Russia's invasion of Ukraine in February marks the most significant challenge to the structure of international order since the end of the Cold War. Russian President Vladimir Putin seeks to reinstate economic and political domination of Ukraine and beyond, with financing and ideological motivation provided by the West. Such ambitions come with high costs to the stability of Russia’s international relations, but Western nations seem unable to isolate themselves from fossil fuels and, subsequently, from investing in Russia's global campaign. Russia's military-industrial complex financially prospers off the world's unrelenting demand for fossil fuels.
Putin's campaign expends considerable capital in addition to the costs of lives, sovereignty, and security of the international system. The costs of his campaign are continuously rising. Russia's military power relies on old technologies that are more challenging to repair. Old political tactics of dictatorial conscription and bribes necessitate an increasing budget to cope with the vast number of Russians refusing military deployment. An average calculation of financial estimates suggests Russia spent roughly 31 trillion rubles, nearly $515 billion, per day during the first two months of the war on Ukraine. Russia's defense budget thrived amidst drastic surges in spending through Putin's planning and preparation to exacerbate the circumstances. SIPRI data assesses a 2.9% increase in Russia’s military expenditure in 2021, during which Russian forces were developing along the border of Ukraine, with military spending comprising 4.1% of GDP. This growth will likely persist, if not increase, at least in the short term. Fiscal projections predict Russia’s defense expenditure to surpass initial budget assumptions by over 43% in the next three years. Russia’s capacity to fund these developments is directly provided by other nations through energy exports.
In most countries, especially Russia, there would be very little GDP without energy. Energy sector trade relations provide Russia with an extensive range of financiers to sustain its budget amidst increasingly rising mobilization costs. Fossil fuel exports constitute Russia’s primary source of revenue and financing for its military-industrial complex. In 2021, oil and natural gas revenues accounted for 45% of the federal budget. Trends against diversification in the Russian economy forecast the share to continue increasing. A CREA report found that Russia earned 93 billion euros, roughly $91 billion in revenue from oil, gas, and coal exports during the first 100 days of the war. The European Union alone accounted for 61% of these imports, with other significant contributors including China and India.
Western nations responded with sanctions to lessen their unintended investments in Russia's campaign. In March, the relatively energy-independent U.S. banned imports of Russian fossil fuels. The EU declared its intention to reduce imports substantially but could not commit to an outright ban on a critical source of European energy security. These responses were preceded by Putin’s prediction of and preparation for their consequences. In the annexation of Crimea, Putin learned that the West would respond to territorial aggrandizement with sanctions and thus sought to prepare for the consequences. Since 2014, the Russian government has employed an economic strategy known as Fortress Russia to develop resiliency to sanctions. The plan entailed the diversification of domestic manufacturing sectors and foreign markets. While failing in the former, the latter accumulated roughly $640 billion of official reserves and fostered deeper Sino-Russian economic relations.
Putin overestimates Western sanctions by labeling them as tactics of economic blitzkrieg, yet he is accurate in pointing out that the West overestimates their capacities to limit his campaign. In March, immediately following the U.S. ban on Russian imports, the U.S. treasury reported a red flag warning that Russia could use cryptocurrency to evade sanctions. Regardless, transitions away from direct Russian imports will take time for nations to find alternative markets or adapt domestic production efficiently. Indirect imports of Russian oil are immune even to outright bans on trade. With consuming nations switching import markets, alternative import markets derive increased demand, which they are likely to supply by buying and selling Russian oil. Russia has persisted with price hikes made possible by reduced but undefeatable demand derived from European energy insecurity. Both European economic anxiety and energy prices serve to benefit Russia’s global campaign funding. Both promptly increased as a result of the explosion of the two Nord Stream pipelines that supplied gas between Russia and Germany. Policymakers suspect Russia sabotaged the critical supply route as a signal of economic belligerence and escalation of the conflict.
Russian economic decline would not necessitate Russia’s global campaign funding to stop. The Russian government increased its defense budget by 700% between 2000 and 2021; simultaneously, 14% of its population lived below the poverty line. The population of Russia will see cuts to education, healthcare, infrastructure, and culture, rather than defense spending. The sinking of the ruble nourished Russia’s drastic budget increase with the ability to pay big bills with a cheap currency. The World Bank projected an 11% shrink in the economy amidst increases in revenues from energy exports. The decline may be less significant given the Russian government regulations limiting trade, more than doubling interest rates, and freezing accounts in central banks. These capital controls prevented money from flowing out of Russia and the ruble's value from plummeting further. However, the government lifted most of its regulations to restore the weaker ruble's proficiency in debt repayment. In observation of the U.S. increases in military expenditure since February, Putin is unlikely to respond by lowering Russia’s. Rising U.S. defense spending signals a threat to Russia’s ambitions of military and global superiority. Any decline the Russian economy faces will likely result in a larger share of Russia's GDP devoted to military expenditures. To Putin, nothing costs more than losing his objective of reestablishing control of Eurasia.
Persistence of Russia’s funding follows increased revenues, reduced military capacity, manipulation of currency valuation, and signals of securitization. The global supply chain crisis fueled by Russia's campaign is on the path to beating the one induced by COVID-19. Efforts to mitigate the crisis prove themselves steps in the wrong direction. Europe's energy dependence, sanctions, and increasing transportation costs from the Nord Stream pipeline explosion ultimately allow Russia to exploit its abilities as a natural gas giant by hiking fossil fuel prices.
The rest of the world, bound by economic interconnectedness, is entangled in financing Russia's campaign through its demand for coal, oil, and gas. Russia's objectives likely entail more losses within and beyond Ukraine but provide compelling political, economic, and security justifications for the West to transition away from fossil fuels and standardize green energy.
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