Don’t buy Putin’s bluff. The West can outspend him

Vladimir Putin wants the world to believe that Russia’s economy is doing fine, and that he has the wherewithal to prosecute the war in Ukraine indefinitely.

He’s bluffing. His aggression is costing him dearly, and the West should exploit this vulnerability to the fullest.


Before invading Ukraine — two years ago, on Feb. 24 — Putin had painstakingly built Russia’s fiscal and financial defenses, a crucial element of his own grasp on power. At just 16% of gross domestic product, sovereign debt was among the smallest of any nation. In the second year of the pandemic, the government was already running a budget surplus (in contrast to large and persistent deficits in the US and Europe). It had accumulated a $175 billion “national wellbeing” fund and more than $500 billion in international reserves at its central bank. The largest banks were well capitalized compared with their global peers.

Now, Putin has radically changed course, both to fund the war and to prop up the economy amid Western sanctions. Military spending has gone from 3.6% of GDP in 2021 to an estimated 7.1%, boosting production of everything from artillery shells to computers. Soldiers’ salaries and death benefits have lifted the fortunes of the poorest families. More than $130 billion in subsidized loans have enabled Russians to splurge on new apartments, contributing to a boom in construction. As a result, real GDP growth rebounded to 3.6% last year, defying predictions of a protracted recession.

Yet the limits to such “military Keynesianism” are already evident. The war’s consumption of able-bodied workers has driven the unemployment rate to an extreme low of 2.9%, forcing civilian industries to pay more for scarce labor. To keep inflation in check, the central bank has had to hike its benchmark interest rate to 16%, further squeezing the private sector. Military spending won’t keep adding to GDP growth: Just maintaining it at the current level would require big sacrifices in other important areas, such as social spending and much-needed infrastructure maintenance. Without the war-related stimulus, Russia’s economic performance would look much less impressive.

Worse for Putin, he’s rapidly eroding the defenses he constructed to protect the economy and himself from unexpected shocks. Much of the central bank’s reserves are frozen in the West. The National Wellbeing Fund’s liquid assets have declined by nearly half since the beginning of the war, to about $55 billion.

The West has its own financial difficulties, of course. In both the US and Europe, governments need to get budget deficits and rising sovereign debts under control.

This will require tough choices, but the temporary spending required to support Ukraine is far from decisive. Taken together, NATO members’ fiscal resources are more than 20 times greater than Russia’s.

On average, European Union members spend about 2% of GDP on defense.

This war will almost certainly end in negotiation. For the West, the goal should be to ensure the most secure and independent Ukrainian state possible — and to deter others from attempting similar land grabs. To that end, it should make the most of Putin’s economic vulnerability, including by tightening sanctions and arming Ukraine.

— Bloomberg Opinion

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