Vladimir Putin would not be able to continue with his full-scale invasion of Ukraine if Russia’s export revenues slump amid a ballooning military budget, according to an economic assessment linking Moscow’s ability to wage war with oil prices.
With the war that Putin started more than 19 months old, Russia’s finance ministry has revealed that it would spend 10.8 trillion roubles ($108 billion) on defense next year, or 29 percent of overall planned expenditure and triple the amount allocated to the military in 2021.
Forbes Ukraine has calculated that the cost for Russia so far has been around $167 billion and while this excluded some defense expenditure, the war is estimated to cost within the range of $100 to $120 billion a year.
But in an op-ed for the Financial Times, Kirill Rogov director of the Re: Russia. Expertise, Analysis and Policy Network, said this amount has been mostly offset by the spike in price of Russia’s main export, crude oil due to the outbreak of the war.
It has been “the buyers of Russian oil, rather than the Russian state, who have been paying for the conflict,” he wrote. He noted how, despite sanctions, Russian exports were $590 billion last year and $460 billion this year—higher than the last decade’s annual average of $430 billion when the average Brent crude price was $67 a barrel.
These higher export revenues meant that so far, Russia did not have to risk political tension by redistributing money from other parts of the state budget, but “this could be about to change.”
Rogov wrote how investing in infrastructure and social spending would be difficult if revenues dropped to the levels of 2015 and 2020 when the average oil price was just $47 a barrel and external income was just $330 billion and $340 billion respectively.
“If export revenues were to dip to $350 billion, Putin would be unlikely to continue the war given the dual burden of military expenditure and high social spending to maintain domestic stability.”
While the price of a barrel of Brent crude was $87 on Monday, Russia’s other big energy export, gas, is facing a slump.
State energy giant Gazprom said sanctions had cut gas production in the first half of 2023 to 179.45 billion cubic meters (bcm), an annual decrease of 24.7 percent, and a 26.5 percent drop in gas supplies to the domestic and foreign markets.
Gabrielle Reid, associate director at strategic intelligence firm S-RM, told Newsweek that the $350 billion export revenue figure “is a neat watershed for Russia’s ability to continue its efforts in Ukraine, but reality is rarely this simple.”
“While a dip in export earnings would naturally impact Russia’s ability to fund the war, this is a sword that cuts both ways. Increased oil prices prompted by recent events in Israel have the potential to lead to better export earnings for Russia, thereby helping fund the Russian war machine.
“Equally, oil prices could stabilize should the Israel-Hamas conflict subside, mitigating these earnings and bringing Russia closer to the $350bn watershed, ” she said. “Russia will look to take advantage of elevated oil prices while it can, but the long-term outlook is far less certain.”
The continued sale of oil to India and China and avoiding more oil embargoes may give the Kremlin optimism that the economy can recover despite sanctions, but less social spending and increasing taxes on private businesses will suppress economic growth.
“These factors could lead to heightened anti-government sentiment and further tarnish Putin’s reputation among Russia’s business leaders,” Reid added.
Update 10/09/23 12:25 p.m. ET: This article was updated with additional comment from Gabrielle Reid.