Russia’s invasion of Ukraine has the potential to develop into a protracted war that will weigh heavily on the Russian economy. Paul De Grauwe argues that Russia simply lacks the economic resources to sustain a prolonged conflict of this kind and that the world should be deeply concerned about the potential for Vladimir Putin to turn to unconventional means as an alternative.
Russia is a small country. From an economic perspective, that is. According to the IMF the gross domestic product (GDP) of Russia amounted to $1,648 billion in 2021. This is about the same size as the combined GDP of Belgium ($582 billion) and the Netherlands ($1,008 billion) in the same year. Even if you add those two countries together, you still have a small country. Russia’s GDP represents barely 10% of the EU’s GDP. Russia is an economic dwarf in Europe.
Can such a small country win an intense war against a country that is resisting tooth and nail and that will have to be occupied for a long time? My answer is no. Russia does not have the resources to do so.
To win such a war, Russia will have to drastically increase its military spending. Russia today spends about $62 billion (about 4% of its GDP) on the military. That’s 8% of US military spending. Such a military budget will not be sufficient to continue waging an intense and protracted war. More military spending will have to be made. But military spending is economically wasted. The tanks and combat aircraft that must be produced to wage the war are investments that are economically useless. This contrasts with investments in machines (and other production factors) that make it possible to produce more in the future. Tanks and fighters will not allow one extra ruble of production in the future. They will, however, crowd out productive investment. The economically small country that Russia is today will therefore become even smaller in the future.
Instead of cutting back on productive investment, the Russian dictator could cut consumption in Russia to make way for more military spending. The fact that Russia has such a small GDP while the country has 146 million inhabitants (more than 5 times the population of Belgium plus the Netherlands) hides the fact that most Russians live in relative poverty. Putin will have to push them even further into poverty to realise his megalomaniac ambitions. It is doubtful whether this policy will strengthen his dictatorship.
There are other effects to be expected from a policy that pushes a country into a war economy. The incomes earned in the war industry will not be able to be spent on consumer goods because these are in short supply. As a result, inflation will rise sharply. The temptation will be great to introduce price controls. The result is known: rationing and scarcity. Paradoxically, this will fulfill Putin’s ambition: a return to the Soviet Union with its long waiting lines in front of the shops.
Russia is economically a small country; it is also an underdeveloped country. It has a production structure of a typical African country. The country mainly exports raw materials and energy (gas and crude oil). They make up 80% of Russian exports. Imports are concentrated in manufacturing products (machinery, transport equipment, electronics, chemicals, pharmaceuticals). Those products represent more than three quarters of total Russian imports.
The problem with such an underdeveloped country is that export earnings are subject to large fluctuations. Today, energy and commodity prices are very high. That has allowed Russia to pile up more than $600 billion in international reserves (dollars, euros, pounds, gold). It has also boosted the budgetary revenues of the Russian government. But those are temporary effects. They have created the illusion that Russia has the resources to wage a protracted war.
It is already clear that this is an illusion. About half of these international reserves are now being frozen by the punitive measures imposed by Western countries. This also makes clear how dependent an underdeveloped country is on the Western powers that control the international financial system. The vast stock of international reserves now available to Russia is not a source of power, but its Achilles heel.
Moreover, these high commodity prices are a temporary phenomenon. “What goes up must come down”. Gas prices, oil prices and commodity prices will fall again and will shrink the resources available to the Russian government and make a protracted conventional war impossible.
Russia is economically a small and fragile country. It is, however, big in two other dimensions. The first one comes from its large resources of energy (oil and gas) and raw materials. This provides Russia with a lot of political leverage in Europe. Russia may cut off deliveries of gas to Europe in response to Western sanctions. This would certainly be painful in the short run in those countries that foolishly have made themselves too dependent on Russian gas. If Russia cuts its gas deliveries today, however, this would, in the longer run, destroy the main source of Russian foreign revenues as European countries would look for, and find alternatives. It would reduce even further Russia’s resources to wage war.
The second pillar of Russia’s power is, of course, its nuclear arsenal. Nuclear bombs do not win a conventional war, but one can destroy a country with them, in the blink of an eye. And here lies a great risk for the rest of the world. What will a dictator do when he realises that he cannot win the war by conventional means but by other means? That remains the most terrifying question today.
Note: This article gives the views of the author, not the position of EUROPP – European Politics and Policy or the London School of Economics. Featured image credit: kremlin.ru (CC BY 4.0)
Fascinating piece, as usual, Paul!
I would qualify the comparison, perhaps not overturning your main conclusion: in real terms (PPP-adjusted), Russian GDP is significantly bigger than Belgium plus the Netherlands. It is similar to that of Germany. Here is my data source: https://data.worldbank.org/indicator/NY.GDP.MKTP.PP.CD
Moreover, Russia could be even more threatening than a rearmed Germany due to its much more extensive land, vital natural resources, and 145 million people with lower median age (39.6 vs 45.7).
Russian GDP is no where near Germany. You seem to be misreading the data.
Paul refers to the nominal GDP of Russia, not the GDP measured by purchasing power parity (PPP). PPP-based GDP is not exactly “real GDP”. It can be useful for measuring the cost of life and consumer spending, because it counts the price differences for basic goods which can be produced domestically like food, but purchasing power doesn’t have much significance when it comes to military spending.
The nominal GDP of Russia measured by the World Bank is about 1,4 trillion USD: https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations=RU
It stands just between Spain and Italy – both countries with significantly less population. Sure, the average Russian consumer may be able to buy the same amount of goods with less money than, say, the Italian consumer, but that doesn’t mean the Russian state can buy the same amount of weapons with less money than Italy. Moreover, Russia doesn’t have a self-sufficient military industry, so cutting their economy from the rest of the world would definitely make it difficult for them to supply their army with new weapons and ammunition.
This means that every lost weapon, vehicle, fighter jet and ammo in Ukraine is an irretrievable loss for the Russian army. And all what the Russian army is left with for that war is their reserve (which is actually pretty big). So the question is – when it becomes more apparent for Putin that he is losing everything Russia has in that war, will he press the red button?
Super post, thanks
I wish I would have been born in Russia or at least visited it once. I was never welcomed in any part of Soviet Union
What you are saying could make some sense a decade or more ago. Unfortunately, after the sanctions following the 2014 invasion of Crimea, import substitution has been accelerated by Russia. Russia is primarily militarily self-sufficient. Moreover, it is the second world weapon exporter after the United States. Therefore, the current sanctions will have little effect on military procurement. Real GDP matters because Russian weapons are mainly domestically produced.
We have made a big mistake, underestimating the potential danger of the military industry restructuring that was going on in Russia in the past eight years.
You can read this Congressional report to have a better idea of how serious and worrying the situation is: https://crsreports.congress.gov/product/pdf/R/R46937#:~:text=Russia%20is%20the%20world%27s%20second,back%20to%20the%20Soviet%20Union.
Having a lot of empty land does not make you a super power. If it did then Canada would also be a super power, since it is the second largest country by land in the world. The Russian population is also not that big when compared to countries like, China, India, USA, Brazil and Indonesia. It’s about twice the size of the population of the UK, with an economy smaller than Spain. Russia just isn’t a super power any longer and that’s the problem here. It still wants to be treated like one….
I would like to draw your attention to an indirect asymmetric threat, that has been posted by a semi-official Russian account affiliated to the Kremlin: https://twitter.com/iron_girlzz/status/1498990454377005056?s=21
War is always painful, loss of life, destruction and grave damage to the environment.
Capitalism. power greedy corporate lobbying and double standards politics are probably to blame. Accusing each other for the crisis is unworthy as world is digital and people are able to understand and decide who is “right, wrong,,double standards, right-wing, left-wing. trustworthy or not” and malicious propaganda may not work,
Covid made changes already on world’s activities. This rhetoric, sanctions, bullying is an eye opener to many growing countries including China, India, Indonesia, Brazil, South Africa, Iran, Turkey and so on, to have a separate and an independent Financial system without Western dominance including a reserve currency other than US$, another SWIFT system, create an International Stock Exchange in Hong Kong or Singapore or elsewhere and to have a “Rules Based System” without political interference to deal with global issues.
Indians accuse UK stealing 45 trillion dollars during colonialism. Middle East oil money may have helped many Western countries than the natives in those countries. Africa accuses the west on robbing their nations during colonialism and slavery. China has prospered well in few decades and no one can underestimate another nation to become self sufficient in a short period if an eminent leader like Lee Kuan Yew.emerges.
We need a better world without wars and no human sufferings!
Several of those countries you mention plus Russia specifically doesn’t allow for free access to information, they are highly based on censorship and only really allowing the information that the leaders want.
Russia internally doesn’t even recognize there is a war in Ukraine, their medias are not allowed to say so and Russia just passed a law making it possible to throw journalists to jail for 15 years if they “lie” about the war, which I think it’s naive to think doesn’t mean “say anything negative of Russia in the war”. People who demonstrate for peace in Russia is arrested.
Additionally the access to the internet is highly controlled and limited.
No there is not free access to information.
While I completely agree that there is a level of hypocrisy from the west considering past wars, it doesn’t make Russias invasion any better. If we point to past injustices to allow new ones, then it never ends.
The free market is the enemy of war. It has undermined the main reason for wars in history. Wealth is no longer achieved by conquering the territory of others. Rather free markets now require information and trade — and that is the antithesis of what happens in war. Most sane people recognize that in today’s world, war will not lead to wealth; rather trade will.
I doubt that you would be happy with a “Rules Based System” without political interference. Would you want our institutions to accept and help the apetheid system in South Africa to thrive?
Perhaps more likely, then, that Putin/Russia will seek to consolidate the Southern gains, which seem the more successful anyway, linking the Crimea to the breakaway regions.
This sounds like wishful thinking especially since it is not even adjusting for PPP. Russia has lots of resources and have good relations with China, India, Brazil and many other countries. Even if I don’t agree with the war, the blame is not entirely on Russia. Their alleged objective is to demilitarise Ukraine and not allow it to join NATO. Putin’s demand was that Ukraine remain neutral. Why is NATO even thinking of expanding all the way to Russia’s doorstep? Perhaps don’t antagonise Russia and many lives will have been spared. Even now, NATO could say Ukraine will remain neutral and this war could be stopped. Russia could also back off but I don’t think that is going to happen.
PLEASE! You sound like a Russian bot. This invasion is about land grab by Putin. Plain and simple. Just like how Russia stole Crimea from Ukraine almost a decade ago. Now Finland and Sweden are seriously considering NATO. So by your logic Russia should have already declared war on these “aggressive” nations trying to join “aggressive” NATO. Putin wanted to demilitarize Ukraine so it would fall easier. Is a nation not allowed to defend itself? In no world would Ukraine attacked Russia. That would be suicide. It basically was neutral. The only aggressive country right now is Russia. Ukraine did not want this war. Russia/Putin did! Quit listening to Russia’s propaganda. So far Russia invaded because of Neo-Nazis in Ukraine, the government is “corrupt”, NATO aggression, Ukrainians are really just Russians, liberation…. what else? It’s like throwing a fistful of noodles at the wall to see what sticks. Get your head out of Putin’s butt and think for yourself!
Strangly putin did not know president of ukcrane was Jewish
Russias demands was that a range of countries should leave NATO, a demand that Russia knows is completely impossible. NATO offered to negotiate a security deal with Russia to ensure both sides but Russia went ahead with the invasion. To me it seems naive to think that Putin didn’t already decide to invade, especially given that there was a direct offer to negotiate security including missiles.
Joining NATO is the only way, especially smaller and economically weaker nations can ensure their defense. How else can they do it unless they spend all their resources in building military defense. And with Ukraine that reality became completely clear. Not being in NATO means that a country like Russia can go ahead and invade because there is no way you can match their military and other countries doesn’t want to get directly involved.
Russia hammers their citizens for many years with the idea that NATO is a threat to them, but it’s completely irrational to think that nato would attack Russia with military. Where Russia did have a point was missiles places close to its borders, but since that part was willingly offered as part to be negotiated for a mutual beneficial security deal, that argument is gone, it was not the deciding motivation by Putin in the first place.
Great content, thank you profesor!!
Your are too me very optimistic. You think that the Russian leadership care anything about the welfare of Russian citizens. They do not.
Russia has been preparing this invasion for a decade, since at least 2012, That is when Putin set the goal, achieved in 2020, of doubling Russia’s grain output. It is now both energy and food secure. They do not really need to export in order to make war, yes they import machinery, transport equipment, electronics, but the guns, the rockets and other weaponry they make themselves.
The Russian military will eventually, bloodily, crush Ukrainian resistance. The death toll will be staggering, surely in the millions. It can then stay as long as it wants. All it needs to maintain its military presence is oil, weapons and the ability to feed its troops.
for anyone interested in my views on the Ukraine crisis, as a LSE trained economist, do visit https://alistairklmilne.com/
Very very intresting essay, dear Professor
Their are some pretty stupid comments here. Consider Ukraine’s crime from Putins perspective. They wish to be a free and independent people and enjoy the kind of life we all do. Their crime is not wanting to be a vassal Russian state condemned to tyranny and poverty. They are no threat to anyone but simply wanting something different from what Putin wants for them is a crime in his eyes. I get tired of reading crap about how the west provoked this or both sides should settle as the blame is equal. There are people who are so habituated to regarding the problems of the world entirely the fault of the US and it’s allies they do not wish to confront the reality of what states like Russia and China would have instead. The US saved our and everyone’s else’s arse in Western Europe in 1941 and it’s time we stopped relying on them and started thinking about a proper European Defence Force. They have China to deal with. All the time we have been cocking about with Brexit all we have done is spread disunity and contributed to a wider narrative (Trump, Le Pen, Orban, Law and Justice, AfD et al) that the west is disunited, weak and in terminal decline. It is unlikely but it would be refreshing to hear tossers like Farage, Rees Mogg and all the other numpties admit our problem is not the EU after all.
Russia is fighting a senseless war against the West in the least sensible way – by bombing a brotherly nation.
Russia is addicted to the sale of raw materials, and if it is forced to sell more to China, Russia will become a vassal state of China. It is terrible where one sick mind can take the world.
As a graduate student of Economics and International Relationship from Bangladesh, I respect LSE explanation, but cannot overlook other factors. What is the Yemeni GDP or per capita income that allowed ongoing wars for many years? Same about Syria, Libya, Iraq and other economically sanctioned countries like Iran or North Korea which are raising wars or developing war heads despite economically harsh conditions. Yes, in 90’s Soviet Union broke due to economic problems, but can we be too much confident that will happen again in the same repeated mode ? My view is NO.
Because, (1) China economy wasn’t a helping hand to Russia in 90’s, it’s now in helping hand due the aggressive mode of the West in the South China sea and supporting the opposition of Chinese regime. Therefore, despite propaganda of the West, China is cornered to choose Russian side as a neighbor and important reliable ally; (2) Russian intervention in Middle-east has introduced a low cost long fighting gerrila force or war alliance that will be a helping hand to Russian Orthodox Christianity and Russian Economy too. There is a growing alliance between Russian Orthodox and Middle-eastern Muslim groups which will minimize Russian cost in Ukraine war beside Chechen army for any long-time conflict. Besides, to overcome the Russian oil supply, the West is welcoming Iran and Venezuela’s oil into market which will ultimately strengthen the that Russian-Middle-east-Latin American socialist Alliance in the long-run. That also explains why majority Muslim countries didn’t vote against Russian war in Ukraine in the UN.
Now, these arguments raise an important question, can European NATO members be united to tolarate a long energy supply disruption war in every fronts in the name and command of the USA which has good amount of oil reserve and itself the biggest consumer? That explains why Ukrainian President is lecturing everyone to ‘unite and do more’ on ground and that’s why NATO members are campaigning within themselves to take concrete actions on ground too. For nearly, one month, Ukrainians are bleeding and the West is using speeches and war equipment businesses without participating on group fight.
Economic sanctions might slow a country, but can not slow down or stop an alliance with full mutual respect and benefits without much economic thought. For 43 years, Iranian axis has already proved that in Middle-east and Russia will be doing the same in the biggest way that this author foolishly thought Russian effort as a ‘small’ economy. That also explains, why President Putin is welcoming every fighting groups or allies into the Ukraine War.
Md. Mehedi Hasan: so basically you say that Russia can afford this war because now it is backed by China, and because Siria and Cechens provide them low cost soldiers. Right?
1. China is literally building artificial islands in the South China sea and filling them with military hardware, even in front of the Capital of the Filipphines, firiing on and seizing ships in the international waters pretending those waters are China’s property, and in your opinion is the West to behave ägrressively’ in the South China sea.
2. “The West is supporting the opposition to the Chinese regime”. Since when the Chinese regime has an opposition? Since when the Communist party has an “opposition” in China?
The only legal Chinese government is the one that has been overthrow by the Communist party and forced to escape to Taiwan, which makes Taiwan the real China. That government, the only legit government of China, and the population in Taiwan have the right to protect themselves, to protect China from the Communist Party.
The only propaganda here is the yours.
You sound like a Chines bot, the same rethoric, the same garbage.
Putin is welcoming every fighting group into the war because he’s desperate due to his weak economy. Despearate old insane man.
This article is proving to be quite prescient, but wow, a few of the Putin apologists commenting here are unbelievably ignorant and disgusting. If you talk to some Russians or look at polling, you’ll find that the main lie swirling around Russia is that they are “liberating their Ukrainian brothers from the Nazis”. Ironically, that paraphrases the excuse Hitler gave for invading Poland. I dare you Putin fans to go up to any Ukranian and tell them they should be grateful for Putin’s generosity. Let me know how that goes for you.
Excellent piece and very precise assessment of the russian wasteful and criminal leadership. They could have built an enormous success story in the past 20 years – instead, putin and his thug goverment, pissed it all away, and most of the assests (mostly stolen) are now arrested by the West. What a horrible story.
The idea that Russia isn’t capable of fighting a war in Ukraine is ludicrous. Countries throughout history have fought wars much further from their borders with more limitations that Russia will face in Ukraine.
I refer to the last comment from GS. In repose. Russia cannot even cross a land border and fight. Let’s face it. They are worse off then when they were poorly trying to master USSR. Seems to me. The same old equipment is still breaking down. Not t mention the new T14 tank on ‘Not so Victory Day’ starving soldiers and starving civilians again. Remember many times in the history of Russia, the people have become cannibals and eaten human flesh. S for their internal working, well. Let’s see. Putin is hours from a coup. Possibly we can accept another poor eastern country into Europe. Forgiveness etc. Russia in NATO. Next stop China! China cannot feed the population. Cannot hydrate the population. Africa a possible land for east west conflict.