“It’s not sustainable.” How the Russian war economy manages to resist (and even grow more than that of the G7 countries)By BBC World

March 2022. The Russian ruble plummeted, the London value of the giants Gazprom and Sberbank fell by 97%.

Long lines began to form at ATMs in Moscow. Yachts, football teams, mansions and even their credit cards were confiscated from the oligarchs. Russia fell into a major recession.

This was the immediate result of the West’s most extraordinary attempt to contain Russia financially after its invasion of Ukraine.

Among the most important measures was the confiscation of the official foreign currency assets of the Russian state and, in particular, the unprecedented freezing of the central bank’s reserves of US$300 billion.

Western governments deliberately avoided using phrases like “economic war,” but it certainly seemed like there was a financial battle with the Kremlin. It was better than the alternative of direct confrontation between nuclear states.

Nearly two years have passed and a great change has occurred in this economic context. In a long, rambling interview this week, Russian President Vladimir Putin gleefully exclaimed that Russia is the fastest growing economy in Europe.

Last week, the International Monetary Fund (IMF) highlighted the strength of the Russian economy when it improved its growth forecast for this year. 1,1% al 2,6%. According to IMF figures, the Russian economy grew faster than the entire G7 last year and will do so again in 2024.

Gazprom gas company

These are not just numbers. The stalemate in Ukraine last year and the growing expectation of a frozen conflict on the ground later this year have been underpinned by the remobilization of the Russian economy towards its military effort, especially in the construction of defensive fronts in the east and southern Ukraine.

Can Russia sustain growth?

Western leaders maintain that this model is totally unsustainable in the medium term. But the question is: how long can it be sustained?

Russia has transformed its economy into a mobilized war economy. The Russian state is spending a record amount in the post-Soviet era.

Military and security spending, which represents up to 40% of the budget, has returned to the levels of the late USSR era. Other areas of state support to the population have been reduced to offset funding for the production of tanks, missile systems and defenses in occupied Ukraine.

On top of that, and despite Western restrictions on Russian oil and gas, hydrocarbon revenue streams have continued to flow into state coffers. Oil tankers are now heading to India and China and most payments are made in chinese yuan instead of US dollars.

Russia’s oil production remains at 9.5 million barrels per day, an amount that is just below pre-war levels. The country has circumvented sanctions by purchasing and deploying a “shadow fleet” of hundreds of tankers.

Last week, its Finance Ministry reported that hydrocarbon taxes in January exceeded levels seen in January 2022, just before the invasion.

The ongoing flow of foreign currency into Russian oil, gas and diamonds has also helped ease tension on the value of the ruble. Western leaders insist this cannot last, but recognize its impact.

A world leader recently said privately: “2024 will be much more positive for Putin than we thought. He has managed to reorganize his own industry more efficiently than we thought.”

Russia exposed

But this form of economic growth has greatly increased Moscow’s dependence on oil revenues, China, and non-productive war spending.

As demand for oil and gas peaks and competing Arabian Gulf production comes online next year, Russia will be exposed.

Statistical increases in gross domestic product (GDP) from the production of tanks and shells that then explode in the Donbas in eastern Ukraine are also far from productive.

The Tatar Atesh military movement has pledged to wage war against the Russian invaders.

Meanwhile, Russia has experienced a brain drain of some of its most talented citizens.

The Western strategy has not been to lay siege to the Russian economy, but to engage in a game of cat and mouse to restrict its access to technology, increase costs, limit revenues, and make the conflict unsustainable in the long term.

“We would rather Russia use its money to buy oil tankers than tanks,” a U.S. official told me. In the oil market, the policy goal is not to try to prevent India, for example, from buying Russian oil, but to limit the profits from that trade flowing back into the Kremlin’s war machine.

But this resilience and stagnation may last at least the rest of this year. And this helps the Kremlin’s clear strategy of wait for a possible change of American president and a reduction in Western funding for Ukraine’s defense.

Frozen assets

That’s why attention is now returning to the central role of those hundreds of billions in frozen Russian financial assets.

Ukrainian President Volodymyr Zelensky told me last month: “If the world has $300 billion, why not use it?” All of those frozen funds should be used to finance Ukraine’s reconstruction efforts, he said.

UK Chancellor Jeremy Hunt and Foreign Secretary David Cameron back the move.

Volodymyr Zelensky, president of Ukraine

Cameron told me: “We have frozen these assets. The question is: are we going to use them?” Cameron noted that “using some of this money now is, if you will, an advance payment of (Russian) reparations” for their illegal invasion of Ukraine, and could be used “to help Ukraine and save Western taxpayers money at the same time.” time”.

The G7 has asked the directors of its central banks to prepare a technical and legal analysis. It is understood that this is something that bothers them.

A major financier told me that there are risks of what he called “turn the dollar into a weapon”. Traditionally, central banks enjoy sovereign immunity from such actions.

One plan being developed would use funds or investment profits to raise tens of billions of dollars for Ukraine.

But it is a delicate balancing act. If Russian assets are seized in this way, what message is sent to other nations, perhaps in the Gulf, Central Asia or Africa, about the safety of their reserves in Western central banks?

These relationships are some of the central arteries of global finance, recycling hundreds of billions of dollars used to pay for energy around the world.

Putin certainly sought to communicate that China was now emerging as an alternative, if not for the West, then for emerging economies.

The Russians have also indicated that they will take legal action against any seizures and, in turn, will take similar assets from Western companies frozen in Russian banks.

So the shadow battle over Russia’s economy is essential to understanding where this conflict and the global economy are headed.

Russia’s war economy cannot be sustained in the long term, but it has bought the country some additional time. The West is about to up the ante, after Russia showed this unexpected resilience.

The precise shape of this financial escalation will have consequences far beyond Russia and Ukraine.

BBC Mundo

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Vladimir PutinVolodimir ZelenskyBBC WORLD

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