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Wednesday, May 25, 2022

How long can Russia keep invading Ukraine?

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University of Kentucky Distinguished Professor Dr. Robert Farley addressed the issue of Russia’s ability to continue the war against Ukraine under the pressure of the sanctions it faces.

War diverts productive youth from economically beneficial tasks into compulsory military service, often involving death or permanent disability.

The economic sanctions were meant to deter Russia from going to war before they later turned into punishment. These measures will severely damage the growth of the Russian economy, isolate Russia from flows of some sensitive technologies, and limit the scope of Russians’ ability to do business abroad. But it may not stop the Russians from continuing their war in Ukraine.

terrible situation
Farley wrote on the “1945” website that the sanctions left Russia in a dire situation. Much of its foreign exchange reserves were frozen, undoing years of accumulation and preparation. In the short term, Russia may default on its sovereign debt. This poses a threat to the global financial system roughly equal to that of Russia, although the latter will surely suffer long-term repercussions. Russia is struggling to complete energy contracts due to strain on transport and energy companies.
Sometimes countries at war run out of money. In World War I, the Allies came perilously close to bankruptcy and were ultimately saved by the generosity of the Wilson administration. In the Russo-Japanese War, Japan gave up many of her field gains because her funding sources (London and New York) had been largely depleted. Russia is not exactly in this dangerous position.

Are you broke?

Russia is not bankrupt in the sense of having no financial assets. It has large foreign exchange and gold reserves, including some $300 billion in gold and foreign exchange reserves that it maintains at home or with friendly countries. Its export economy is based mainly on energy, which allows it to earn foreign exchange, especially since Europe continues to buy Russian gas. It is also based on entering into barter agreements and doing business in currencies other than the dollar, according to Farley.

Its armed forces depend on its defense industrial base, which means that Russia can buy its equipment with its own currency. It can sign contracts with the only significant country in terms of military support, namely China. Russia seems to have prepared some time for the possibility of its disengagement from the global financial system.

Between expectations and reality

Russia reportedly expected the conflict to last only a few days and thus have limited economic impact. Even if that plan materializes, the costs of long-term mobilization and mobilization on the Ukrainian border will put pressure on Russia’s defense budget. But the situation turned out to be much worse than the Russians expected. Russian forces are still engaged in the field and have failed to inflict a crushing defeat on the Ukrainian army.

Russia is using pre-war stockpiles of ammunition, food and vehicles at a dangerous and potentially unsustainable rate. Estimates of the financial cost of the fighting range from $500 million to $20 billion per day. The accuracy of these claims depends on what counts as cost. Including the total price of the destroyed equipment brings observers closer to the higher estimate, but does not necessarily reflect the immediate burden on the Russian economy.

Between strength and suffering
Farley says that the short answer to the question posed is that Russia can keep fighting for a long time because it supplies most of its needs through its defense industrial base and because it still exports energy to a few key partners. This is very different from saying that the Russian economy will not suffer from the war. Military production replaces civilian production, workers tend to work harder for valuable hard currency, and the inflation that is likely to result from a war economy will no doubt create social unrest.

But Russia can manage its own money supply and domestic financial system through tools that Moscow possesses and that Washington cannot easily interfere with. The ability of the Russian government to print money means that the national economy will continue to function in some way, despite the impact of the sanctions.

distortion of the economy

However, the prospect of a long war does not mean anything positive for the Russian economy. War diverts productive youth from economically beneficial tasks into compulsory military service, often involving death or permanent disability. The need to fuel the war machine will distort Russia’s economy by diverting production from industries vital to the economy. Hyperinflation can result from printing too much money to buy too few consumer goods. In conclusion, Farley wrote: “If the war ends tomorrow, it will take Russia years to recover from the damage done to her economy, and there is no indication that the war will end tomorrow.”

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