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Russia losing the economic war too

Feb 1, 2023 | Ukraine, Opinion, World, Featured, The View From Here - Walter Kish, Politics

Russia’s war on Ukraine continues its destructive trajectory, though it is becoming increasingly obvious that the Russian military is incapable of satisfying Putin’s megalomaniacal goal of subjugating his southern neighbour. Although the Russians still occupy large chunks of Ukrainian territory, this is shrinking each day as the war continues, with Ukraine increasingly taking the initiative in reclaiming lands lost during the initial phase of the invasion.

Although news about the war tends to focus on the fighting that is happening in the air and on the ground, we should not forget that just as important, is the war being waged on the economic battlefield. Since the war began, most of the countries in the free world have cooperated in imposing strict sanctions against Russia, sanctions that will over time severely cripple Russia’s economy, and hopefully force it to abandon its unwarranted aggression.

There are some key aspects of this economic warfare that are particularly damaging to Russia’s political and economic future. One of the most important ones is the fact that the sanctions have cut off Russia’s access to western technology. Despite its claims to have a modern high-tech economy, Russia has never succeeded in developing its own domestic electronic chip manufacturing sector and is almost totally dependent on western sources for the integrated chip technology that most modern products require. This includes military technology which Russia is expending at a fast pace in the war, and which it has very limited ability to replace now that the west has banned the export of the needed electronic components to Russia. It will soon run out of its current stocks of advanced missiles, latest generation aircraft and other military technology. It is already resorting to taking cold-war era obsolete equipment out of mothballs and sending it to the front where it is no match against the more modern equipment that is being supplied to Ukraine by its allies.

The longer the war continues, the more acute will Russia’s resupply issues become. To compound the situation, Russia has no allies it can turn to for any significant military supply assistance, in contrast to Ukraine which can count on a significant network of allies to provide it with the latest equipment and munitions that it needs. China has refused to provide military supplies to Russia, and its only other allies tend to be third-world dictatorships with limited ability to help.

The other major blow to Russia’s economy is the fact that it has very quickly lost almost all the foreign export markets for its petroleum products. This will ultimately prove fatal, as this sector is the single biggest contributor to the country’s revenues, and correspondingly its ability to finance the war. Putin believed that since Russia was the largest supplier of natural gas and oil products to Europe, that he could intimidate the Europeans into not supporting Ukraine as well as pressuring Ukraine into making territorial concessions.

That did not happen. The EU countries have over the course of the war weaned themselves almost completely off their dependence on Russian petroleum imports through a combination of securing alternate sources, as well as in reducing demand through various conservation efforts. It has also helped that it has been a warmer winter than usual this year, greatly reducing the demand for natural gas for heating. EU countries have enough supplies of natural gas in storage to carry them through this winter without any major issues.

In addition, the EU and most of the other major western countries have imposed a cap on the price of almost all Russian petroleum products, thereby reducing Russia’s oil revenues significantly. Although Russia has increased its export of petroleum products to countries like China and India, these have been at a sharply discounted price that barely covers the costs of production.

Russia’s isolation from the global financial markets is also causing increasing pain on the Russian economy and quality of life. Russia has somewhere in the vicinity of $600 billion in foreign currency reserves abroad, most of which are now frozen and inaccessible because of sanctions. Foreign investment has dropped to virtually zero. Most foreign companies have left the country or suspended their operations there, causing shortages of many goods, dramatic price increases and inflation. Even before this latest war, many of Russia’s better educated young people had already fled Russia for a better life in the west, and this war has only accelerated that trend. It is estimated that the latest conscription efforts have led anywhere from hundreds of thousands to millions of young Russian men to flee the country. Russia is sacrificing its future to prolong a misguided war it cannot win.

Russia has dug itself into a deep economic hole which will take decades to recover from even if the war ends tomorrow. It is time for those Russians in power that can still think rationally to cut their losses, send Putin into early retirement and end this madness.

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Nadia Prokopiw
Federal Provincial Child Care
Serving Ukrainian New Comers in Toronto

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