How long would Russia have money for war?

China, India, and African countries support the Russian economy, but rising inflation and a falling ruble confirm that international sanctions are working.

According to Ukraine's military intelligence, Russia's resources are not unlimited, war is costly, and the systemic crisis in Russia is irreversible. It is only a matter of time. Economists report the Kremlin will still have internal resources for war, but there are opportunities to reduce its volume and availability.

Support for Russia's economy by its allies and those who do not care about Ukrainian deaths

Professor of Economics at Indiana University, Volodymyr Lugovskyy, believes that based on the examples of North Korea and Iran, unfortunately, Russia is likely to have funding for war for a considerable time. The question is how much funding is available and how it can be decreased. Serhiy Fursa, the Ukrainian investment banker at Dragon Capital, also shares this opinion. "They will still have the resources. Iran has been under sanctions for 40 years but has the resources to produce kamikaze drones and terrorize Israel," the investment banker says.

The World Bank estimates that in 2022 Russia's GDP fell by 3.5%, demonstrating the effectiveness of sanctions imposed by the West in connection with the full-scale invasion of Ukraine. Still, the International Monetary Fund believes that the Russian economy could grow by 1.5% this year.

A representative of Ukraine's military intelligence, Andriy Yusov, told Ukrinform that the Kremlin is covering the drop in budget revenues from reserve funds that were actively filled with foreign currency and gold before the full-scale invasion of Ukraine. Their volume is estimated at more than $150 billion.

"In fact, using these reserves, Russia finances the war: it maintains the army, manufactures and purchases weapons," Yusov said.

In addition to reserves, Russia receives income from oil exports. At the beginning of the year, Russian exports 8.3 million barrels of oil per day, the highest level since April 2020, according to the International Energy Agency (IEA). China was the largest buyer (43% of Russia's crude oil exports), followed by India (36%), the EU (8%), and Turkey (3%).

Russia's exports of petroleum products have been largely sustained by new buyers from Africa, who are eager to consume Russian diesel fuel, which has been cut off from Europe. However, due to Western sanctions, Russia's fuel export revenues hit their lowest monthly level since the invasion began, totaling €591 million a day in June, down 8% from May and 18% from April.

"Limiting Russia's profits from oil and gas exports is necessary. The idea of setting a price cap on Russian oil will certainly help - it has forced Russia to sell oil at a discount," Lugovskyy said.

After the price cap for Russian oil purchases was set last December, according to the Russian Ministry of Finance, revenues from the country's oil and gas industry fell by 52% in the first four months of this year compared to January-April 2022.

"It is also important to keep global oil prices low. To do this, we need the help of countries like Saudi Arabia and the UAE," adds the economics professor.

He believes this issue will likely be discussed at the planned summit in Saudi Arabia on President Volodymyr Zelensky's "peace formula."

Sanctions' impact on Russia's inflation and depreciation of the ruble

The decline in foreign investment and the withdrawal of international companies from the Russian market have led to an increase in domestic demand that exceeds the capacity to expand production. It means that Russia is unable to produce enough goods to meet domestic demand, which is why prices are rising.

According to the Central Bank of the Russian Federation, the current price growth rate, including various underlying indicators, has exceeded 4% annually and continues to increase.

"Experts in Russia's financial and economic system are much more aware of macroeconomic and inflationary risks than financiers were during the fall of the Romanov dynasty when they failed to take into account the threat of hyperinflation and the food crisis," Yusov said.

On 21 July, the Russian Central Bank (RCB) decided to raise its key policy rate by 100 basis points to 8.5% per annum to curb inflation to 4% in 2024.

Since the beginning of this year, the ruble's depreciation has also significantly increased inflationary risks. The reasons are lower export revenues and continued demand for foreign currency from Russian importers. It has a significant impact on the foreign exchange balance.

"Analysts expect a weaker ruble over the entire horizon," the CBR said. The bank's experts have downgraded their forecasts for 2024 (from 77.9 to 85 rubles per dollar) and 2025 (from 79.5 to 85 rubles per dollar).

Further restrictions and control of resource imports for Russia are essential

Ukrainian investment banker Serhiy Fursa believes that for sanctions against Russia to be most effective, India and China should join them. Unfortunately, this will never happen, so it is necessary to tighten controls so that the Kremlin has fewer opportunities to circumvent sanctions restrictions.

China is an important ally of Russia, so, according to economics professor Lugovskyy, the critical issue now is how to convince China to reduce the supply of military goods to Russia. Officially, China does not supply Russia with lethal weapons and military goods, but it has been proven that dual-use goods reach Russian buyers.

The most important aspect is, of course, limiting Russia's ability to import vital resources. China's recent restriction on the drone export and their spare parts may be an important factor in this regard," Lugovskyy said.

On 31 July, China imposed restrictions on exporting civilian long-range drones, citing Russia's war in Ukraine and concerns that the drones could be converted for military use.

According to the economist, it is also necessary to develop strategies to reduce re-exports to Russia from countries such as Turkey, Kyrgyzstan, Armenia, and Kazakhstan.

Ukrainian intelligence also acknowledges an urgent need to close the various loopholes through which Russians are trying to import dual-use goods, primarily electronics used to manufacture missiles and other weapons.

"We are working with our allies to close loopholes or grey supply channels. We have already achieved some results, but to eliminate the problem of Russia's sanctions circumvention, requires stricter and more effective mechanisms, especially in the area of export control," Yusov concluded.

Unfortunately, we cannot expect the aggressor state to run out of money soon, but the civilized world can significantly limit the resource for killing Ukrainians.

Oleksandra Klitina, Kyiv