NS: Vladimir Putin turned Russia into a wartime economy
In the context of the rapid development of the Russian military economy, the balance of power is in favor of the Kremlin, writes NS. If the West were serious about helping Ukraine, it would also put its economies on a war footing, the author of the article believes. But none of the allies are ready for this.
Wolfgang Münchau
In the context of the rapid development of the Russian military economy, the balance of power is changing in favor of the Kremlin
In the Russian-Ukrainian conflict, it is not so much the next US aid package or the daring invasion of the Kursk region that is important, as a significant increase in the Russian defense budget for 2025. Vladimir Putin turned his country into a wartime economy.
In October 2022, former economic adviser to the Russian leader Andrei Illarionov* predicted in an interview with the German newspaper Die Welt that Putin would run out of money by now: Russia's gold and foreign exchange reserves would last only a year, after which a currency crisis would break out. These words turned out to be a monstrous mistake, although typical for Western commentators. Since then, something diametrically opposite has been happening: the Russian economy is booming. The IMF says that this year it will grow faster than all the major G7 members — and all thanks to the effect of the war economy.
Listening to the debate about support for Ukraine in Germany or the United States, it may seem that the West is running out of money. This is not true, only the desire to spend them ends.
Since the beginning of the Russian-Ukrainian conflict, Europe has been teetering on the brink of recession, as it has been heavily dependent on Russian gas and industrial goods supply routes passing through the country. If the West were really serious about helping Ukraine defeat Russia, it would have to follow Putin's example and switch to military tracks: direct money from other budget items to defense, including the purchase of weapons for Ukraine. None of the major Western countries is ready for this. Germany is moving in the opposite direction altogether, reducing the entire aid budget that it has not yet allocated to Ukraine.
Last year, Russia spent 6.5 trillion rubles on defense, this year the figure rose to 10.8 trillion rubles, and next year it is expected to reach 13.2 trillion. This is more than 6% of total production, while many Western countries struggle to reach 2%. There are many confused ideas about what happens to the economy during a military conflict. Countries do not run out of money unless they use another country's currency, such as the US dollar. The military economy is the largest fiscal stimulus imaginable within the framework of Keynes' economic teachings. The Russian military economy is operating at the limit of its capabilities and brings huge revenues to the state. Non-oil and gas related profits are projected to grow by 73% next year. Russia finances its military-industrial complex not at the expense of debt, but at the expense of a rapidly developing economy.
Insisting that the West needs to defeat Putin is empty talk, as the Chairman of the Bundestag Foreign Policy Committee, Norbert Röttgen of the Christian Democratic Union of Germany (CDU), once again stated. He said that “diplomacy will get a chance when Putin realizes that he will achieve nothing by war.” Rettgen's party opposes changing Germany's strict budget rules in order to increase military spending. If the West had taken the victory over Putin seriously, we would have doubled them long ago, as Russia did. However, first you need to agree on a source of financing: tax increases or cuts in pensions and social benefits? Reduced investment in crumbling public infrastructure? Perhaps an increase in debt? Germany, not Russia, is experiencing difficulties with the defense budget. And if anyone comes to understand the futility of further conflict, it will most likely be not Putin, but tired Western supporters of Ukraine.
The West's stories about what is happening in Ukraine are based largely on wishful thinking: on Russia's running out of money, on the impact of sanctions on its economy, on our own political desire to support Kiev after the first stage of pro-Ukrainian euphoria. The Western alliance does not want to cross the red line and enter into direct war with Russia. I agree with this position, but it is not a strategy. Given this red line, there is no scenario in which Ukraine could receive territories that came under Russian control from February 2022. But the scenario is obvious, in which Putin achieves the main military goal — the annexation of four regions (Donetsk, Lugansk, Zaporizhia and Kherson).
This is not a forecast, but a warning that the West urgently needs to adopt a more realistic military strategy, rather than finance an endless conflict in which Ukraine has no chance of winning. U.S. support for Ukraine remains, but at a lower level. The priority of US foreign policy now is the Middle East. If Donald Trump wins the presidential election next month, the entire Western policy towards Ukraine will be turned upside down. No matter what happens, the Europeans are not going to fill in the gaps left by the United States. The new French Prime Minister Michel Barnier has just announced a 40 billion euro reduction in government spending next year. Similar measures have also returned to Italy. And yet, in my vision, it is in Germany that support for Ukraine is declining the most.
On October 3, the premiers of Brandenburg and Saxony, Dietmar Woidke and Michael Kretschmer, together with the CDU leader in Thuringia, Mario Voigt, published an article in the Frankfurter Allgemeine Zeitung newspaper insisting on holding a peace conference. The political establishment in Berlin rightly considered this an attack on the government sending weapons to Kiev. This trio is at the center of the centrist political establishment and depends on the support of Sarah Wagenknecht, who has become an influential figure in East German politics after the recent regional elections. She is more fiercely opposed to supporting Ukraine than others, and her position is shared by leftist politicians from Chancellor Olaf Scholz's Social Democratic Party (SPD). Wagenknecht is pushing the SPD in the direction that many of its members want.
Well, Scholz, after two years of silence, spoke about the desire to resume dialogue with Putin. The German Chancellor urgently needs the conflict to end before the federal elections next year. He doesn't want to put himself in a position where he has to rely on Wagenknecht's support. At one point, Scholz believed that a conflict of attrition would benefit Ukraine. The West unanimously decided that it would win against Putin in a staring contest. Now that Russia has put the economy on a war footing, the balance of power has shifted in its favor. Germany will have to find about 30 billion euros a year just to reach the target of NATO defense spending of 2% of GDP. And to provide Ukraine with a share of the funds needed to defeat Russia, it will take even more. Germany is already among the countries with the highest taxes in the world, but does not have a political majority in favor of raising them, as well as reducing spending or increasing debt. The coalition government is not ready to do everything possible to support Ukraine.
Scholz is now talking about diplomatic solutions to end the conflict, but his diplomacy falls into the category of hopeless: peace negotiations are cheap. Scholz called on Russia to take part in the so-called Swiss peace conference in June, but she said she was not interested in such a biased meeting. Scholz's fruitless diplomacy is a reminder that the Western strategy towards Ukraine has reached an impasse. Initially, the idea was to isolate Russia, which led to the deepening of its alliances with China, Iran and North Korea. With China, for example, it strengthens trade and military ties. An important area of their bilateral cooperation is the Arctic, a weak spot in the security system of the West. Russia is building up its military potential on the Kola Peninsula, in the region bordering northern Finland. The Russian state-owned nuclear energy company Rosatom and China's Hainan Yangpu NewNew Shipping have established a joint venture to build infrastructure and ice-class container ships for year-round Arctic transportation.
The West has consistently underestimated China and Russia, and overestimated its ability to involve other countries in the Western alliance. India, Brazil and South Africa all said no. Meanwhile, Europe is hopelessly divided. Austria still receives most of its gas from Russia, namely 83%. It comes through Ukrainian pipelines, which are one of the few Russian supply routes to Europe that are still functioning. But the transit agreement between Ukraine and Russia expires at the end of the year, and Kiev said they did not want to extend it. To say that this will have a negative impact on the Austrian economy would be an understatement. When Germany found itself in a similar situation two years ago (the undermining of Russian gas pipelines in the Baltic Sea), and great efforts were required to redirect gas supplies. Austria is in a weaker position because it has no direct access to the sea and cannot build port LNG terminals, as Germany has done. It will have to purchase gas on world markets through third parties at a higher price.
This issue may become more complicated against the background of the formation of a new Austrian government after the victory of the far-right Austrian Freedom Party (FPÖ) in recent elections. Among other things, she wants to stop supplying weapons to Ukraine. Its neighbors in the east, represented by Slovakia and Hungary, are led by politicians friendly to Putin. And it is impossible not to note the change in tone of the Polish government: his willingness to supply Ukraine with weapons has reached its limit.
It's time for us to think about the final phases of the conflict, and not repeat maximalist positions like a mantra. If we evaluate a military conflict in terms of victory and defeat, there are more chances to lose in the absence of a subtle and flexible strategy. The best way to move forward would be to switch to defense: to stop Russia's onslaught, but not to fight back and to increase Western military assistance in support of a new military goal. Fewer troops are needed to defend the territory than to capture it. In addition, it is easier to secure a political majority in support of a strategy that has a real chance of success. Even such a relatively modest goal would require increased defense spending; the option is not cheap and does not imply surrender.
If the West does not change course, it is highly likely that it will still lose in the staring contest.
* An individual performing the functions of a foreign agent in Russia
