is practically absent: Resource-rich Russia heavily depends on Western technologies. This is where Western sanctions are effective. Attempts to replace Western technologies with domestic developments have not succeeded, as indicated by a new study from the Institute for Economies in Transition at the Bank of Finland. While circumventing sanctions, Russia continues to import Western products or substitute them with Asian alternatives but remains isolated at the same time.
- Low innovative capacity: During the period of military economy in the United States during World War II, a powerful, innovation-oriented military-industrial complex was created. This subsequently stimulated technological breakthroughs in the civilian sector even during peacetime. On the other hand, the Russian military machine is not very innovative and, unlike the U.S., is not focused on developing products that can be (energy) efficiently used in the civilian sector. Soviet automotive giants and aviation manufacturers have become a thing of the past. To this day, Russia has not managed to create a competitive civilian aircraft.
- Lack of youth: In the years following the collapse of the Soviet Union, Russia experienced particularly low birth rates. As a result of Russia’saggressive war in Ukraine, tens of thousands of military personnel are now dying, and hundreds of thousands of the most capable young men and women have left the country. After the war, Russia will face an even greater shortage of innovative youth than before.
- The Russian National Wealth Fund is nearly depleted: The Russian economy has been and remains highly dependent on the import of fossil resources, whose reserves are limited. International climate policy is attempting to replace fossil fuels with more stable energy sources. To ensure that future generations can benefit from its resource wealth, Russia established a National Wealth Fund, to which revenues from the resource sector were deposited. This fund is now being used to finance the war in Ukraine, and will soon be exhausted. Moreover, there are no prospects for developing a civilian economy that is less dependent on raw materials.
Unfortunately, neither the strong economic ties that existed between Russia and Europe before the war in Ukraine nor the extensive economic sanctions imposed by the West, have been able to prevent the classic war of destruction and attrition that Russia is waging in Ukraine. Significantly greater pressure on Putin’s team will likely arise only when Russian resource revenues are drastically reduced. This does not mean that all Western sanctions are ineffective. They complicate Russia’s access to Western markets and technologies, weaken its private economy, and make the country increasingly dependent on China.
Without a radical shift, the prospects for the country look increasingly bleak. Even if it seems that the country’s economy is currently doing well, in reality, Russia is living off material reserves and repeating old mistakes that once led to the collapse of the Soviet Union. Economically and technologically, the West remains far more powerful than Russia. The West should dare, as it once did under President Ronald Reagan, to deliberately and coordinatedly leverage its advantages in the geo-economic war of attrition.
