Vladimir Putin is ready to continue the war of attrition against Ukraine. Although the Russian people are also suffering, this pain is not enough to force the newly elected president to change course.
This is reported by RBC-Ukraine with reference to Reuters, informs UAINFO.org.
As noted in the article, Putin could reconsider his decision if the West could reduce Russia's oil revenues.
Even if revenues from hydrocarbons remain at the previous level, the Russian government will have to put pressure on its citizens. The economy is overheating as Putin, who just received a new six-year term to extend his 24-year rule, is pouring more and more money into the war. Defense spending, which is budgeted for this year in the amount of 118 billion dollars, has tripled since the beginning of the war. Inflation is 7.7%.
The central bank raised interest rates to 16% and said the official cost of borrowing must remain high for an "extended period" to bring inflation down to its 4% target. The government introduced capital controls to support the ruble.
The government will also need to take fiscal measures to bring domestic consumption in line with output. At the top of the list is likely to be tax increases targeting wealthier individuals and companies. Putin has already signaled this. Although such decisions will be unpopular with some, it will not be resisted
Guns instead of oil
Putin boasts that Russia's economy grew by 3.6% last year, more than any of the G7 rich democracies that support Ukraine. GDP will grow by 2.6% this year and 1.1% next year, the International Monetary Fund predicts.
But the big picture is not as good as the numbers suggest. First, the military economy by its very nature does not produce goods that ordinary people can consume. With the government funneling more of the national income into producing tanks and shells, there will be less money for consumer goods and services, says Tim Ash, strategist at RBC BlueBay Asset Management.
The government has shielded the population from the economic costs of the war by raiding its national welfare fund to finance a budget deficit that was 3.7% of GDP last year. But this is unsustainable, as the fund's liquid assets have more than halved since Putin invaded Ukraine two years ago, and now represent just 2.7% of national income. One way or another, the military economy will crowd out non-military spending. This will come at the expense of higher taxes, inflation, high interest rates and spending cuts.
Moreover, the war is damaging Russia's medium-term prospects. Western sanctions deprive it of advanced technologies. Labor productivity, which Putin wants to increase, fell by 3.6% in the first year of the war. Investment fell to 19.7% of GDP in 2022 from 21.4% in 2017.
According to the US government, about 315,000 Russian servicemen were killed or injured, while the independent publication Re:Russia estimates that more than 800,000 people left the country by July of last year. This brain drain of young and educated people is another drag on the economy.
Although the economy appears to be in a state of stagnation, the President of the Russian Federation does not face any internal financial constraints preventing the continuation of the war. And at the same time, he is not yet under any external restrictions.
Putin managed to hold out because Russia still makes a lot of money from hydrocarbons. Despite the fact that Ukraine's allies have embargoed its oil and Europe has found an alternative to its gas, in 2023 Russia had a current account surplus of $51 billion. Although this figure is less than the record $238 billion in the previous year, Moscow is still in the black.
The situation could change if Ukraine's allies can reduce Russia's export earnings to the point where it is in deficit, says Jacob Nell, a senior researcher at the Kyiv School of Economics. He argues that Russia, and before it the Soviet Union, faced a crisis when the current account turned negative.
Since Russia could cut imports slightly if necessary, Nell estimates that exports would have to fall by about $80 billion before Putin would have to take extreme measures to stabilize the economy. About $30 billion of that amount could come from tightening the gas embargo, as well as restrictions on the export of fertilizers and metals such as nickel. But the main part of the expenses should be obtained by reducing the price that Moscow receives for its oil to 50 dollars per barrel.
This is easier said than done. At the end of 2022, the G7 countries and other allies imposed a price cap on Russian oil of $60 per barrel. However, Urals oil is trading at around $71 per barrel, which is about $14 below the price of Brent. Although the United States has tightened sanctions on tankers that violate the price cap, Russia can partially circumvent them by using its own fleet.
Ukraine's allies may benefit if world oil prices drop sharply. Without that, they will need much tougher measures to drive the price Russia gets for its oil down to $60, let alone $50.
The key to achieving that goal will be persuading India, the largest importer of Russian offshore oil, to stop paying a price above the cap, Nell says. Then the country could profit from cheaper oil, and its refiners could increase their profits.
The problem is that Russia may refuse to sell oil at such low prices and instead limit production. This will lead to an increase in world oil prices, which will cause losses to India, as well as to Ukraine's allies. While oil cuts will hurt Russia, Putin may be willing to take the risk for a while if high oil prices boost Donald Trump's chances of winning the November US presidential election.
Ukraine's allies are not yet ready to take the necessary risks to crush Russia's revenues. Until they do, Putin will have no financial reason to stop fighting, the Reuters article emphasizes.
No comments:
Post a Comment