Russia's Escalating Economic Woes: Putin's War Fund
Russia's Leader, Putin, Allegedly Embezzles Pension Funds for War Expenses
By Lea Verstl
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Russia's ballooning budget deficit is a testament to the combined effects of Western sanctions and an oil market downturn. To keep the war machine rolling, President Putin is dipping into the state pension fund, a move that foreshadows trouble ahead for Russia's economy.
Putin exhibits little concern for losses in maintaining his war engine. Not only is he bearing heavy casualties on the Ukrainian front, but the war is costing Russia dearly. The invasion has left gaping holes in the Russian federal budget, with the Kremlin resorting to unconventional measures to cover up the deficit. This year, the Kremlin intends to siphon around 4.8 billion euros from the reserves to offset the budget shortfall, with predictions of a tripling of the deficit in 2022. The pension fund, established back in 2008, is being tapped every year, with its portfolio comprising stocks and various assets to finance Russia's pension system.
Risky Financing for Short-Term Gains
Alexandra Prokopenko, a former advisor to the Russian Central Bank and current researcher at the Carnegie Endowment for International Peace, explains the immediate benefits of drawing on the pension fund for Putin: "In the short term, it helps Putin to exploit the pension fund." However, this tactic offers only a temporary reprieve for the Russian economy. Prokopenko admonishes that such a strategy is not conducive to long-term economic stability, as the welfare fund is quickly dwindling.
Inequality: The Rich Get Richer While the Poor Suffer
The widening income gap in Russia is a painful side effect of Putin's fiscal decisions. As the Kremlin directs valuable resources away from the civilian sector and toward the military apparatus, the poor are left in the lurch while the rich continue to thrive. Since the onset of the war, the wealthy have seen their wealth increase, whereas the impoverished have fallen further into despair. This precarious situation has given rise to significant social discord and may even stoke discontent among the populace.
The Almighty Pound of the Might: Russia's Economy and Oil
A significant economic vulnerability for Putin lies in the magnitude of dependence on oil exports. With decreasing oil revenues, the budget remains in the red, as per assessments by the Ministry of Finance. To maintain economic balance, the Kremlin must make crucial budget cuts, particularly in the civilian sector. However, the military remains unaffected by such measures, leaving the civilian economy to bear the brunt of the financial squeeze.
Slippery Economic Slope for Putin
Putin has shown little indication of considering the economic ramifications of his decisions at the onset of the war, making it unlikely that increasing transaction costs will serve as an effective deterrent on his bloody path. However, the finite resources of the Russian pension fund might eventually drain, forcing Putin to prioritize economic considerations.
Although the war engine may continue to roll for the moment, economic reality will eventually catch up with Putin, as the pension fund reserves are eventually exhausted. At that point, Putin would likely need to divert all available labor force, funds, and resources from the civilian sector to the military apparatus, straining the already struggling economy and risking an economic and social collapse.
On the other hand, international sanctions, such as those imposed by the EU, continue to wear on the Russian economy by raising transaction costs and increasing the prices of goods due to circumvention measures. If the US were to impose secondary sanctions, the economic strain on Russia could be even more substantial.
In the podcast "Wieder weggelezlt," Prokopenko warns, "I don't believe he's in a position to calculate losses yet." However, the consequences of Putin's choices will eventually come to bear as the economic and social consequences of the war weigh heavier upon Russia.
The Intelligent Podcast for Curious Minds: "Wieder weggelezlt"
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Topics Covered:
- Russia
- Vladimir Putin
- Fiscal policy
- Ukraine
- Ukraine conflict
- Sanctions
- Oil price
- Raw material oil
- Poverty
- Gap between rich and poor
- Black Sea
- Military
- Interest rate
- EU
- USA
- Donald Trump
- Gas
- Nord Stream
- Swift agreement
- The European Central Bank might consider revising the energy policy of EC countries, given the current financial instability of Russia, which could have a significant impact on the region's economy.
- The ongoing conflict in Ukraine and the subsequent economic woes in Russia highlight the complex intersection of politics, finance, and general news, demonstrating how these factors can affect the stability of a nation and the world at large.
