The impact of the war on the Russian economy and Ukrainian politics

Editor’s note: This article by FPRI scholar Mitchell Orenstein is the product of a workshop on “The World Order After Russia’s Invasion of Ukraine,” hosted by the University’s Perry World House. of Pennsylvania on April 14, 2022.

Moscow grossly underestimated the economic costs of launching its war in Ukraine. Cradled by the limited sanctions that greeted his 2014 invasions of Crimea and Donbass, and a false sense of security provided by his hundreds of billions of dollars in reserves, President Vladimir Putin seems to have believed he could circumvent all sanctions that a country divided West could muster. He seems not to have understood the shock wave that a total invasion of a European state would produce in the West and the massive unity of the European Union’s economic response. He had not anticipated Germany’s U-turn in its relations with Russia or the sudden attraction of NATO membership for Finland and Sweden. Russia’s invasion of Ukraine appears to be Putin’s catastrophic mistake, which puts Russia and its regime in grave peril.

On April 6, 2022, the White House said: “Experts predict that Russia’s GDP will contract by up to 15% this year, wiping out the last fifteen years of economic gains. Inflation is already above 15% and is expected to accelerate… Supply chains in Russia have been severely disrupted. Russia will most likely lose its status as a major economy and continue a long descent into economic, financial and technological isolation. That seems like a reasonable projection. However, there remain a number of uncertainties, such as whether Russia will be forced to default on its debt; whether its foreign trade, especially in oil and gas, will be banned; whether it will continue to be able to count on India and other developing countries for economic support and circumvention of sanctions; and what is the real size of Russia’s foreign exchange reserves and whether these include assets of oligarchs, for example, or other hidden treasures of Russian mafia state networks.

Moreover, after Bucha’s war crimes were exposed, Western leaders strengthened their resolve to punish Russia, primarily through damaging economic sanctions. Yet Europe has mostly refrained from the ultimate sanction: eliminating gas imports from Russia. Fifty percent of Russia’s export earnings come from oil and gas, and its main customers are in Europe. Every day, with every atrocity, Europe is getting closer and closer to the decision to cut the link with Russia’s energy supply, a decision that would have long-term strategic ramifications and damage the Russian economy, at least until she can establish new customers and transit routes. Once the European Union has made this decision, it is difficult to see why it would return. As recently re-elected Hungarian strongman Viktor Orbán says he will veto an energy boycott, a consensus is building in Europe to take the one step that, more than any other, would undermine Putin’s ability to finance this war. medium term. A few countries, including Germany, have already banned Russian oil and are also seeking to become independent of Russian gas. Russia recently halted gas shipments to Poland and Bulgaria.

The logic of the sanctions is that the worse Russia’s economic situation deteriorates, the greater the likelihood of a political backlash from within that would challenge Putin’s delusional leadership. The first month of the war was characterized by extreme disarray, both in politics and on the battlefield. Russian military and government leaders seemed bewildered. Defense Minister Sergei Shoigu disappeared for a few weeks. Putin fired the heads of the Federal Security Service’s foreign intelligence office, as several generals died on the battlefield and Ukrainian farmers towed out of commission Russian tanks. Some reports said Russian leaders had fled to a nuclear bunker deep under the Ural Mountains, while Ukrainian President Volodymyr Zelensky remained in charge in Kyiv. Some Russian oligarchs have indicated their dismay at the invasion and its results, believing that Putin had squandered 20 years of Russian prosperity in one act. While a palace coup or popular uprising remains unlikely, neither is impossible, and Russian politics will remain volatile as living standards plummet, despite a crackdown on dissent and freedom of expression.

Putin redirected the army to a concentration of forces in eastern Ukraine, preparing a new offensive there. In some ways it is already a defeat, due to the rapid reduction of military objectives, from a full takeover of the country to an effort to extend the Russian occupation of eastern Ukraine. Yet, as security analyst Sergei Karaganov argues, Russia must win this war, however defined, and adopting a narrower definition can work. Much depends on events on the ground. If Putin manages to retain extensive territory in eastern Ukraine and can claim victory, that’s one thing, but if the Ukrainian military manages to push back Russia, it will prevent Putin from declaring victory and he will become more politically vulnerable. Expect Putin to prolong the conflict as long as possible.

This war has already been a huge political success for Ukraine, although extremely costly in terms of lives lost, property damaged and cities destroyed. In this document, Ukraine gained recognition as a state on the international stage. Most nations are forged in war, and Ukraine has turned this terrible onslaught to its long-term advantage by presenting itself to the world as a mighty state. It has emerged as a democratic, European nation, with a powerful civic nationalism that transcends the Ukrainian-Russian linguistic divide to include a wide diversity of ethnic identities: Polish, Jewish, Armenian and Greek. With its popular and telegenic President, Ukraine has left an indelible mark on the world stage. Most notably, after decades of skepticism from leading EU states, Ukraine has emerged as part of Europe, of European values, and therefore a potential future member of the bloc. This will definitely change Ukrainian politics.

Ukraine will become a more confident country in the future, more deeply rooted in Europe. She will steer her government towards the Western integration project, applying for EU membership and taking all possible steps to achieve it. Zelensky gave a decisive direction to Ukrainian politics, as an attempt to integrate as closely as possible with the West to gain security and economic progress.

A critical part of this will be reconstruction efforts. Already, Ukrainians are flocking to Kyiv, seeking to rebuild their economy and their city, which has suffered extensive damage, although nothing like bombed cities like Mariupol. Western and other funding will be needed to rebuild cities, bridges and other infrastructure.

Expect much of the initiative to rebuild Ukraine to come not only from the government, but also from civil society organizations, which have played a major role in refugee aid and advocacy national level and could also play a central role in reconstruction. Ukraine’s liberal and nationalist civil society has been building for decades. The Euromaidan movement of 2013-2014, like the Orange Revolution before it, was a civil society movement, organized by individuals and groups outside the state. While civil society flexed its muscles in 2006 and 2014, it was unable to fully control events thereafter, but its strength and importance increased during the war. Citizen volunteers have solved many problems of the current war, organizing relief for targeted cities. They also formed the backbone of its territorial defense forces and volunteer battalions. It is hard to imagine that civil society will allow itself to be marginalized in the future by Ukrainian governance and reconstruction. Civil society now has the power and legitimacy to play a greater role.

At the same time, the strengthened Ukrainian civil society will face competition within the particular internal politics of Ukraine. For decades, the oligarchs have ruled different towns across the country, subsisting on the state or state-provided rents. The oligarchs have tended to strengthen their position when state leadership is lacking, and the destruction of so much of Ukraine may create opportunities for them to rise up and consolidate their power, because the government does not won’t be able to handle Herculean tasks like rebuilding entire cities. without partners or funding.

Vladimir Putin has called Ukraine “anti-Russia” and, to some extent, that’s true. Ukraine has shown the world what can happen when Eastern Slavs internalize typically Western values ​​of nationalism, democracy and civic identity. He can defeat Russian armies made up of indoctrinated, drunken and corrupt conscripts. A new Ukraine demonstrates for all to see that Russia has taken a wrong turn in submitting to a modern-day Ivan the Terrible. A different kind of Western liberal identity is possible, even in the heart of what was once Kyiv Rus’. Even after the neoliberal shock therapy depredations that cost Ukraine so much. Despite economic collapse and corruption, Ukraine has developed a powerful civil society to respond to the unique opportunity to maintain national independence after 1991. Today, Ukraine has lessons about democratic transition to teach to the rest of the world, primarily to Russia and Belarus.

The opinions expressed in this article are those of the author alone and do not necessarily reflect the position of the Foreign Policy Research Institute, a nonpartisan organization that seeks to publish well-reasoned, policy-oriented articles on U.S. foreign policy and the national security. priorities.

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