For at least a year now, the Kremlin has been convinced — and persuaded many others — that it holds all the cards in Ukraine, with more manpower and ammunition, a bigger arms industry and, as a result, an advantage in the most important commodity of all for a war of attrition: time.
This presumption proved a fallacy from the first day of the war, when Russian troops marched into Ukraine expecting instant victory, with parade uniforms in their backpacks but just a few days’ worth of fuel and supplies. It remains false today, as difficult as Ukraine’s position on the front lines has become — not least because Russia’s economy is losing its near-miraculous Teflon shield.
Vladimir Putin and Donald Trump in 2019. The pair made plans over the phone for a meeting in Saudi Arabia.Credit: AP
This is a critical point to understand as a new US administration gets set to start peace talks. If President Vladimir Putin does have time to burn, he can bargain from a position of strength, knowing that Ukraine must eventually fold to his demands.
The reality, however, is that Putin’s hand is weaker than he would have us believe, and it’s US President Donald Trump who can afford to dig in at the negotiating table. Some of the strong cards the Kremlin is often claimed to hold are either contingent on choices made in the West (with its far larger economic and military potential), contested by Ukraine (think of Kyiv’s growing long-range strike capability, or the territory it still holds in Russia’s Kursk region), or illusory.
Putin’s threats of a nuclear strike falls into this last category and serve as a perfect example of just how effective a bluff can be (in this case restricting the flow of arms to Ukraine) when it’s believed. Russia’s economy is also now moving toward this group, if it isn’t there already.
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Russian resilience in the face of unprecedented Western sanctions and asset seizures has been a surprise similar to Ukraine’s ability to resist on the battlefield. Instead of collapsing, as many believed it would, the economy grew, thanks not only to evasion of sanctions but also to a world-class central bank governor and massive official and unofficial fiscal stimulus for the war effort.
Even now there’s no sign of crisis, but there has been a sharp turn for the worse that creates opportunities to pile on pressure and change Putin’s risk calculations during talks. This chance needs to be taken, not as an alternative to a peace settlement, but to make one possible. How do we know this isn’t just wishful thinking (again)? In a report published on January 23, the Centre for Macroeconomic Analysis and Short-Term Forecasting, CMASF, a Moscow nonprofit that advises the Russian government, said that despite strong overall growth numbers, Russia’s non-defence economy has been stagnant since mid-2023. More recently, investment and household consumption stopped growing, too, as the central bank drove its key interest rate up to 21 per cent, to battle stubborn inflation.
So far so manageable for a wartime economy. The danger lies in the amount of credit that’s been pumped into the defence industry to fund its extraordinary growth, much of it taken out on variable rates. According to the same report, a credit crunch began in November-December. The full extent of the problem remains hidden, says CMASF, as banks opt to restructure bad debt discreetly rather than report it, thereby mitigating the risk of failing capital ratio requirements.
