The Bankrupt Colonialist

What kind of peace could Russia afford?

Kharkiv following Russian shelling, 14th March 2022 (Photo by Wolfgang Schwan/Anadolu Agency via Getty Images)

The Russo-Ukrainian War has settled into a pattern of  Russian failure to achieve core military objectives, combined with a readiness to inflict death and destruction on the Ukrainian people. While some attacks, such as those on the training base near Lviv over the weekend, have a discernible strategic purpose, most are indiscriminate and, other than vengefulness, their purpose is less clear. They have evidently not made it easier for Russian troops to enter cities. They might be intended to coerce Kyiv into making concessions in the negotiations but President Zelensky has not wavered on securing his country’s freedom and sovereignty. It may be that the damage is an end in itself, so that even a free Ukraine is incapacitated. Whatever the purpose, making causing hurt the military priority has left Russian war aims even more confused than they were three weeks ago.  

This is particularly important when we consider the South where Russian forces have more presence and possibly still more military options if they can move out from their current positions. This is the area where they might expect to make lasting territorial gains as a result of the war. Yet it is here that their methods have made any gains less sustainable, both economically and politically.  

The Economics of a Peace Deal

The relative optimism expressed by both Ukrainian and Russian negotiators about a possible peace deal seems surprising given the state of the war. This is the best account we have of the state of the negotiations (it also fits it with other accounts) from Kommersant based on an interview with Mikhail Podolyak, adviser to the head of the Ukrainian president's office.  

I want to focus  on just one of the issues raised by this account. I dealt with a number of others in my previous post.  

My interest is in the relevance of the anticipated economic impact of the war on both the belligerents to the negotiations. Up to now the main question has been about whether sanctions and the pressure on the Russian economy will force Putin to abandon his aggression. There is, however, also a post-war issue, which is the cost of reconstruction. Estimates of the impact of the war on Ukraine are already well over $100 billion, and this for an economy that also faces already a contraction of at least 10% in its economy and probably more. A recent IMF assessment noted that in addition to the economically consequential damage to ports and airports: 

"As of March 6, 202 schools, 34 hospitals, more than 1,500 residential houses including multi-apartment houses, tens of kilometers of roads, and countless objects of critical infrastructures in several Ukrainian cities have been fully or partially destroyed by Russian troops."

And that was over a week ago. Understandably Kyiv wants compensation. This is raised in the kommersant story. According to Podolyak:  

“compensatory mechanisms should be clearly spelled out: at the expense of what and from what budget all this will be restored. I'm sorry, these are the amounts in billions of dollars if we take a preliminary estimate.”         

Yet reparations of this sort - a more than reasonable request - would not only amount to an admission of guilt for the damage caused (Russia ludicrously claims only military targets have been hit) but will be beyond the capacity of the Russian economy, in its enfeebled state, to support.  

The costs of the Russian war effort are not as high as those inflicted on Ukraine, and its infrastructure has not been attacked. Nonetheless war expenditure - lost equipment, fuel, ammo etc. – is still well into the billions of dollars. Looking forward the most worrying issue for the Kremlin is the isolation of the country’s economy. Since the start of the war the Russian stock market has closed, interest rates have doubled, inflation has shot up, and the value of the rouble has plummeted. One recent estimate suggests that Russia faces a drop of from 7 to 15% in GDP in 2022. It risks defaulting on it’s debts.

Whatever the impact on Russia’s ability to prosecute the war it is hard to see how Russia is going to have much spare capacity to compensate Ukraine for the damage it has inflicted upon it, even in the unlikely event it was prepared to offer to do so as part of an agreement.  

The Economics of No Peace  

There is a further issue here even if there is no agreement. The cities and towns that have suffered the worst as a result of Putin’s war are those that were once claimed to be pro-Russian and so required “liberation” from Ukrainian “genocide”. A regular suggestion with regard to Putin’s more modest war aims (as opposed to occupying the whole country and installing a puppet government), to be achieved with or without an agreement with Ukraine, is that Russia will hold on to territory its forces have taken in the east and south. At the very least Moscow will want the provinces of Donetsk and Luhansk in their entirety, and not just the previous separatist enclaves, to be annexed or given some independent status. This was, after all, the demand with which Russia entered the war.  

This is considered by many analysts to be quite likely, and some go so far as to suggest it would be prudent, though painful, for Kyiv to accept it to get the war over. It is, however, by no means straightforward even from a Russian perspective.  

First, if Ukraine has not otherwise been defeated and so “demilitarised” then this will be a frontier that will require defending for the indefinite future. Second, given what has happened over the past few weeks to the population of these territories, those remaining will be more hostile to Russia and will likely resist an imposed government. We are seeing signs of this already, leading to Russia returning to the old Soviet playbook by abducting local mayors and other leaders, as if this will make a difference to popular sentiment. Third, these territories will be economically wrecked and with no prospect of recovery so long as they are separated from Ukraine.  

Before the war Russians were grumbling about the cost of subsidising the existing enclaves. The Ukrainians stopped paying the pensions of those in the enclaves some time ago. Their economies were in decline before 2014 and that process has since accelerated. They are now poorer than other parts of Ukraine and prone to criminality.  

So the cost of occupying even this limited part of the country will be considerable and that is before even thinking about the expense required to render those horribly damaged towns and cities at all habitable, with effective infrastructure and accommodation. The alternative is to leave them in their devastated state with the bulk of their population departed and with minimal productive economic activity.  

Precedents  

Consider what happened to Chechnya after Russia’s war to prevent secession which also involved brutal attacks on civilian areas. In this case Putin found a Chechen ally, Ramzan Kadyrov, to govern the country, in his own ruthless way. Russia handed him just under $8 billion between 2002 and 2012, which Kadyrov spent as he chose. The capital Grozny was rebuilt but the economy functioned thereafter at barely a fraction of pre-war levels. Despite efforts to make the economy more productive, in 2017 it was estimated that Chechnya required 80% of the government budget to be subsidised. Attempts to turn the situation around have not been helped by Chechnya’s rampant corruption. So this relatively small territory is already costing Moscow close to $3 billion a year. Crimea, annexed in 2014, may be costing a similar amount.  

Or take Syria. Here Russian air power was also used in a  brutal way, this time against rebel populations and in support of the Assad regime. That campaign succeeded in keeping Assad in power but Russia lacks the resources to reconstruct Syria and as Assad has little support from other Middle Eastern countries, other than the equally economically challenged Iran, nobody else is inclined to help. This is a recent World Bank assessment:  

“Now moving into its eleventh year, the conflict in Syria has inflicted an almost unimaginable degree of devastation and loss on the Syrian people and their economy. Over 350,000 verifiable deaths have been directly attributed to the conflict so far, but the number of unaccounted lethal and non-lethal casualties is almost certainly far higher. More than half the country’s pre-conflict population (of almost 21 million) has been displaced—one of the largest displacements of people since World War II—and, partly as a result, by 2019, economic activity in Syria had shrunk by more than 50% compared to what it had been in 2010.”   

It reported a study which found that losses caused by the conflict’s disruption of the economy exceeded those losses caused by physical destruction by a factor of 20.  

Syria was a far cheaper war for Russia to wage, probably in the low billions of dollars, in fuel, ordnance, and personnel cost. Far less has gone into economic assistance and much of that has been returned to Russia as arms sales and gas and infrastructure contracts. Russian patronage kept a regime in power but left the country with little prospect of an early recovery from this humanitarian and economic catastrophe.

Implications  

The strains on the Russian war effort are already evident, from the army’s hesitation about trying to fight their way into cities and the recruitment of mercenaries, to the reported appeal to China for help with supplies of military equipment and Putin’s fury with his intelligence agencies for misleading assessments and wasting roubles on Ukrainian agents who turned out to be useless. He is now having to choose between a range of poor outcomes, which the US suggests may include escalation to chemical use (which would be both militarily pointless and test further Western determination not to get directly involved).

We are now beyond the point where Putin has much ‘face’ to be saved, even if it were a priority for the other major powers to save it. In launching this disastrous war he has revealed himself to be not only a vicious bully but also a deluded fool. 

War is rarely a good investment. Putin has acted for reasons of political and not economic opportunism. The prospects for any territory “liberated” by Russia is bleak. They will not prosper and will remain cut off from the international economy. To the extent that people stay they will have to be subsidised for all their needs while there will be little economic activity.  

Because of the destruction the short-term prospects will be bleak even if these territories are fully returned to Ukraine. But over the longer-term they will be much better off because of the amount of economic assistance Ukraine will receive and its integration into the international economy.

This support will be even more vital should Putin be inclined to follow a scorched earth policy, attempting to demolish Ukraine’s defence and industrial capacity, diminishing it as a modern economic power for the foreseeable future. This would be not so much a strategy and more of a temper tantrum, punishing the Ukrainians for refusing to be colonised.

Yet as Germany and Japan showed after 1945 even shattered economies can be rebuilt to even greater levels of efficiency with sufficient resilience and resources. That is another reason why Western financial assistance and investment will be especially vital - Ukraine’s full recovery will serve as a testament to Putin’s failure.

As part of this, and with his standing boosted by his war leadership, President Zelensky will need to tackle some of the chronic problems of corruption that have plagued his country.  

We have been caught out already by Putin’s capacity to act on the basis of his warped world-view, whatever objective calculations might suggest. Nonetheless, it is worth keeping this analysis in mind when considering prospective peace deals. The Russians may have underestimated the costs of conquest from the start but their approach to war has raised those costs considerably, especially in those parts of Ukraine close to Russia. If they are realistic about future costs (big if) then they might prefer to revert to the old formula from the 2015 Minsk agreement that would have given these areas more of a say in some new constitutional arrangement. On the other hand these areas will now, if allowed to express themselves, likely be as anti-Russian as the rest of Ukraine.  

The other implication is that while economic sanctions have not yet given the West much leverage over Putin’s war strategy they do offer it leverage over his peace strategy. While he may have convinced himself that Russia – with Belarus – has a self-sufficient autarchic option this is another self-serving fantasy. The question of the future of sanctions and how they might be unwound is not one to be discussed separately from any peace talks. They are a vital part of the negotiations. As there can be no Western-led peace talks without Ukraine, it should be made clear to Moscow that for now this is a card for Zelensky to play. The future of the Russian economy can then be in his hands. Should a moment come to start to ease sanctions, some leverage will be required to ensure that any agreement is being honoured. There could be a link  to reparations for the terrible damage caused.

“Fanaticism”, according to George Santayana, “consists of redoubling your efforts when you have forgotten your aim.” As his original war plans failed Putin has insisted his forces follow a disruptive and cruel strategy that has put his original aims even more out of reach and Ukraine with a say over the future of the Russian economy.