Four years after Russia’s full-scale invasion of Ukraine, the devastation wrought by the Kremlin’s drones, infantry, missiles and armour continues to be matched by economic destruction. This is a cost borne mostly by Ukraine: The World Bank now estimates the cost of reconstruction, were the war to end today, is now $588bn, nearly three times the country’s GDP.
Simultaneous to the fighting in Ukraine itself, the economic war between Russia and the West rages on. But that battlefield has shifted far more sharply than the one in southern and eastern Ukraine has over the past year. With a war of attrition being waged on the ground, how the geo-economic battleground plays out from here may well prove more important in determining how the conflict is ultimately settled.
The nature of the changes in both sides’ economic fighting conditions, however, is obscured by a dense fog of war. This is compounded by the fact that most participants in this economic conflict are increasingly happy to obscure the state of the geo-economics at play, and to let narratives play out that are more rooted in propaganda and politics than fact. To understand where the war is headed, it could help to bust three myths about Russia’s current state of economic affairs and Western capabilities.
The first is that the economic cost Russia has borne is manageable. The Kremlin may appear willing to wage the war no matter the cost to its coffers and people, but that does not mean that doing so is not devastating its economy.
As a result of the 2022 invasion, the Kremlin has lost what was its largest gas export market: Europe. Before the war, Russia sold roughly 150 billion cubic metres (bcm) of gas to the EU annually; that number is down to 38 bcm. Based on the recent prices for European gas futures, every billion cubic metres is worth more than 300 million euros ($353m), meaning Russia is losing out on as much as 34 billion euros ($40bn) annually. That sum will increase next year when EU countries will phase out completely Russian gas imports.
Approximately $335bn in Russian sovereign assets remain frozen worldwide as well. Although the Kremlin has launched repeated legal challenges to the underpinning sanctions to scare off Ukraine’s backers from harnessing these in its defence, reading between the lines of recent Russian offers in negotiations indicates the Kremlin acknowledges a large portion thereof will never be recovered.
The Kremlin has also acknowledged that its remaining domestic piggy bank, the National Wealth Fund, is running dry, and with withdrawals at a record pace at the beginning of the year could even be spent by year’s end, barring a sustained uptick in oil prices.
The sole area of the economy that is performing well is that connected to the military and defence production, but sustained high borrowing costs and the decline in employable Russians due to war losses and recruitment mean that the Russian economy continues to bleed, too.
The second myth that must be dispelled is that the US has lost interest in fighting t