The Economy of War: Putin Faces an Economic Quagmire in His Pursuit of Peace
Russia's leader, Putin, finds himself in a predicament where he allegedly cannot afford to pursue peace.
The recent peace negotiations between Russia and Ukraine in Istanbul were a farce, set up to fail from the start. With Putin having no real interest in a settlement, the talks were little more than a theatrical display, as predicted by US President Donald Trump.
Political analysts have called this "peace theater," with Putin showing no genuine desire to end the conflict. The reason for his intransigence lies not solely in the military situation, but also in his war economy. By creating a war economy to fuel his attack on Ukraine, Putin has left himself with few options except to continue the war.
Russia's Economy is Now Based on War
Since the invasion of Ukraine, Putin has transformed the Russian economy to focus on war. Military spending now accounts for over 7% of the country's economic output and consumes a third of state spending. All available resources are channelled into the arms industry, leading to a labor shortage in other sectors. The arms sector now supports the entire growth of the Russian economy.
The war against Ukraine is also an economic experiment for Putin. Initially, the increased military spending boosts growth and employment. However, economic analysts warn that the war economy is reaching its limits. Russia simply cannot sustain the level of military spending indefinitely without causing economic chaos.
A Ceasefire Could Trigger Economic Collapse
Suddenly stopping Russia's war machine would lead to a catastrophic economic downturn. The Kremlin economy is so dependent on the arms sector that the crash would be all the more dramatic if the production of tanks, rockets, and grenades were to cease. This dependence has driven up wages and interest rates to record levels, making it difficult for civilian companies to secure financing.
If hundreds of thousands of soldiers were to return home, Putin would face a massive problem. The non-military sector could not absorb returning veterans in the short term, potentially leading to widespread poverty and social unrest. This, unfortunately, is a lesson learned from the Soviet Union at the end of the Cold War, when millions of Red Army soldiers suddenly found themselves unemployed.
The EU Considers Harsh Sanctions Against Russia
Despite the economic risks, Putin finds himself in a dilemma. Continuing the war indefinitely is not a sustainable solution, as Russia's resources are finite. The Kremlin cannot maintain the current level of military spending without transforming Russia into a planned economy, causing shortages in other areas and leading to social tensions. Additionally, the vast stockpiles of arms from the Soviet era are depleting.
Expanding the war to other countries could offer a solution to this dilemma. By capturing new resources and funding military spending, Putin could keep the war machine running and prevent massive unemployment among returning soldiers. Throughout history, dictators have pursued this strategy to finance their armies and keep soldiers occupied.
Insight: The dependency of Putin's war economy on the conflict makes achieving a peaceful resolution challenging. Peace would require significant economic and political risks for the Kremlin, potentially undermining the political foundations of the war economy.
- Arms Industry
- Russia
- Attack on Ukraine
- Vladimir Putin
Sources:[1] ntv.de[2] Foreign Policy (DeVore and Mertens)[3] The Conversation (Luzin)[4] The Guardian (Deputy Chief of Mission at the US Embassy in Ukraine)[5] The Economist (Putin's War Economy)
- The arms industry in Russia, fueled by the attack on Ukraine, has become a significant pillar of the country's economy under Vladimir Putin, accounting for over 7% of economic output and consuming a third of state spending.
- In light of the European Union's consideration of harsh sanctions against Russia, Putin's war economy, built around the conflict, could face severe challenges if peace negotiations were to lead to a ceasefire, potentially leading to a catastrophic economic downturn in the non-military sector.
