Leadership: Russia’s Wartime Economic Crisis


March 6, 2024: By late 2023 Russia expected its 2024 government revenue to be a record $349 billion, and that most of the increase would be for the military and the aftereffects of the fighting in Ukraine. In 2024 Russia planned to spend nearly 40 percent of the government budget on defense. There are also plans to sustain this level of revenue by keeping Russian military spending at record level for as long as it takes to prevail in Ukraine. This means more spent on weapons and equipment from Russian suppliers as well as continuing the generous death and disability payments to soldiers or their families. The impact of these payments is obvious on poor regions of Russia that have a lot of men in the military. So many local men have been killed or disabled that the families of the dead are now relatively wealthy and spending money on new cars or upgrading their housing and lifestyles in general. This is intentional because the government is desperate to avoid large-scale dissatisfaction with the war effort. Satellite photos of areas in Russia where a lot of men were in the military and sent to Ukraine show significant increases in the size of cemeteries.

The Russian defense budget is now a wartime budget with about twenty percent of the budget spent on military matters. For the first time since the Soviet Union collapsed the defense budget will be six percent of GDP and exceed spending for social welfare programs. Russia plans to maintain this higher defense spending until they win the Ukraine war. That is unlikely to happen because the Ukrainian war effort is subsidized by weapons and military equipment supplied by NATO countries. Collectively, NATO nations account for about half the global GDP.

Despite the fact that NATO is far wealthier, the Russians believe the massive NATO support for Ukraine won’t last as long as the Russian determination to prevail. Russia notes that NATO has 31 member states. Not all these nations agree on long-term policy or how much should be spent on continuing support for Ukraine. At the same time, NATO members agree that Ukraine should be allowed to join NATO. That can only happen when the war with Russia is over. At the moment the Ukrainian forces are better armed and equipped than the Russian invaders. That is one reason why Russian forces are suffering much higher casualties and equipment losses than the Ukrainians.

By spending so much on military production and social welfare, Russia expects to maintain popular support for the war effort. The problem is that Russia does not have enough income to sustain a wartime economy. Spending too much on defense was a major reason why the Soviet Union went bankrupt and collapsed in 1991. It was later discovered that the Soviet government had inadequate financial controls and lacked a realistic financial plan. This was revealed to the world, and most Russians, after 1991. Up until 1991 Russia was spending about 15 percent of GDP on defense and not enough on more urgent matters like managing the economy prudently in order to avoid a financial collapse. Russian leaders did not believe national bankruptcy would cause the collapse of the Soviet Union. Misunderstanding or ignoring a problem won’t solve that problem or eliminate the consequences.

Most of the current Russian leaders consider the collapse of the Soviet Union a great tragedy. The war in Ukraine is seen as a step towards putting back together an empire as large, or nearly as large as, the Soviet Union was. Current Russian leader Vladimir Putin considers the collapse of the Soviet Union in 1991 a historical tragedy that should be corrected. That won’t be easy, as Russia is discovering in Ukraine. The collapse of the Soviet Union created 15 independent nations, including Russia and Ukraine.

Most Russians believe inept leadership by the Russian-dominated Soviet government was the cause of the problems that led to the bankruptcy and dissolution of the Soviet Union. While many other nations still consider the Russians clever, those who live in Russia or nations that were once part of the Soviet Union are less admiring. This includes China, which regards Russian leaders as prone to making poor decisions. Publicly, the Chinese profess their admiration of and friendship with Russia. Privately, the Chinese have less respect for Russian leadership. China does not discuss this with the Russian government because China wants to maintain good relations with its large nuclear-armed neighbor. China has not forgotten the 1960s rumors about Russia suggesting that the United States cooperate with them in destroying China with a joint nuclear attack. The Americans declined but were alarmed at the lengths Russia was willing to deal with what they considered a serious threat. While Russia still fears growing Chinese military power, the Chinese fear Russia making another dumb mistake that will harm China or Russia.

The Chinese regard Russia’s current military budget policies as another example of Russian self-delusion and poor policy decisions which might help Russia but will make neighboring states more wary of what Russia is going to do next. The Russian invasion of Ukraine was considered another example of bad decision making and Russia appears to have learned nothing useful from their defeats inside Ukraine. Russia is already in bad shape economically and militarily, while current plans to vastly increase defense spending will make things worse. That’s what Russian leaders tend to do. They often find the worst decision and embrace it. This often leads to internal unrest and another revolution. The Russian people certainly have a lot to be unhappy about. Not just the risk of being mobilized into the military and killed in Ukraine or seeing that happen to family members or close friends. In addition to the personal tragedies, Russians have to deal with declining living standards. Inflation is nearly eight percent in 2024 and cumulative inflation since the war began is nearly 50 percent.

Then there is the labor shortage. Before Russia invaded Ukraine the Russian population was continuing to decline. One reason Putin had for invading Ukraine was to increase the Russian population. Russia did that in 2014 when they seized Crimea and part of eastern Ukraine. Russia subsequently declared that these Ukrainian areas were now part of Russia. Invading and conquering a neighbor to increase your population does not work if the conquered population does not want to be assimilated. It takes generations for such assimilation to succeed and in many cases it never does. Plus, atrocities against even assimilated populations can reverse centuries of assimilation, as happened during the 1930’s starvation of Ukraine by Russia which killed 10 percent of all Ukrainians and called by Ukrainians the Holdomor, or great hunger. Russia has that problem in the Caucasus, where the Chechens, who were conquered over two centuries ago, are still resisting assimilation. The Ukrainians now appear equally resistant but, unlike the Chechens, have powerful allies in NATO and the United States. Even in Europe this assimilation process often takes a long time. When Italy was finally united in 1870, some observers commented that now there was an Italy, but where were all the Italians going to come from? The war in Ukraine is not just an economic crisis for Russia, but a demographic and political one as well.




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