Russia’s crushing, poverty driven defeat by the end of next summer.
Russia’s culmination point had been reached by the end of August 2022. Their capacity to wage this war, especially for offensive operations, is getting more and more limited by the day.
Short Summary of the article: Negotiations with Russia will be fruitless. The only way to defeat Russia will not come to pass through a complete military victory. The defeat of Russia will come by successfully bancrupting them and starving them of supplies. Until they are facing another state collapse, similar to the ones in 1917 and 1992.
“We believe in investing in places where there is the rule of the law, and not the law of rulers”
Jeffrey Sonnenfeld
Here is why honest negotiations are going to be impossible:
Russia has nothing to give but idle threats (nuclear blackmail) and brutal barabarism (Bucha). This is then topped up with more idle threats (grain deal) and more murderous actions against their neighbor as well as their own people. The annexations have made any meaningful compromise impossible.
The war will end at some point, of course.
It will end by exhausting Russia’s resources. At the current depletion rates, I expect that Russian logistics will be utterly depleted, and their military utterly exhausted by the end of August next year. Or before next winter at the latest.
If the West would force Selensky to negotiate a settlement. The Ukrainian people and the Russian regime would simply not accept it. The Germans use the term “Realpolitik” for this. Putin wants all of Ukraine and even more than that: He wants to see the Western rules based order collapse.
The free world cannot allow this to happen, just as we couldn’t allow Hitler to enslave Europe. The West and Ukraine have to realise that a horrible war is better than an even more horrible peace. It will cost us all dearly, but the price for freedom is something worth fighting for.
“Putin made any kind of peace negotiations impossible” claims Soviet Expert Dr. Eleanor Bindman is a specialist in post Soviet politics.
She claims that Russia and Ukraine have completely diametrical ideas of what the future of Ukraine should look like. Since Putin has annexed these territories, any common ground has been successfully destroyed for any agreement. The situation won’t change for as long as this regime is in power.
How is this war going to end, then? Militarily? politically? Or economically? My assessment is that the most likely way to stop Russia is by driving them into domestic debt default and therefore into state collapse.
“The sinews of war are infinite amounts of gold” Marcus Tullius Cicero
Russia’s budget shows that they are already tethering. The numbers are all flawed, of course, since months Russia publishes no useful economic data.
The textbook definition of what a GDP is goes as follows: It is the final value of goods and services produced in a single country in a given period of time.
This research paper takes a closer look at how and why statistics published by autocratic regimes should always be taken with a grain of salt.
When using the expenditures approach to calculating GDP, the components are consumption, investment, government spending, exports, and imports.
This extensive paper takes a very thorough and well resarched look into the problems of the Russian economy. It uses good methodology to explain in more detail how Russia is holding back data to cover up the real extent of their economic problems. This paper and another one by the IIF both assess that Russia’s GDP may fall by 15 to 20 percent for 2022 instead of -2.3 percent as the IMF forecast claims.
Now let’s answer the question: What constitutes growth?
- Consumer spending by population size, adjusted to purchasing power
These markers are in free fall.
Over 1.4 million people have left Russia, 20 percent of those are high net worth individuals, their wholesale and retail sector is collapsing, and their production of consumer goods is also tethering. This drives prices and lowers the purchasing power of Russians. The mobilisation also ejected hundreds of thousands of young men from the workforce. Their collapsing demographics and over 810.000 Covid Deaths are not helping to brighten up the situation.
Also, asking teachers to contribute to the war effort from their salary is not very reassuring.
2. Investments:
Billions of Dollars have been removed from the Russian market, and BRI spending from China went to zero. Their banks made 25 Billion Dollars in losses only for the first half of 2022.
That isn’t all there is to it, of course. Over 1 billion dollars of Western capital have been deinvested in the past 10 months.
Domestic lending is in collapse over 7 million microcredits have defaulted in the first 10 months of 2022. Such credits are usually taken by people who already have no capital available to them. Over 38 percent of Russians report that they struggle to make ends meet with their money.
https://www.google.com/amp/s/khodorkovsky.com/third-russians-struggle-make-ends-meet/
Their foreign debt default is exacerbated by the exorbitant sum of roughly 300 billion up to 900 (!) Billion Dollars that China had invested in Russia through their BRI program, now this sum is in foreign debt default as well. So both Russia and Belarus have a steep bill to pay back. Overall, they owe China in conjunction with at least 500 billion Dollars or more.
https://www.themoscowtimes.com/2022/09/02/russian-banks-post-record-25bln-first-half-loss-a78707
3. Government spending:
Roughly speaking, this is the state budget. Most of Russia’s revenue flows to Moscow and Petersburg. Especially most of the revenue from their oil, gas, and commodity business flows to Moscow.
Defense, welfare, education, healthcare, pensions, social security, budget for workers employed by the state, infrastructure projects, and other smaller things, which are also part of what comprises a state’s budget.
Government Spending refers to public expenditure on goods and services and is a major component of what constitutes GDP growth. Government spending policies, like setting up budget targets, adjusting taxation, and increasing public expenditure, are very effective tools in influencing economic growth.
Due to Russia’s war time economy, Russia is now gradually moving more and more funds to the military to cover the exorbitant costs of this war.
The total costs of this war amount to an estimated 1 to 6 billion dollars on a daily basis.
This is unsustainable for a country with the economic might of the state of New York. The only way to sustain this in the short term is to print money. This could lead to hyperinflation, similar to the situation of the Weimar Republic after WW1.
Their trade surplus due to commodity exports and tax raises are some other ways to generate cash for Putin’s war. Russia has also been selling parts of their gold reserves. They also use their remaining rainy day funds to cover these expenses.
Currently, this fund is, according to estimates, depleting at a rate of roughly 75 billion every 100 days. This has slowed down lately, though the fund sits at roughly 200 billion dollars in total at the moment.
Russia defaulted on its foreign debt, which makes lending money from abroad impossible due to sanctions applied against them. Their domestic debt default is a matter of time. When this happens, is hard to say. Nations go bancrupt gradually and then all of a sudden.
4. Exports and imports
Imports have been in free fall since the beginning of the invasion. Western imports dropped by more than 80 percent, but also, Chinese imports dropped by 50 percent. The sanctions thus far targeted their chip sector, their automotive and aviation sector, as well as commodities such as coal. Additionally, more than 1200 companies have left Russia since February 24th.
Report by the Russian Federal reserve
Nabiullina (Head of the Russian Central Bank) has already confirmed aloud what I wrote in the very first letters: by the end of May we are ending the "good old days" and moving into a new economic model. Which does not yet exist, which has not yet been invented, but for which we will pay a fantastic price for trying to create.
Import warehouses will be depleted of everything accumulated in the pre-war period by that time (end of May), whether the government will risk unlocking the strategic reserves - we wonder ourselves.
If you unpack it (the strategic reserves), up to another six months of time appears. That phase (the extra 6 months) would be on the level of the early '90s. And then... I don't even want to talk about it. And there is no point in looking that far ahead: earlier we tried to plan for years ahead, now it would be a success if we could predict a month out.
https://www.igorsushko.com/2022/04/food-shortage-luring-ukraine-to-counter.html
Also Russia’s parallel import strategy and their attempt to source the necessary spares from Asia have mostly failed. These countries have also curbed their imports, for example, China by roughly 50 percent in fear of secondary sanctions.
70 percent of the empire’s spare parts are imported. They cannot even produce their own wheel bearings for their trains, as Russia’s industrial base and collapsing demographics. The sanctions make domestic production and innovation increasingly difficult.
Russian exports:
Defense exports
Their arms exports are in full collapse. Russia lacks the capacity to produce the same volumes as before. They cannot continue to export their weapons and uphold their contracts because of the war.
https://foreignpolicy.com/2022/07/21/ukraine-russia-arms-business-weapons-exports-africa/
Food exports
Their wheat exports and fertilizer exports are in a downward spiral. The worst is yet to come next year. In case their farmers aren’t back on their fields by next year’s planting and harvest season, this could very well lead to massive shortages. This will also have disastrous implications for the world’s food supply.
Their coal exports are holding up quite well, as China and India now import vast volumes but at a steep discount.
However, Russia’s main exports are oil and gas. As 45 percent of their entire budget is based on commodities eexport.
50 percent of their entire GDP is connected to the oil and gas sector. Over 60 percent of the Federation’s exports are coming from commodity trade.
Russia is dependable on exports to Europe and on the money provided by Europe. The strong Rubel is actually bad for exports, as it drives down revenue.
80 percent of their natural gas export capacity is meant to bring natural gas to Europe. The problem for Russia here is geo. political:
Europe can pump their gas from West to East, and it is diversifying their suppliers since the war started. Only 7 percent of their natural gas imports come from Russia by now.
Russia physically cannot move those 80 percent worth of gas imports to Asia.
Their pipelines to Asia simply do not support it. Their LNG capacity only comprises about 5 to 8 percent of their entire export capacity.
Last but not least, let us have a quick glance at the elephant in the room: Crude oil and refined products.
Russia most likely doesn’t have enough ships to maneuver its oil around a G7 price cap, S&P Global warned in a note on Tuesday.
Russia’s finance ministry has significantly cut expectations of taxable oil production for 2023, according to the draft budget for the next three years, in the expectation Western sanctions will mean an overall decline in output and refining volumes.
Their export volumes are already going down even a month before the ban on Russian crude oil.
Peter Zeihan calls it the Russian crude oil vanishing act.
A round trip to Europe by sea takes about 6 to 9 days. A round trip to Asia from the same ports takes about 70 days. When the West stops importing via pipeline and via tankers next month. (apart from exceptions, which will therefore “only” lower the export rate by 90 percent)
Russia does not have the physical capacity to move those 2.7 million barrels of crude, which it moved to Europe in 2021 by ship. At least 1 million barrels a day of seaborne crude exports will just disappear in 2023 and force Russia to close down the rigs.
If they indeed have to do that, the perm frost will end their oil business from these sites for good. Russia lacks at the very least 110 tankers to move the volumes, which they will lose once the embargo hits.
Also Russia’s remaining reserves are usually either deep down (the oil fields close to China, the Berent Strait).
Without Western Know, how both of these reserves are difficult or rather next to impossible to tap into for Russia, without the help of the companies that turned their back on this market 8 months ago.
Also, their remaining reserves in 2016 were sitting at 80 Billion Barrels with a yearly production of roughly 4.2 Billion Barrels. That means even if Russia can keep production running at the current rate, they have roughly 52 Billion Barrels left.
That means even if Russia could tap all reserves, which is highly unlikely they would run out of oil to export within the next decade. As they would only have roughly 10 Billion Barrels left by 2033.
Putin has successfully destroyed Russia’s economic future with this senseless attack. His attempt to make our future look like his version of the past will ultimately fail, but not just that:
“A nation scrambling for supplies like this isn’t a nation losing a war. This is a nation whose institutions are failing.” Peter Zeihan
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Post scriptum:
I want to add an article here by Ben Hodges. He describes what he thinks could happen to the Russian Federarion once this war is concluded.
General Hodges says “The world must be ready for Russias disintegration”
It is becoming increasingly clear that Ukraine is going to win this war and that the Kremlin faces a historic crisis of confidence,” Hodges said.
“Indeed, I now believe it is a genuine possibility that (Russian dictator) Vladimir Putin’s exposed weaknesses are so severe that we might be witnessing the beginning of the end — not only of his regime, but of the Russian Federation itself.”
“The first is the breakdown of domestic confidence in the Russian Army, which has traditionally been at the core of the Kremlin’s legitimacy,” Hodges said.
Its humiliation in Ukraine is now almost complete, with the proud Black Sea Fleet still hiding behind Crimea, too frightened to take action against a country that doesn’t even have a navy.”
Second, the damage suffered by the Russian economy has been too devastating to sustain a population of 144 million,” said the general.
The loss of energy markets, which compensated for the country’s lack of modern industries, cannot be reversed. European governments will not rely again on Nord Stream-1 (natural gas pipeline), having witnessed how easily it can be turned off, and are already making long-term investments in domestic energy supply.”
Finally, Hodges suggests Russian demographics makes the state more brittle than it may seem.
“For despite possessing 70 times the landmass of the United Kingdom, the Federation has just twice the population,” he writes.
“These numbers make civic solidarity difficult to achieve in the best of times, but now, with the metropole in a weak position, any sense of national identity could rapidly deteriorate.” Ben Hodges