Vladimir Putin is attempting to project an image of economic strength to the world, suggesting Russia can sustain its military campaign in Ukraine indefinitely. However, this portrayal is deceptive. Putin’s aggressive actions are exacting a heavy toll on Russia’s economy, presenting a significant vulnerability that the West should exploit to its fullest advantage.
Prior to the invasion of Ukraine two years ago on February 24, Putin had meticulously fortified Russia’s fiscal and financial defenses, crucial for maintaining his grip on power. With sovereign debt at a mere 16 percent of GDP, Russia boasted one of the lowest debt levels globally. Even amid the pandemic, the government managed a budget surplus, amassing substantial reserves including a $175 billion “national wellbeing” fund and over $500 billion in international reserves held by the central bank. Additionally, major banks were well-capitalized compared to their global counterparts.
However, Putin’s course has drastically shifted in response to funding the war and mitigating the impact of Western sanctions on the economy. Military expenditure surged from 3.6 percent of GDP in 2021 to an estimated 7.1 percent, fueling production across various sectors. Subsidized loans exceeding $130 billion stimulated consumer spending, contributing to a construction boom and a rebound in real GDP growth to 3.6 percent last year.
Yet, this strategy of “military Keynesianism” has inherent limitations. The war has strained the labor market, driving unemployment to a record low of 2.9 percent and exerting upward pressure on wages. To curb inflation, the central bank hiked interest rates to 16 percent, further constraining the private sector. Sustaining high military spending will inevitably necessitate sacrifices in vital areas such as social welfare and infrastructure.
Moreover, Putin is rapidly depleting the economic defenses he painstakingly erected. Western sanctions have frozen a substantial portion of the central bank’s reserves, while the National Wellbeing Fund’s liquid assets have declined significantly. The government is now running an annual budget deficit, and domestic banks face mounting risks amid soaring interest rates.
While the West grapples with its own financial challenges, its fiscal resources dwarf those of Russia. Leveraging this advantage, Western nations should intensify sanctions and bolster Ukraine’s defenses. By exploiting Putin’s economic vulnerability, the West can hasten an end to the conflict and ensure a more secure future for Ukraine.
