A costly troop mobilization, plummeting energy prices, and a new round of Western sanctions threaten to wreak havoc on Russia’s already battered economy and undermine President Vladimir Putin’s war in Ukraine.
The economic storm clouds are gathering as Mr. Putin directs more financial resources toward the Ukrainian conflict. According to analysts, the Kremlin’s decision to call up more than 300,000 soldiers will necessitate new funds to equip, train, and pay the new reinforcements. It has also caused havoc in Russia’s private sector, which is facing new challenges as workers report for duty or flee the country.
And it’s happening just as Russia’s main economic strength, the windfall from soaring energy prices, appears to have peaked. Because of lower energy revenues, Russia’s federal government budget was in deficit last month. That was before the latest drop in oil prices and before Moscow cut off the majority of its remaining natural-gas flows to Europe.
“Mobilization is another significant hit to the Russian economy, particularly given the increased uncertainty,” said Maxim Mironov, finance professor at Madrid’s IE Business School. “And it occurs as oil and gas revenues begin to dwindle.”
Wars are frequently won by the side with the financial resources to fight for the long haul. Ukraine’s economy has been battered, but it is receiving a flood of aid from the West to keep it afloat.
Western sanctions slowed Russian commerce, but Moscow was able to stabilize the economy thanks to an increase in energy prices. The ruble rose sharply against the dollar after plunging at the start of the war, and inflation eased. The Russian government and independent economists now anticipate a shallower recession this year than previously anticipated.
While there is no evidence of an impending economic collapse, domestic business owners and investors were alarmed by the news of the mobilization. According to activists and analysts, Mr. Putin’s order opens the door for a much larger draft. Following the draft announcement, Russia’s stock market, which is mostly dominated by domestic investors, plummeted.
Prior to the draft, official data showed that the government ran a large budget deficit in August. It reported that the year’s budget surplus had shrunk to 137 billion rubles, or $2.3 billion, for the first eight months of the year, down from around 481 billion rubles in July.
To close the gap, the government has proposed several measures, including raising taxes on the energy industry. It issued government bonds for the first time since February this month and pledged to run a deficit next year. Local savers will be required to fund the bonds. Foreign investors who owned 20% of government bonds prior to the war are barred from participating in the market. Moscow is barred from participating in foreign debt markets.
Russia’s economic problems are a result of the country’s own policies. High energy prices caused by the Ukraine war initially generated enormous revenues for Russia. According to the Institute of International Finance, oil and gas accounted for roughly 45% of Russia’s total federal budget revenues in the first seven months of the year.
However, high energy prices have slowed global growth and caused a widespread slowdown in demand for oil. Brent crude has dropped nearly a third from its June high to trade for less than $85 per barrel.
Taking into account the $20 discount for Russian crude, Moscow is already selling its oil below the price required to balance the budget, which S&P Global Commodity Insights estimates at $69 per barrel in 2021. The strong ruble complicates matters for the Kremlin by lowering the value of oil exports when converted into Russian currency.
According to analysts and ship-tracking companies, oil exports have fallen along with the price in recent weeks. The drop was most likely caused by a combination of a slowing global economy and impending European Union sanctions on Russian fuel, which take effect in December.