As Russia moves into its second year of war against Ukraine, it is worth looking at its strategic outlook going forward.
Even before invading Ukraine, Russia’s economic performance had been chronically anemic compared to most of its neighbours and competitors. In early 2022 the International Monetary Fund (IMF) was predicting post-pandemic recovery growth in Gross Domestic Product (GDP) for Russia totalling about 21% over the period 2020 to 2027. That is well below the rates predicted for neighbouring China at 96%, India at 107.4%, the European Union (collectively the second-largest economy in the world after the US) at 40.7%, the US at 48.2%, and Canada at 70.1%.
As Russia analyst Alexandra Prokopenko recently concluded in a review published by the Carnegie Endowment for International Peace, Russia may in fact experience negative economic growth over the next several years because of the conflict. To be sure, the country has to this point weathered the economic impacts of the war and resulting sanctions better than expected. It defied predictions of an eight to ten percent drop in GDP by economists both outside and inside the country and lost only three to four percent. However, the pre-war estimates had been in the plus three percent range, so the net loss of six to seven percent in economic output is still significant.
Further, she notes that the war effort has masked a number of more serious problems with longer-term consequences. For example, while overall industrial production has fallen only about a tenth of one percent since the invasion, this was largely the result of increased defence production. Automobile production fell by half and there were significant reductions in several other key civilian sectors. New investment has almost completely dried up, even by pro-state businesses, and somewhere between half a million and a million working-age people have left the country, many of whom may not return after the war. State finances have been primarily focused on defence and security, in the current budget making up a third of all planned expenditures, while spending on economic development initiatives has been substantially reduced.
The forced pivot of the economy away from the profitable European markets is also proving difficult as much of the transportation infrastructure has been built to service it and is struggling to handle the increased traffic to new customers. Further, international shipping companies often won’t handle Russian cargo because of Western sanctions, and settling payments can be difficult and time-consuming once deliveries are completed. Russian industries are adapting and the transportation issues will be resolved in time, but the country’s economy is now predicted to continue underperforming for some time, not only due to the lingering effects of sanctions and the war’s economic disruptions but also structural factors within the state’s autocratic and often arbitrary political system.
The Globe and Mail’s Eric Reguly has further pointed out that while Russia initially received a substantial financial boost from high global oil prices in 2022, they have since fallen. Brent crude has dropped from a peak of $133 in March to a current price of $87. Further, Russia can’t get anything close to that price as its remaining principal customers, China and India, are demanding – and getting – substantial discounts. Ural oil has been selling at less than $40. The almost complete loss of the European gas market has similarly shut down important revenue streams.
Overall, therefore, the short, medium, and longer-term economic outlook for Russia is not good and will not likely improve any time soon. However, Vladimir Putin still has access to substantial economic resources to support the war effort without necessarily risking his political control of the country. Prior to the war Russia was spending as much as 4.4% of its GDP on defence. An extreme example of what spending level might be theoretically possible for an authoritarian nation is North Korea, which is estimated by some sources to be spending around 26% with no popular unrest threatening the regime. However, the Kim family has worked for decades to render that country uniquely isolated from the rest of the world. Russia is a very different country with substantial economic, institutional and human connections around the globe, and its people have much more limited tolerance for diverting funds away from social and economic development. There are, consequently, limits on Putin’s ability to tap the economy for substantially greater defence spending, but they are less restrictive than those faced by most of his Western adversaries and he does have a certain amount of room for manoeuvre.
Recent announcements by Moscow indicate that Putin plans to take advantage of that fact. As recently reported by the US Institute for the Study of War, Russia plans to expand its military from 1.35 million personnel to 1.5 million over the next three years, with new units and formations being activated in several areas along the borders with NATO states. Training and readiness is to be substantially improved and other structural reforms are to be made. The institute sees this as both preparation for a protracted conflict with Ukraine and an effort to restore Russia’s ability to credibly confront NATO.
Whether these ambitious measures can be implemented as quickly as planned or will actually deliver the expected improvements in combat effectiveness remains to be seen. Quickly expanding the force structure is not that difficult for a military as heavily dependent on conscription as Russia’s, but improving training and achieving high levels of readiness is a different matter. This takes time and significant resources. Consequently, these new increases in capacity are unlikely to have a material impact right away, but could start to have effect as early as 2024. For 2023, Russia will have to largely make do with its existing forces along with reinforcements generated from already enrolled conscripts or brought in from other areas of the country. Recent news reports of the transfer to the Ukrainian theatre of remaining elements of the 36th Combined Arms Army (some elements were already there) from the area around Lake Baikal near the Mongolian border should be seen in this context.
Regardless of how successful the military reforms prove to be in qualitative terms, the increased numbers of troops coming available over the next several years will undoubtedly have an effect. As a number of commentators have observed, “quantity has a quality all its own.” Consequently, Ukraine’s ability to hold, let alone retake, ground may become increasingly constrained over time even with the current substantial level of infusion of Western equipment. It will likely need even more support if it is to successfully hold off the increasing Russian pressure.
Despite the fact that he has the capacity to continue the war for some time, the political outlook for Vladimir Putin continues to deteriorate as a result of it. Internationally, the invasion of Ukraine seriously isolated Russia, which very quickly received multiple embarrassing censures in a wide group of fora ranging from the UN General Assembly to various international sporting and cultural organizations. It has been forced to direct considerable diplomatic efforts towards rebuilding influence among even its BRICS partners and other countries with which it has long maintained close relationships. While there have been recent signs it may be making some progress, it is uncertain at this point how much practical impact these efforts will have in materially countering Western sanctions or reversing Russia’s wider diplomatic isolation.
Domestically, while Putin has so far successfully limited the net economic impact of Western sanctions by aggressively marketing to other customers and taking other measures, his country’s economy is suffering considerable structural damage from them and at some point after fighting ends he will need to persuade the West to lift the sanctions. Even if he is successful in that, Russia is now likely permanently cut off from what had been its largest and most profitable customers in the European Union, at least when it comes to energy and strategically critical commodities. Its sales to China, India and smaller countries will never generate the same level of reliable income previously enjoyed. This is not an immediate threat to his regime, but will materially hamper future efforts to reinvigorate the country’s economy – which he will need to do to at least some degree if he is to retain political control over the oligarchs and a reasonable level of popular support. How many of the hundreds of thousands of young, educated citizens who left because of the war can be induced to return to help in that renewal effort is difficult to predict.
A bigger concern for Putin is that, whenever the conflict does end, he will almost certainly still face the problem of a Westernizing Ukraine, a process that may well accelerate as its European, North American and other supporters are likely to invest heavily in its reconstruction and recovery. Quick entry of Ukraine into the European Union is also likely, perhaps even before fighting ends. The example of an increasingly successful Ukraine, which would be impossible to conceal from the Russian people, could in time become a problem for him. Even worse from his perspective, he will face a further enlarged NATO that is more united and collectively focused than at any time since the worst days of the Cold War.
Regardless of how the war is concluded, Vladimir Putin will have few good options for dealing with the changed strategic environment he has created.
The Challenge for the West
The West needs to develop strategies for dealing with a frustrated, angry and possibly politically damaged (but still nuclear-armed) adversary who may become even more unpredictable. Max Bergmann of the US-based Centre for Strategic and International Studies has recently proposed a strategy of promising an “open door” approach to Russia, once it ends the war, as an encouragement for it to do so and to give it a positive alternative pathway forward to the one it is currently following. This approach may or may not be the right one to take, but serious thought needs to be given to how to encourage Russia (with or without Putin) to alter course from the self-destructive and globally disruptive road it is now on.