All major industry groups witnessed growth, with the most substantial uptick coming in sectors driven by investment demand.

“Part of the substantial increase in receipts in certain industries is likely due to more active advance payments for government contracts at the beginning of the year,” Interfax quoted the Central Bank as saying in an update.

The Central Bank warned that the positive results should be treated with some caution as these payments are redistributed over the calendar year, so the nominal growth in January payments cannot be fully attributed to growth in economic activity.

Additionally, the longer New Year holidays this year — 11 calendar days compared to 8-10 days in previous years — may have led to accumulated payments, a factor that is difficult to fully account for in seasonal adjustments, the Central Bank noted. Nevertheless, the significant increase in receipts in January still supports the conclusion of noticeable economic growth.

The strong inflows mirror other surprising positive results.

Prime Minister Mikhail Mishustin reported to President Vladimir Putin last week that the economy grew by a robust 4.1% in 2024 — stronger than the expected 3.8% — and growth in the last quarter of the year was unexpectedly strong.

That was followed by another surprise after the services and manufacturing PMIs put in their strongest growth for a year. Both posted almost no growth in December, suggesting that the economy is cooling, but the combined PMIs posting 53.1 points in January was well ahead of the 50 no-change benchmark, S&P Global reported last week.

Economists are watching these economic indicators closely amid a raging debate over what 2025 has in store for Russia’s economic performance. The Central Bank kicked this debate off with a pessimistic medium-term macroeconomic outlook at the start of August 2024, predicting that growth would fall to a mere 0.5% and consumption would collapse.

With inflation hovering at around 9.5%, well ahead of the Central Bank’s target of 4%, and overnight interest rates at a historically high 21%, some have warned that Russia faces a wave of bankruptcies in the middle of this year.

More recently, a report claimed that the state has forced banks to channel hundreds of billions of rubles into state-directed soft loans to defense sector companies and that could precipitate a credit crisis. However, well-regarded Russian economists have argued that there will be no banking crisis and that the economy is much more robust than it first appears.

While 2025 will be the toughest year yet for Russia’s economy, which is starting to feel real pain, the jury remains out on just how bad it will be, or if the problems will be severe enough to push Putin into calling an early halt to the war in Ukraine.

One of the best open sources for information about Russian casualties is Mediazona:

Mediazona (Russian: Медиазона) is a Russian independent media outlet focused on Anti-Putinist opposition that was founded by Maria Alyokhina and Nadezhda Tolokonnikova, who are also co-founders of the protest group and band Pussy Riot. The outlet’s editor-in-chief is Russian political journalist Sergey Smirnov.

Mediazona is an independent organization that is ideologically opposed to Vladimir Putin. It is the antithesis of a Russian propaganda outlet. Mediazona employs a multi-faceted methodology to track Russian casualties in the Ukraine war, which includes:

1. Open-source intelligence gathering: They monitor publicly available information from news agencies, social media platforms, official military reports, and local residents’ groups.
2. Collaboration: Mediazona works closely with the BBC Russian Service to track and verify casualty reports.
3. Comprehensive database: They maintain a regularly updated casualty list, which currently contains over 44,600 names of Russian soldiers killed in action.
4. Probate Registry analysis: Mediazona combines their casualty list with data from the Probate Registry database to estimate the true mortality rate among Russian men.
5. Statistical modeling: They use a method that accounts for all excess male mortality up to age 50, considering factors such as social composition, delays in notary consultations, and death registration delays.
6. Cross-referencing: The team verifies information by cross-checking multiple sources and databases.
7. Volunteer network: A team of volunteers assists in data collection and verification.
8. Continuous updating: The database is regularly updated to reflect the most current information available.

According to Mediazona’s latest data, there are 88,726 confirmed Russian combat deaths since February 2022. Mediazona estimates, using probate registry data, that the number may be as high as 120,000. This is a far cry from the numbers claimed by Ukrainian intelligence, which forms the basis of CIA estimates.

It is essential that you understand that Russia views this war as vital to its continued existence. Russia is not fighting to reconstitute the Soviet Empire. It sees Ukraine as a Western-proxy being used to attack Russia with US and NATO supplied weapons and intelligence, with the ultimate goal of destroying the current government. Accordingly, the only satisfactory outcome for Russia is to end this threat. President Putin is willing to accept a negotiated settlement provided that Ukraine is stripped of its capacity to launch future attacks on Russia and that NATO ends any consideration of making Ukraine a member of NATO.

According to the latest IMF projections, Russia’s economy is expected to grow by 1.4% in 2025, a slight increase from their previous forecast of 1.3%. This represents a slowdown from the estimated 3.8% growth in 2024. The IMF attributes this slowdown to several factors:

1. Transition from a “war economy”: Russia’s economy has been running hot, fueled by substantial public spending on the war effort.
2. High inflation: The IMF reports inflation in Russia at 8.3% in 2024, with sequential inflation even higher at above 9%.
3. Monetary tightening: In response to high inflation, the Central Bank of Russia has raised interest rates to 21%, which is expected to weigh down economic activity.

The IMF’s forecast for Russia in 2025 is lower than the Russian Economic Development Ministry’s baseline forecast of 2.5% growth. However, it falls within the Central Bank of Russia’s current forecast range of 0.5-1.5%.

It’s worth noting that some Russian officials, including Economic Development Minister Maxim Reshetnikov, have criticized the IMF’s forecasts as overly pessimistic, arguing that they don’t account for measures taken by Russian authorities to support the economy.

Here is the critical point: Despite the projected slowdown, the IMF’s forecast suggests that Russia’s economy continues to show resilience in the face of Western sanctions, largely due to factors such as robust oil and commodity exports to countries like India and China, and the expansion of its military-industrial complex.

The Russian government view of its economy remains upbeat, with officials highlighting strong growth figures and resilience in the face of Western sanctions. The Russian government points to several key indicators to support this optimistic view:

1. GDP growth: The economy grew by 3.6% in 2023 and is expected to grow by around 4% in 2024, making Russia one of the fastest-growing major economies.
2. Low unemployment: The unemployment rate dropped to 2.6% in 2024, a historically low level.
3. Rising global economic status: According to the World Bank, Russia has overtaken Germany and Japan to become the fourth-largest economy in the world when measured by purchasing power parity.
4. Increased investment: Fixed capital investment grew by 9.8% in 2023 and 14.5% in the first quarter of 2024.
5. Trade surplus: Russia enjoyed a surplus of $50.2 billion in 2023 and $40.6 billion in the first half of 2024.

President Vladimir Putin uses these economic indicators to argue that Western sanctions have been ineffective and to showcase Russia’s economic model to partners in Asia and Africa. His message is resonating with the leaders of the Global South.

If you consider Russia’s perspective on the war in terms of casualties and the economy, Vladimir Putin is under no pressure to reach a negotiated settlement that does not address Russia’s strategic concerns that it will no longer face a military threat from NATO. If you fail to understand this and adjust your strategy to make a deal, your efforts to negotiate an end to war in Ukraine will not succeed.

The US and its allies have been seeking to stop the Kremlin’s war machine by limiting export revenues and imposed more sanctions on Russia’s energy industry and banks that service it late last year. That triggered a collapse in the ruble and depressed Russia’s foreign trade in December. Exports dropped by 19% last month compared to the previous year, and imports shrank by about 8%, according to central bank data published on Tuesday.

Still, oil and gas income spiked by a third in December from the previous year and increased by 26% for 2024, according to the Finance Ministry, while other sources of revenue posted a similar advance for the full year due to taxes and dividends amid robust economic growth.

“The volume of non-oil and gas revenues in 2024 significantly exceeded estimates in the 2025-2027 budget law, including from the largest tax sources,” the Finance Ministry said in a statement.

The increase in revenue allowed the government to spend more than ever, with total expenditure for the month of 7.15 trillion rubles, breaching the previous record set in December 2022.

Russia last year posted its widest fiscal gap since the Covid pandemic in 2020 at 3.5 trillion rubles or 1.7% of gross domestic product. The government ran a budget deficit for a third year as President Vladimir Putin’s February 2022 invasion of Ukraine led to huge increases in state spending on the military and measures to support domestic business amid sweeping sanctions.

Total revenue in 2024 rose by 26% to 36.7 trillion rubles, while expenses increased by 24% to 40.2 trillion rubles. The Russian currency lost about 12% against the dollar in the period, according to central bank data.

The Kremlin continues to ramp up spending on the war as its forces slowly advance in Ukraine. About a third of its budget is expected to be spent on military needs in 2025, according to the budget law.

The budget’s execution in 2024 confirms doubts that a planned increase in spending this year of only 3.2% is realistic, according to Alfa-Bank.

“We expect that the growth in expenditures this year will be higher, leading to a larger budget deficit,” the bank’s analysts said in a note.

Running the gamut from individual limits against Russian leaders and businesses, to comprehensive restrictions on key sectors like Russian oil and natural gas, these sanctions are intended to impose unacceptable economic costs that directly hinder Russia’s war effort and indirectly incentivize Russia to end its campaign.

However, experts have been debating whether and how well they have worked. Some argue that the comprehensive sanctions, and in particular the widespread restrictions against its oil and gas revenue, are bringing Russia’s economy — and therefore its military campaign — to its knees. Others concede that sanctions may not successfully end the war outright, but contend they at least offer an inexpensive and low-risk way to slow Russian advances and take a public stand against the invasion. And yet, after nearly three years, the war still rages, Russia’s economy has rebounded, and Russian domestic support for Putin and the Kremlin are at an all-time high.

The problem with this solely economic debate is that it overlooks the risk for more serious counterproductive consequences. Sanctions are not just failing to end the war in Ukraine or weaken the Kremlin’s warfighting currency, they’ve also backfired, inadvertently strengthening Moscow’s hardline position, undermining the utility of alternative strategies, and shoring up the Kremlin against future international coercion. As a result, the fallback position that sanctions are at least better than nothing ignores their long-term perverse consequences for regional peace and international stability.

Sanctions against Russia after its invasion of Ukraine have included everything from economic restrictions to information controls. They have grown to include bans on industrial and technology export, bank freezes, restrictions against state-owned media outlets, and targeted sanctions against “high profile individuals and entities” including President Putin. The crown jewel is international bans on Russian oil and gas which account for 60% of Russia’s exports and nearly 40% of its federal budget.

The sanctions arguments

From the outset, Russia in 2022 appeared ready to cave to Western sanctions. Economic size and market diversity are usually good predictors of sanction-sensitivity, and Russia’s GDP is less than a quarter that of the U.S., its GDP-per-capita ranks only 70th globally, and perhaps most importantly, it is a rentier state, highly reliant on oil and gas export revenues for many of its state functions. Russia’s sanctioners, on the other hand, all possess formidable economies and the diversified stable markets necessary for wielding significant clout.

On the surface, these sanctions therefore looked like a good bet. And by naïve criteria they even enjoyed some success. Proponents argue sanctions are working because foreign businesses closed, domestic production nearly halted, and domestic talent fled so that now the Russian economy is a ticking time bomb ready to collapse. But sanctions are a long game that take time to accrue pressure, so proponents argue for waiting it out until Moscow cries “uncle.”

Russia’s economic resistance

But patiently waiting for Russia to run down its reserves and public patience has not panned out as proponents hoped. Targets of persistent sanctions, like Moscow, are not passive recipients. It has shielded critical supporters, built new trade networks, and ultimately earned more from its oil exports in 2023 than 2021. Some critics argue that the sanctions have failed because the U.S. and its allies are not able and willing to impose sufficiently thorough sanctions. Others blame Moscow’s clever domestic fiscal policies. Still others blame BRICS nations for systematically undermining the allies’ sanction efforts.

But whether by external sabotage or Moscow’s growing domestic immunity to sanctions, Russia is now economically less susceptible to sanction pressure than it was in 2022. Its trade flows with China doubled from 2021 to 2023 and exports to India increased ten-fold. Rather than curtailing the war effort, sanctions have catalyzed an economic and political partnership with China, India, Iran, and North Korea, suggesting a worrying geopolitical restructuring. The implication is that this growing network of partners will be more economically sanction-resistant and politically anti-Western.

Public approval

Pro-sanctions hold-outs argue, however, that even if Moscow manages to shield its elites from economic costs, the Russian public is still left holding the bill and will eventually turn on its leaders. But this pathway to policy change is looking increasingly unlikely. While sanctions are meant to undermine public support for the government’s sanctioned behavior, the Russian public has instead reacted to sanctions by rallying behind the government, strengthening Putin and his supporters’ domestic political position. Even before indicators of economic health began to boomerang, public approval ratings of both Putin and his government more generally had already surpassed pre-war levels.

Like many autocracies, Moscow holds tight reins on the spread of information domestically, and has a history of co-opting the information that does come out to its own political advantage. Leaders have used sanctions to rally public support, repurposing them to foment patriotism and resist foreign pressure by controlling the domestic narrative around sanctions and the war. This rally effect is not new. Putin and the Duma enjoyed a slight bump in favorability following the invasion of Georgia in 2008 and a larger increase following Crimea in 2014. What is notable, however, is how long all branches of government have managed to ride the post-Ukraine high. Putin’s approval hovered around 65% for two years, but jumped to over 80% following the invasion and has risen from there.

Attempts to combat misinformation and propaganda have also backfired. Private companies like Twitter/X and Meta attempted to crack down in 2022, blocking official accounts and removing false or misleading social media posts. Moscow responded by passing a series of censorship laws and banning Facebook and Twitter/X altogether in Russia. International and independent media was pushed out, social media accounts monitored, and reporters silenced, all effectively cutting off the Russian public’s access to any independent reporting on the conflict.

Without independent fact-checking to muddy the domestic information environment, calls to resist sanctions and rally behind leaders in Moscow can fall on more fertile ground. They see only claims of Russia’s “Responsibility to Protect” citizens in Ukraine, exhibits on NATO and the U.S.’s “chronicle of cruelty,” and claims that “regardless of the situation in Ukraine…[the West has] only one goal – to restrain the development of Russia.” As such, sanctions and unofficial restrictions have inadvertently strengthened Putin and his supporters’ domestic political position.

Counterproductive consequences

The sanctions debate should look beyond simple economic measures to consider the long-term risks. Sanctions are not just a cheap, non-violent way of signaling — however futile — public disapproval. Economic costs are not their only downside. The result of sanctions has been a Moscow with greater incentive and ability to pursue future military incursions, enjoying the unquestioned approval of an isolated domestic public, and the economic resistance to weather future restrictions. As a result, while sanctions may scratch Washington’s itch to resist the invasion, they actually create perverse incentives that undermine future engagement with Moscow on Ukraine and international security more broadly.

Ariel Petrovics is an Assistant Research Professor at University of Maryland’s School of Public Policy, a Research Fellow with Managing the Atom at Harvard Kennedy School’s Belfer Center for Science and International Affairs, and Non-Resident Fellow at the Quincy Institute. She earned her PhD in Political Science from the University of California, Davis.

But it’s the latter, the Russian pig (lead image) who, upon turning into pork, is breaking through the enemy’s defences towards strategic victory of Russian economic power to capture a world market. This means defeat – unrecoverable loss of market share – for the hostile states led by the once powerful pork exporters, Germany, Spain, Denmark, Canada, and the US. As the most recent European Union (EU) pig and pork slaughter data show,  the war is pushing up the energy and feed costs of pig farming,  and drastically cutting European exports of pork to the Asian consumer market, the biggest in the world.

There, Russia’s strategic ally China has cancelled the closure of its market in effect for Russia since 2008,  and simultaneously has begun pork trade restriction moves against Spain, Denmark and The Netherlands, the principal European exporters of pork to China. In trade war retaliation, China is also steadily reducing the volume and value of its pork imports from the US since 2021.

Behind the Ukraine front, the test of who is winning the war against Russia is also who puts their money and their meat where their mouth is. In Russia, meat consumption is rising per capita to a level never recorded before in Russian history.  At the same time, the country has become the world’s fifth largest pork producer.  

From self-sufficiency in pork production in 2018 to the export of market surplus, this industry achievement has been based on direct and indirect state support measures, including retaliation against EU imports which followed the start of the EU’s anti-Russian sanctions in 2014.  

“Practically speaking,” says Yury Kovalev, “we no longer have imports, but not because this is closed, but because over the past fifteen years an entire industry has been created, production has grown every year, and we have almost completely abandoned import dependence.”  Kovalev is general director of Russia’s National Union of Pig Breeders (NSS). Kovalev is also forecasting that Russian pork exports  will soon capture about 10% of the Chinese import market – about 300,000 tonnes per annum – displacing the Europeans.  

Here is the Russian market story from all sources, just before the opening of the China trade began in September 2023.  

For the full 15-year, 45-story  archive on Russian pork, click to read. The concentration of the pork industry into fewer large corporate hands, including the oligarch-sized Miratorg group of the Linnik brothers (14.3% market share) and the Rusagro combine of Vadim Moshkovich (5.9%), has been analyzed through this  archive. According to the latest tabulation published this February, over the past year the Linniks have increased their production by 21% to 803,500 tonnes, and lifted their market share from 12.6% to 14.3%. The top-5 pork producers now have a combined market share of 38%; this has not changed compared with a year ago; by contrast, in 2011 the top-5 Russian producers accounted for 26% of the market.

NATIONAL UNION OF PIG BREEDERS – TOP-20 RUSSIAN PORK PRODUCERS AT END-2023

No industry source will say publicly that the financial subsidies,  trade protection and other  administrative resources applied to the pork industry by the Putin administration to end import dependency and secure the domestic food chain are also responsible for the accelerating concentration of ownership and profit.

In this newly published report on the Russian pork industry,  Vzglyad, the semi-official platform for security analysis, explains the reasons for the exceptional success. Between the lines, however, the publication targets the Kremlin economic advisors, led by Central Bank Governor Elvira Nabiullina, for running a high-interest rate policy.  Vzglyad did not ask its sources to estimate what the net loan rate to the pork producers is after they offset their cost, investment, tax and other government benefits.

The Russian text has been translated verbatim; illustrations have been added.

October 8, 2024
Russia has made a revolution in animal husbandry How has Russia managed to achieve outstanding success in animal husbandry in twenty years
By Olga Samofalova

Russia has taken the fourth place among the world’s largest meat producers. Experts call it the livestock miracle of Russia. After all, Russia has come a long way from an overwhelming  dependence on American meat to reach complete self-sufficiency in poultry meat plus pork. How has Russia raised animal husbandry from its knees in 20 years, who helped the country in this, and why are there not comparably impressive successes in beef so far?

Russia has managed to achieve the fourth place among the world’s largest meat producers. This was recently stated by Prime Minister Mikhail Mishustin at a meeting with Chairman of the Board of the Russian Agricultural Bank Boris Listov.

According to the National Meat Association, imports of meat and meat products from 2003 to 2023 decreased from 2.67 million tonnes to 0.64 million tonnes.

Particularly impressive results in import substitution have been achieved for poultry and pork meat. Meat imports in the early 2000s reached 1.2 million tonnes, but in 2023 only 0.23 million tonnes were imported.

“Imports of pork and pork offal, including lard, over the years has reached from 600,000 tonnes to 1.250 million tonnes at its peak in 2010. This year, pork imports will be only 3,000  tonnes, and exports will be about 300,000 tonnes. Beef imports have also decreased significantly, though not because of our successes, but because of changes in the structure of domestic consumption: other types of meat have become much cheaper than beef, and people have begun to eat less beef. Imports in 2003 reached 700,000 tonnes, and in 2023 decreased to 231,000 tonnes, and this year we will supply about 40,000 tonnes of beef for export to other countries,” says Sergei Yushin, Head of the Executive Committee of the National Meat Association.

How did Russia manage to achieve such incredible success in animal husbandry for poultry and pork?

Yushin, chief executive of the National Meat Association, recalls that from the 1990s into the early 2000s, the situation was difficult: 70% of consumption was provided by imported broiler meat – the famous ‘Bush legs’. There was an excess of legs in the USA, as they prefer other parts of the chicken there.

“The first investments went specifically into broiler production, because it is the most affordable and acceptable meat for Russians; there are no religious restrictions on its use; a low payback period due to the rapid production of a piece of meat from chicken, unlike pig farming where the terms of investment return are several times longer, not to mention beef cattle where capital costs are also much higher,” says Yushin.

Interestingly, the first major investors in Russian poultry farming were American funds, which began to actively come to Russia after 1998.

An important milestone in the development of animal husbandry was the arrival of Alexei Gordeyev to the Ministry of Agriculture in the early 2000s. “Gordeyev drew attention to the fact that import dependence is dangerous, and if a man-made disaster occurs, or animal disease, then there will be nothing to eat. Secondly, it was a shame that Russia, having huge territories for the production of animal feed, oilseeds, etc., is so heavily dependent on imported meat,” says Yushin (right).

The main problem, he said, was the low and often negative profitability of production, so  Gordeyev set about the task of ensuring profitability. Accordingly, in 2005, customs and tariff regulation measures were introduced – quotas were introduced for meat imports, and high duties were imposed on import volumes exceeding the quota. This has led to an increase in meat prices and then to the incomes of Russian enterprises. Europe used the same measures to raise its livestock production after the Second World War, the source recalls.

Since about 2005, thanks to these import duties, a second industry has appeared that has become interesting to investors – pig farming.

“Many foreign companies, primarily German, Danish and French, also took part in the formation of modern pig farming in Russia. They not only built their own pig farms, but also provided expertise, technological equipment, breeding programs, genetic material, and so on,” Yushin says.

The second important stage was the implementation in 2006-2007 of the National Agro–industrial Complex Development Project, where for the first time the state provided preferential loans for livestock farming. Government support and cheap money have done their job – banks have become more willing to lend to companies to build farms.

The third stage was the adoption in 2008 of the state program for the development of agriculture and regulation of the market of agricultural products, raw materials and food, which was in effect for four years until 2012. “This program provided for a number of measures to support agricultural producers, including animal husbandry. These are the construction of new and modernization of old facilities, zero rates for the supply of breeding material from abroad. Then substantial funding was allocated,” the source says.

In 2012, Russia joined the World Trade Organization (WTO), and measures were provided to protect our market for livestock farmers. At the same time, the state support program was extended until 2020.

“All these years, enterprises have been built in Russia. We worked closely with leading foreign companies that supplied us with the best equipment, the best technologies, the best breeding material, and advised on the production of feed for farm animals. Genetic companies, world market leaders, opened their representative offices in Russia and trained our specialists. They have done a lot of work on the development of breeding in Russia. There was a breakdown of stereotypes that the work of a collective farmer is dirty and for the uneducated. Very educated, erudite and active people have joined the industry. Without this, nothing would have happened either,” Yushin believes.

Another factor which helped the Russian livestock miracle happen was the growth of household incomes in the 2000s when meat consumption began to grow in step with the growth of the economy.

Over twenty years, meat consumption in Russia has increased from 52 kg per capita in 2003 to 80 kg per capita in 2023; this includes poultry from 18 kg to 36 kg and pork from 17 kg to 32 kg, while beef consumption has decreased from 17 kg to 13 kg.

TRAJECTORY OF RUSSIAN MEAT CONSUMPTION, KILOGRAMS PER CAPITA

“Despite the large volumes of imports, we had to produce more and more and the demand of the population supported good prices, which allowed companies to take out new loans and build, build, build. We have built a huge number of enterprises, created more than a hundred thousand new jobs. The development of animal husbandry has prompted the accelerated development of crop production, the construction of the most advanced feed mills, veterinary science, vaccine production, etc.,” says Yushin.

It is clear that at the stage of the formation of animal husbandry in Russia, the cost of meat was artificially inflated by the government’s import restrictions.

“I don’t hide the fact that at the initial stage in the second half of the 2000s and in the first half of the 2010-2020 decade, Russians overpaid for meat compared to the world market. But the goal was to raise profitability and increase local production. So that the moment will come when the competition in the market will be so fierce that meat will become one of the cheapest in the world for us.”

US, AUSTRALIAN BEEF EXPORT PRICE IN RUSSIAN ROUBLES PER KILOGRAM, 2013-2024

DOMESTIC BEEF PRICE IN ROUBLES PER KILOGRAM, 2021-22 

“And indeed, today commercial pork is more expensive in Brazil, in Canada and the US,  where traditionally there were cheap pigs – pork is more expensive there than in our country. In terms of poultry meat, we are one of the lowest in price,” says Yushin.

Over the past decade, active work has been underway to open export markets. “We are displacing [other country] imports in the competitive struggle, but our market is also not so flexible — people cannot go on eating infinitely more meat. Our meat consumption level has already increased to 83 kg per person, and this is the level of rich countries. Therefore, our potential is to increase exports. Russia already supplies meat to more than 60 countries on a regular basis,” the expert says.

Exports of meat and meat products have grown enormously in twenty years – by a magnitude of 22 times: from 36,000 tonnes in 2003 (mainly supplied to neighbouring CIS countries) to 800,000  tonnes in 2023. Foreign countries bought 343,000 tonnes of poultry meat, 223,000 tonnes of pork,  and 36,000 tonnes of beef.  

An important step was the understanding of the country’s leadership that top officials of the state should develop exports, as did the presidents of the United States, Brazil, the Prime Minister of France, etc., the expert notes. The departments of government have also joined the effort in parallel, and the Ministry of Agriculture has created a strong agricultural attaché apparatus abroad. “We see the result: almost 45 billion roubles worth exports of agricultural products. Who would have believed this ten years ago,” Yushin notes.

Another thing, the expert does not hide, is that the current situation with expensive money due to the high key loan rate of the Central Bank greatly complicates the situation. “To be realistic, the industry may face a period of stagnation in investment and a halt in growth. And then we will lose the fight for world markets to other countries where loans are still cheap. No one will take out loans at 22% to 23%. The cost of construction has almost doubled in price over the past five years. The labour force has not only risen in price, but we also have a shortage of workers,” the source expresses concern.

Another potential for the development of animal husbandry in Russia lies in cattle meat. “Russia has not achieved great success in beef, except that it fully meets the needs of the Russian market in expensive marbled beef, which was previously imported from America and Australia. Consumption of this expensive meat has increased ten times in 10 years. In addition, we also export it. However, there were no large investments in beef, with the exception of a few projects. There are very long payback periods, the infrastructure of cattle raising is not developed, and there is low or even negative profitability. So we see a continuing decline in the number of cattle. We have enough beef, plus there are imports, but beef is where Russia could take the next step, albeit it’s a difficult one. But this requires no less money than other projects. We are talking about a trillion rubles and a period of 10-20 years,”” Yushin concludes. Beef in Russia is also one of the cheapest in the world, and this is one of its tragedies, since the low price scares off investors and slows down the development of the industry. 

Moreover, he has promised to cut all import tariffs from these countries to zero. This comes after both the EU and US have imposed steep trade tariffs on Chinese imports of EVs. And last week Prime Minister Justin Trudeau announced that Canada will impose a 100% tariff on Chinese EVs and a 25% tariff on steel and aluminium in October.

China’s BYD burst on the scene last year with soaring EV exports that they can produce cheaper than in the West and have superior battery technology – BYD cars now have a maximum range of 2,000km – and comparable software. Unable to compete, the West has simply closed its borders to imports to protect its domestic producers but even that is not going well. VW just announced it will start closing some German factors in an effort to cut costs.

This is not a war story. It’s simply an admission that the West is becoming increasingly uncompetitive and the only way to “survive” is to resort to protectionist trade policies.

Why is this happening? Several things go into the pot.

First and most obviously is that thanks to the war in Ukraine, the EU in particular, which, unlike the autarkic US, is input deficient. It is too densely populated to produce enough raw materials to meet its own needs and so remains reliant on the import of a lot of basic stuff from oil & gas to metals and chemicals – a lot of which used to come from Russia. Now it doesn’t the EU is put in the bizarre position where it has to import coal from Australia and petrol from India (which started life as Russian crude but had an identity change on a ship).

I’ve said it before: sanctions on Russia are not sanctions, they are distortions. In what used to be an efficient market, there are now premiums that the EU have to pay on its basic needs, whereas, Russia is offering discounts to friendly countries of up to 16% on oil for one. Add these together and the Emerging Markets (EMs) are enjoying something like a 20% energy cost advantage over the Western producers – that is a huge advantage. No wonder that the West can no longer compete and Germany for one is deindustrialising.

In the 1990s the US used to have this thing they called “non-market economy” and complained that products from countries like Russia were unfairly competing with Western goods as they enjoyed such cheap domestic energy tariffs so the US slapped import duties on these goods. What has happened now is once again all the goods coming from the east are enjoying the same energy cost advantage, but this time no one in the West is complaining about it as it’s due to sanctions we imposed on Russia and are determined to tighten them even more.

Another factor is the tit-for-tat trade tariff regimes that are emerging. If China is serious about dropping import tariffs on the less developed countries (LDCs) then there is another spread emerging between expensive goods from the West thanks to tariffs, and much cheaper goods from Africa without tariffs. That will drive more trade inside the tariff-free block and given the economic benefits of the so-called comparative advantage then it will increase the overall wealth of the participating countries faster than those inside the trade tariff walls.

The EU’s new Carbon Border Adjustment Mechanism (CBAM) is also a tariff, albeit one motivated by environment concerns and not protectionism, but it’s another tariff and tariffs are actually a tax on the consumer as they make goods more expensive than they are in other markets, which in turn drives up the cost-of-living and slows growth. Global inflation is already a problem and these tariffs will make it worse.

Government subsidies are another distortion that undermines the market. China has been accused of massively subsidising the development of its EV business to give it a competitive advantage. But the US is doing exactly the same thing as part of its IRA (Inflation Reduction Act) that is providing massive subsidies to things like the chip industry to keep it on top. This is an old tactic whereby a government subsidies an industry to put its opposition out of business and then hikes prices when there is no one left. The investors of the solar panel, the Germans, have already been through this and seen that industry destroyed by cheaper Chinese producers. The government in Berlin recently decided not to subsidise its producers and give up on the business as it cant afford the billions it would cost to

keep them going.

Finally, maybe the biggest factor is the massive differences in wages between the north and the south. A recent study published in Nature Communications developed markets of the West are bleeding the Global South of wealth thanks to massive differences in nominal wages for centuries. But this too is starting to change.

Thanks to almost two decades of globalisation, workers in the Global South contribute a whopping 90% of the labour that powers the world economy, and 91% of labour for international trade but only receive 21% of the revenues, the study says.

But the really surprising result is that this is not just limited to textile sweatshops in Myanmar, but increasingly these factors are powered by middle and high technology skills. If the Global South’s labour were valued in terms of Northern wages by skill level, it would total €16.9 trillion in 2021, or €310 trillion over the period from 1995 to 2021. If they earned as much as a western then these economies would rapidly surpass the West in terms of nominal GDP size.

And wages are rising fast in the Global South, which in turn funds the emergence of a new middle class that drives further economic development. Russia used to export a lot of its manufacturing to China, but Chinese wages overtook those of Russian about a decade ago, which spurred a boom in manufacturing investment in Russia as it became cheaper to employ Russians than hire a factory to do the work in Guangdong.

Wages are still lower in the Global South than in the West, but as these factories go up the value chain production is expanding thanks to a burgeoning domestic market that is leading to more competitive exports of better quality goods – products that again the Western producers can’t compete with.

Technology plays a role here, but the US seems to have miscalculated with its attempt to use administrative means to keep its technology lead with the CHIPS act and other measures. All that has happened is it has driven Chinese firms to cooperate intensively and innovate. US export controls on technology exports to China have backfired, hurting US technology companies, and have been unsuccessful in cutting China off from the technology, thus driving innovation in China’s technology sector, according to a report from the Federal Reserve Bank of New York. China used to import $400bn of Western technology; now it exports $70bn a year of its own technology.

As bne IntelliNews reported, the world is becoming increasingly fractured, breaking into two camps centred on Washington and Beijing, but if China drops its tariffs, as are other non-Western organisations like Putin’s Eurasian Economic Union (EUU), then a now Global South tariff free trading block emerges that can produce increasingly more competitive products. All the money remains in the West for now – the EU plus just the Eastern seaboard US states account for 50% of global GDP by themselves – but all the growth will be in the Global South. According to a study by KPMG, China has already overtaken the US in adjusted GDP and India is about to, but the same study says both will overtake the US in nominal terms as well by 2075.

The government of Boris Yeltsin had decreed it was withdrawing all old rubles from circulation. Russians who’d stuffed rubles in mattresses for decades would be wiped out, unless they could fight through huge bank lines to exchange bills. Worse, the maximum amount was 35,000 rubles, or roughly $30-$35, about 60% of a Russian’s average monthly salary of 58,700 rubles. Those who exchanged the full 35,000 had passports stamped barring all future exchanges. I’ll never forget seeing a burly woman yelling, to no one in particular: “Vori, blyad!” (“Fucking thieves!”).

“Black Saturday” is remembered as a breaking point in the arc of post-Soviet history, the moment when many Russians stopped believing a glorious new democratic future was just around the corner, if it was coming at all. A week or so after the event, on August 6th, 1993, then-Prime Minister Viktor Chernomyrdin burned his name in the nation’s history books. An aphorism-spewing figure whose unique place in Russian lore is like a cross of Yogi Berra and Spiro Agnew, Chernomyrdin said one of the most purely Russian things of all time: “Hoped for better, turned out as always.”

With inflation above 2500% the previous year of 1992, Russia was beginning a long period of economic suffering that wouldn’t hit climax until 1998, when the country defaulted and plunged into a crisis presaging the rise of Vladimir Putin. It’s hard to describe the disaster of the nineties in terms that will make sense to Americans. Life expectancy for men dropped seven years almost overnight, from 64 in 1990 to 57 in 1994. Deaths from disease doubled. An already heavy-drinking country saw alcoholism rise by 60%. The Lancet estimated Russia that decade saw seven million “excess deaths,” whatever that means. I know what it looked like: mass poverty, spiraling crime, and sharply rising levels of fury toward the West, largely seen as a primary culprit in designing Russia’s crony-capitalist hellscape.

Harvard economist Jeffrey Sachs, whose ideas for quickly transforming communist economies to market-based systems were dubbed “shock therapy,” saw his name become synonymous with pain. Though he’d overseen successful reforms in a similar situation in Poland, fellow Harvard acolytes Yegor Gaidar and Anatoly Chubais had a lot less luck when appointed economic czars in Boris Yeltsin’s Russia. Russians early on associated “shock therapy” with inflation and the abrupt removal of safety nets they’d grown used to in Soviet times (though residents were awarded their apartments as property, and kept a few other important subsidies like cheap home energy). Loss of access to good medical care was a particular problem in the new paradise. I wish I’d taken a picture, but I remember seeing graffiti on an apartment building when visiting the Arctic mining town of Vorkuta during the 1998 crisis. It read, ФОК ТЕРАПИЯ: “Fuck Therapy.”

Now, on a day the Biden administration is leveling sanctions over the unkillable Russiagate hoax for the umpteenth time, Sachs has come forward with a new account that suggests the U.S. never wanted to lose Russia as an enemy:

I worked as a journalist for the Moscow Times from the early nineties until roughly 1996 and then at my own newspaper, the eXile, through the end of the decade. Though I never wrote about Sachs, I did extensively cover Gaidar and Chubais (members of a group of Western-educated neoliberal politicians derisively tabbed the “energetic young reformers”). I also wrote exposés about a pair of Harvard economists who technically served under Sachs and helped design Russia’s infamous privatization schemes. These policies handed vast industrial properties to a handful of new oligarch pals of Yeltsin for pennies and were so grotesquely theft-ridden, Russians changed the very word, privatization. They called it prikhvatizatsia, or “grabitization.”

At the eXile, I spent years traveling Russia working various jobs, trying to document what the New York Times called Russia’s “costly and painful, if good, progressive and necessary” transition to capitalism. I saw nothing that resembled capitalism or democracy in my travels. Competition was managed by politicians who doled out zones of commercial operation like racketeers, there was no labor presence (anyone trying to organize in an oligarch-owned business got a bullet in the ear), workers were often paid in products or chits for company-owned commissaries, and assassination was the country’s only functioning regulatory mechanism. This was a mafia state, with the president as the Don, not a capitalist “democracy.”

Even farms, like the Siberian ranch where I stayed one night with an elderly watchman as he waited for trucks full of city horse thieves, had become gangland territories. From oil to booze to watermelons, every industry was owned by gangsters.

I thought it was intentional: Harvard economists designed mass privatizations creating oligarchs overnight, oligarchs funded Boris Yeltsin’s election campaigns, and Yeltsin allowed American-trained politicians to run his government. Essentially, we helped Yeltsin rob his people so that we could have a co-pilot seat in a conquered vassal state. I was criticized for writing it that way back then, but eventually this became conventional wisdom. Naomi Klein’s Shock Doctrine blamed Sachs and America for imposing what she said was “free trade and democracy… [imposed] with Shock and Awe military force.” Klein cited Russia as just another in a long line of countries where “economic shock therapy” was applied “without restraint” through “fire-sale privatizations” that created “the country’s notorious oligarchs.”

The more time I spent looking at U.S. economic policy toward Russia, the more I was convinced something was terribly wrong. I corresponded regularly with Janine Wedel, then a professor at George Washington and Pitt Universities who wrote an influential article in The Nation called “The Harvard Boys Do Russia.” Janine’s thesis was the rapid liberalization of Russia’s economy was “more shock… than therapy” and that one of the biggest by-products had been episodes like the mass inflation of 1992 and Black Saturday: “The evaporation of much potential investment capital: the substantial savings of Russians.” Her article was not kind to Jeffrey Sachs, and described him as part of the corruption scandal at the Harvard Institute of International Development (HIID) that I also wrote about.

Who’s right? By the time I started digging into HIID, Sachs was gone. He said on Breaking Points today that privatization, certainly the nuclear core of Yeltsin-era corruption, “wasn’t my bailiwick” and that he never worked on those issues with colleagues who “didn’t do the right thing.” All I can say is, as someone who covered prikhvatizatsia fiascoes like the infamous loans-for-shares auctions as much as any American, Sachs never crossed my radar. I assumed that as a Harvard heavy with ties to Lawrence Summers and the “energetic young reformers,” he was at least a co-architect of Russia’s downfall.

Now, I’m not so sure.

Several weeks ago I heard from fellow Substacker and former Intercept writer Ryan Grim, to whom Sachs had sent a note and an essay. With the professor’s permission he was kind enough to let me read it. I was shocked. The gist of the Sachs essay was not that U.S. economic policies toward Russia were misguided or poorly executed, or even that he’s been misunderstood. Rather, he described an American strategy in which economics were subservient at all times — and crucially, from the start — to a security mission. Led by military and security agencies that believed “the Cold War never ended,” the U.S. viewed subjugation of Russia and NATO expansion as primary goals from the very beginning. In hindsight, this makes a lot more sense than the conventional wisdom, which is that Bill Clinton, Strobe Talbott and Dick Cheney tried to be friends with Russia, and just made a dog’s breakfast of it.

In the essay, printed in Ryan’s Drop Site and also here on Racket, Sachs describes repeated attempts to convince U.S. policymakers to make a sincere effort to bring Russia into the fold as a democratic partner. His idea, both before and after the collapse of the Soviet Union, was a Marshall Plan-style stabilization effort that would have included temporary debt freezes and targeted investment to keep the country afloat during its transition. Why not? They’d supported them in Poland, after all, and they’d worked there. “I thought, ‘It’s the same,’” he recalled today on Breaking Points, laughing. “Just multiply it by four.’”

However, ideas U.S. and European leaders supported for Poland were rejected for Russia. In this portion of his essay, Sachs describes what happened after he advised Gaidar to ask the G7 for debt relief:

“In November 1991, Gaidar met with the G7 Deputies (the deputy finance ministers of the G7 countries) and requested a standstill on debt servicing. This request was flatly denied. To the contrary, Gaidar was told that unless Russia continued to service every last dollar as it came due, emergency food aid on the high seas heading to Russia would be immediately turned around and sent back to the home ports. I met with an ashen-faced Gaidar immediately after the G7 Deputies meeting.”

After Yeltsin was in office in what was now democratic Russia, Sachs thought for sure authorities would change their minds. No go. Here, he describes meeting with former George H.W. Bush Secretary of State Lawrence Eagleburger after proposing his “Marshall Plan” on TV:

In early 1992… I was on air with acting Secretary of State Lawrence Eagleburger. After the show, he asked me to ride with him… Our conversation was the following. “Jeffrey, please let me explain to you that your request for large-scale aid is not going to happen… Do you want to know why? Do you know what this year is?”

“1992,” I answered. “Do you know that this means?”

“An election year?” I replied.

“Yes, this is an election year. It’s not going to happen.”

This account suggests a new angle on what I lived through. For one, early liberalization initiatives would have looked a lot different if Russia had the same package of ameliorative goodies Poland received (a stabilization fund, debt relief, etc.). Secondly, Sachs implies privatization existed in a realm separate from pure economics and was maybe even was part of the security plan, something a lot of us in the expat community suspected. His line in the interview today about loans-for-shares being an aspect of “financing Yeltsin’s re-election campaign” is not something I’ve heard from a U.S. official, though colleagues wrote about the idea years ago in a piece called “The Russia You Never Met.” The premise was the oligarchs who got the privatization cheddar fed it right back to Yeltsin’s campaign, which was far behind the communists in fifth place at 8% in presidential election polls at the start of 1996. He made a mysteriously heroic comeback that year, which was celebrated in a “Yanks to the Rescue” Time magazine cover and a Hollywood movie called Spinning Boris.

Ordinary Russians certainly believed Americans wanted to be their friends. I know this because they wanted to be my friend, throughout the “messy transition” period when people like Bill Clinton and Boris Yeltsin made exaggerated displays of bro-ship. However, I recall Russian attitudes turning after the bombing of Kosovo in 1999, and especially as NATO began expanding toward Moscow. Most Americans have not heard the story that in negotiations for the dissolution of the Soviet empire, James Baker III promised Eduard Shevardnadze NATO would not “leapfrog” East Germany toward Russia. CIA whistleblower Melvin Goodman confirmed that story to me years ago, and I remember it meant a lot to Russians.

In the telling of Sachs, NATO expansion all the way to Ukraine was a goal from the start. Why not bring in Russia as an imperfect, but more stable and democratic partner? Because “the men in the suits,” as Sachs described the natsec officials behind the White House, never wanted any part of a Russia that retained significant military power, or its own sphere of influence. “They sought and until today seek a unipolar world led by a hegemonic US, in which Russia and other nations will be subservient,” Sachs writes.

This is why we’re currently in dire straits in Ukraine, on the razor’s edge of a nuclear threat: we didn’t want to change, or even try to take advantage of such a rare opportunity for cooperation and peace. We were in a Cold War and chose to stay there, maybe until it got hot. It turns out, we too are like the Russians: “Hoped for better, turned out as always.”

The entire economy – from energy to industry, from finance to trade – will depend on Western aid and investment. For Ukraine, which will be in debt for generations, this is a looming future with limited sovereignty. The external debt currently stands at $132 billion, which corresponds to 89% of GDP. According to various estimates, by the end of this year, it is expected to exceed 100% of GDP.

The giants of American finance are already lined up in the starting blocks: the number one fund Black Rock and the first bank Morgan Stanley, which have signed cooperation agreements with President Vladimir Zelensky. This is a mortgage not only from the standpoint of irreversible belonging to the Western camp, but also economic and military dependence on the USA and European countries. The latter, at least for now, are among those who will also pay the highest price for the war. The sanctions had a negative impact on many European businesses: losses in the first year of the war are estimated at one hundred billion euros. As of the end of this year, the EU had accepted more than 3.5 million refugees and spent 76 billion euros on support and military aid.

According to data for 2023 for 600 industry groups, 176 of them recorded write-offs of assets, accruals, and other expenses as a result of the sale or reduction of activities in Russia. The reconstruction estimated by the World Bank is 400 billion euros for infrastructure and industry, with additional costs of the urban and agricultural sectors. But Kyiv has estimated the cost at $750 billion, a figure that continues to rise amid bombing, import-export disruptions, and population displacement.

A program to attract up to $400 billion in investments has been created in Ukraine. Zelensky is optimistic and believes that this is “the greatest opportunity for Europe since the Second World War.” As for European allies, the financial resources allocated to Ukraine by the EU and the EIB remain far from the original ambitions: about $50 billion.

The Americans will take the lion’s share. After a meeting between President Volodymyr Zelensky and BlackRock CEO Larry Fink, the company agreed to coordinate “the efforts of all potential investors and participants in the country’s recovery” and direct capital to various sectors of the economy. This was followed by the signing of an implementation memorandum in November. The Wall Street giant will also provide advisory support to public and private investments. Other private and institutional investors followed suit. Meanwhile, BlackRock and JPMorgan Chase are working with the Ukrainian government to create a reconstruction bank.

Ukraine has also reached an agreement with international insurers to insure ships carrying grain and other food from Black Sea ports even if the war lasts much longer. The partnership was announced by insurance brokerage giant Marsh McLennan. It will offer up to $50 million of hull and liability insurance from Lloyd’s of London, providing cover for war risks.

Meanwhile, ten of the most important investment funds have already won the war and have taken advantage of rising food prices, generating profits estimated at almost $2 billion. The Guardian reports: “They have made obscene profits by betting on hunger and exacerbating it. At the start of the Ukraine war, financial investors piled into grains and commodities in large numbers, seeking to capitalize on uncertainty and rising food prices.” It is reported that in recent years, the area of Ukrainian agricultural land transferred under the control of American agro-industrial companies has exceeded 4 million hectares.

Adding to the speculation are the huge profits of the global arms sector, the turnover of which in 2022 amounted to two thousand billion dollars. A number that continues to grow. At the same time, the USA is the largest producer and main supplier of Ukraine. From the Ukrainian point of view, this means being a victim several times. Victim of the war, of the manipulations by rival great powers that take advantage of the inexperience of the Kyiv elite, of the endemic corruption in the country – an aspect that is becoming increasingly obvious to Ukrainian public opinion. Finally, victim of a huge debt that will sooner or later have to be paid off. And everything is weighed down by the uncertainty of the United States, which is increasingly less willing to provide loans and non-repayable financing.

More than two years after US President Joe Biden declared ‘the rouble would be turned to rubble’ by sanctions, the Russian economy looks if anything more resilient with GDP growth hitting 3.6% in 2023 – outstripping every G7 country. 

Instead, Western efforts to cripple the Kremlin’s war effort by freezing funds, booting Russian banks from international payment systems and ceasing trade have only prompted Moscow to build better relations with other international partners, including China and Iran.

Now, experts are sounding the alarm, warning that Britain and her European partners will only become weaker in the face of their foes – and more subservient to the US – if sanctions continue apace. 

Speaking exclusively to MailOnline, Dr. Ksenia Kirkham, a specialist in economic warfare at King’s College London, said Europe is ‘shooting itself in the foot’ with its sanctions strategy and has pushed Russia to ‘escape Western mechanisms of control’ and become more self-reliant.

And Alan W. Cafruny, professor of international affairs at the US’ Hamilton College, argued Europe’s decision to cut off Russian oil and gas imports has done nothing but damage their own economies and line the pockets of US corporations – all while Russia continues to export its hydrocarbons out east unperturbed. 

The West’s ruthless commitment to punishing Russia with economic warfare has already endured for a decade.

America and the EU slapped Russian entities with sanctions as early as 2014 after the annexation of Crimea, a tactic which the UK Foreign Office said aimed to ‘deter, disrupt and demonstrate’ – that is, to deter further Russian aggression, disrupt its nefarious activities and demonstrate the West’s resolve. 

But the all-out invasion of Ukraine by Russian forces in February 2022 crystallised the failure of sanctions as a form of deterrence, with the measures evidently failing to stop the Kremlin from pressing ahead with its violent goals. 

‘Sanctions influenced Russia’s behaviour enormously, but not in the direction of stated objectives by the sender states,’ Dr. Kirkham said. 

‘If the objective was to deter Russia, then sanctions were distinctly counterproductive – they have simply made Russia more aggressive towards the West, especially towards the US.’

Then, following the outbreak of war, Ukraine’s Western partners refused to come to Kyiv’s defence with boots on the ground or planes in the sky.

Instead, they dramatically increased the scope of their already failing sanctions, seeking to weaken Putin’s war machine and compel a change in behaviour by crippling the economy and levying even harsher penalties on key state entities and individuals. 

But Dr. Kirkham believes these tactics have only expedited Russian efforts to undermine the West’s dominance in global political and economic forums.

‘Russia’s isolation is a myth,’ she said flatly. 

‘Moscow has been forming strong alliances with its BRICS partners and some other states in the Middle East, Africa and Latin America, with the aim of creating a new global balance of power. 

‘What we witness now is (Russia’s) development of alternative trade routes, payment systems, and duty-free zones that bypass sanctions and escape Western mechanisms of control.

‘The most alarming factor for the West is that, in the long run, its overreliance on sanctions compliance will undermine the very mechanisms through which sanctions effectively operate – i.e. the dollar hegemony and control over supply chains.’

Supporters of the West’s sanctions regime claim that Russia’s current economic strength will not last, arguing that the true impact will be felt in the coming months and years as the war rumbles on. 

But Dr. Kirkham doubts this, arguing that Russia has in recent months begun to shore up its deficiencies that sanctions would be expected to capitalise on. 

‘In 2022-2024, with a record high defence spending (7.5% of GDP), we have witnessed a boost in Russia’s military capacities – the country possesses all the necessary natural resources, workforce, and knowledge to respond to the needs of ”special military operation”,’ she said.

‘The gaps in some segments like electronics and machinery have been successfully covered by Russia’s partners that now not only replenish Russia’s shortages in some key components but also share their expertise and knowledge to secure Russia’s future self-sufficiency and domestic production. 

‘It would be wrong erroneous to suggest that the ”Kalashnikov” economy is dependent on the continuation of war.’

Cafruny went even further, suggesting the impact of the war and resulting sanctions may even be a net benefit to Moscow.

‘To be sure, the militarisation of the economy may lead to bottlenecks down the road, but if anything the overall impact of the war on the Russian economy has been generally positive,’ he declared.

He went on to explain how Europe scored an own goal with its decision to turn away from Russian energy imports, struggling with surging prices while the likes of China and India purchase Moscow’s crude at an enviable discount. 

And the porous nature of sanctions has allowed Russia to sidestep restrictions, with third countries simply able to buy up Moscow’s product and sell it on.

‘European countries have suffered greatly from a ”sanctions boomerang”,’ Cafruny said.

‘Throughout 2022-2023 natural gas prices soared, especially devastating the German economy based on relatively inexpensive natural gas. 

‘US LNG exporters, having pressed both the Trump and Biden administrations long before the war to cut off Western Europe from Russian energy, have profited massively from increased exports to Europe.’

As a result, the ‘hub and spoke’ relationship of European nations to the US will only solidify, with Britain and EU states becoming yet more reliant on America for military protection, oil and gas imports, and market access.  

With no end in sight for war in Ukraine and the Russian army making slow but steady progress in the Donbas, Western policymakers now face a troubling paradox. 

Unwilling to provide direct military support to Kyiv, the US, UK and Europe have little option but to continue awarding untold billions in aid packages to President Zelensky while shoring up loopholes and deficits in the sanctions regime.

But if the last decade has proved anything, it’s that the current approach to sanctions is not working as intended, and in the eyes of many has ceased to be effective altogether.  

Dr. Kirkham called on policymakers to review their approach to sanctions, warning that the current trajectory will not reduce Russia’s military effectiveness but could have unintended consequences for countries the world over. 

‘The overreliance on the mechanisms of deterrence, such as trade wars and economic sanctions… eventually leads to further disruption of vital supply chains, causes business inefficiencies, and resource exhaustion.’

It isn’t just that Ukraine’s economy is now more than ten times smaller than Russia’s. The problem runs much deeper. Since the Ukraine crisis started in 2014, Ukraine has ducked opportunities to enact the structural reforms it needs to tackle deep-seated corruption and diversify/strengthen its economy.

Ukraine needed either to set a course towards an economic model that exports and has spare capital to invest, including overseas, or towards an economic model that is comfortable to import and can attract foreign investment to offset the difference. At the moment, Ukraine is neither and it can’t make the cardinal shift while war is raging.  Real economic reform in Ukraine has therefore sat in the pending tray for a decade.

Data from the National Bank of Ukraine shows that the country consistently imports more than it exports. Not since 2022. Since 2006, the year after the Orange revolution. While on average, Ukraine’s yearly trading shortfall was $11bn in the ten years before war broke out, that figure almost tripled to $31.6bn in 2022 and 2023.  Yes, exports of goods have fallen since war broke out, by 17% and 30% in 2022 and 2023 respectively compared to the average.  But, critically, imports of services have also doubled since 2021. Ukraine’s trading surplus in services amounted to $3bn p.a. between 2012 and 2021; since 2022 it has slumped to a deficit of $9.8bn.

Service imports have in large part been driven by the large scale relocation of Ukrainians to other countries. Ukrainian people spending Ukrainian money in other countries counts as an import, just as spending by foreign tourists in London counts as a service export for Britain. For Ukraine, that imbalance won’t be resolved until war ends and its citizens return en masse.

Why does this matter? When a country imports more than it exports, it burns up supplies of foreign currency. If it runs out of foreign currency, then it can’t pay for imports and external debt.  Just look at what happened in Sri Lanka in 2022, which ran out of reserves and defaulted for the first time in its history. Functional economies avoid this trap by attracting foreign investment, look at the US and the UK for example, which consistently run deficits but maintain healthy foreign exchange reserves.

Ukraine, however, isn’t a functional economy.  Few foreign companies are making productive investments in Ukraine, and this challenge dates back to 2014, and the onset of the Ukraine crisis.  Foreign investment into Ukraine’s private sector since then has averaged a paltry $2.2bn p.a. compared to $15.6bn p.a. from 2010 to 2013.  That’s mostly because investors generally avoid zones of conflict and war.  But it is also partly driven by the power vertical in Ukraine in which a handful of Oligarchs maintain an iron grip on business interests across the country.

The war hasn’t changed and won’t change that fundamentally negative economic picture. Ukraine can’t attract significant foreign capital while at war.  And efforts to boost its exports have run into headwinds, particularly in Europe, with EU farmers rebelling against the flood of cheap imports from Ukraine.

So Ukraine needs to depend on a friendly lender of last resort. In the Soviet Union, that would have been Russia.  Today, it is western donor nations. Look at Ukraine’s balance of payments and you’d see that it received on average $5bn p.a. in secondary income between 2010 and 2021; largely hand-outs from other governments. In 2022 and 2023 respectively it received massive inflows of $28bn and $24bn, to help stabilise its current account and prevent a collapse in foreign exchange reserves.

More concerning, with Kyiv now spending an astonishing half of its ballooning budget on defence it has been forced to go to the lenders as well, borrowing a staggering $40bn in the two years since 2022, or almost one quarter of its current GDP.  That’s a 2000% increase in central government borrowing compared to the average in the ten years prior to war.  After much huffing and puffing, Victor Orban reluctantly agreed the EU’s most recent programme of support to Ukraine, amounting to 50bn Euro which runs to 2027.  But 33bn Euro of this is loans, equating to another 19.9% of Ukraine’s current GDP.

Today, Ukraine’s gross external debt is already around 90% of GDP.  In a downside scenario, the EU has predicted that Ukrainian debt could hit 140% of GDP as early as 2026.  If that doesn’t worry you, it should. With war widening Ukraine’s current account deficit, western nations will need to provide ever greater amounts of macro-financial assistance just to prop up the country’s reserves.  Because if Ukraine ran out of reserves and had to devalue the Hryvnia, then it would simply not be able to service its debt and would go into economic meltdown, requiring even greater western assistance.

Across the line of contact, much boiler plate analysis is churned out daily about Russia’s putative economic woes, but what does the data from Russia’s Central Bank tell us? Despite the structural challenges it faces, and notwithstanding the legally questionable freezing of $300bn (or around half) of its foreign exchange reserves, Russia is anything but short of liquidity.

With western journalists blowing a collective raspberry at the rouble’s collapse after war broke out, Russia nevertheless brought in a staggeringly large current account surplus of £238bn in 2022.  That’s more than Ukraine’s pre-war yearly economic output, and over two times the value of western financial and military assistance to Ukraine in 2022. It is almost four times larger than Russia’s average current account surplus in the ten preceding years.  Russia’s current account surplus stabilised to $50bn in 2023, which is consistent with the long-term trend, and from the first two months of data, may come in slightly higher in 2024.

The Russian economy is trimmed to export and reinvest earnings. The country hasn’t run a yearly current account deficit since 1998, the year it defaulted.  Largely because of this, Russia has very low external debt, at less than 20% of GDP.  Russia’s military spending could rise to 10% of GDP this year, with defence spending comfortably outstripping Ukraine’s by three times.  It doesn’t need to borrow significantly and has enough liquidity left in the tank to fund huge social programmes, which mean consumer spending in the economy remains strong.

Russia’s current economic model brings downside risks in terms of the country’s inability to diversify into new, more value-adding sectors of industry.  These risks have been acknowledged by Putin but are too long-term to affect decision making on Ukraine. For now, Russia holds a significantly better economic hand in prosecuting an attritional war.

No credible western military analyst now predicts a complete victory by Ukraine in this war that would push Russia back to its pre-war (let alone pre-2014) lines. But, in any case, it is clear that victory hinges on the balance sheet, more than on the battlefield. Ukraine will never have the economic resources it needs to out gun Russia. So, setting aside issues of weapons’ supplies to Ukraine and, indeed, who will pay the reconstruction bill when war ends, how long are western powers prepared to keep plying Ukraine with more debt as it prosecutes an unwinnable war?

The economic policy no-mans-land that Ukraine has chosen to occupy didn’t start in 2022, but rather in 2014, when the Ukraine crisis began. We were told that Ukraine wanted to make a ‘European choice’ and cast off the rusted-over shackles of Soviet era mismanagement. It is therefore an irony that western assistance has not prompted a genuine and meaningful effort at reform in Ukraine that would speed the process towards eventual EU membership.  Rather, it has created and will continue to solidify a state of truculent dependence which weakens Ukraine economically and leaves it as ungrateful for western support as it was for Russian.

Ukraine could still make its European choice. But first that would require painful political choices.  A choice to end the war through negotiations and a choice, for the first time, to face down vested interests and undertake meaningful reform in Ukraine. It’s far from clear to me that Zelensky has the power to make either choice. For now, and to paraphrase from the movie Top Gun, I fear Zelensky’s ego is writing cheques his country can’t cash.

Ian Proud is a former British diplomat and was the Economic Counsellor at the British Embassy in Moscow from July 2014 to 2019.  While in Russia, Ian advised UK Ministers on Russia’s political economy, and that of neighbouring former Soviet states, including Ukraine. He recently published his memoir, a Misfit in Moscow: how British diplomacy in Russia failed, 2014-2019.