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The Money Question: How Long Can Russia Wage War Against Ukraine?

Russian artillery firing. Image Credit: Creative Commons.

How long can Russia afford to fight? The campaign of economic sanctions that have fallen upon the Russian economy was designed first as a deterrent, now as a punishment. It will have the effect of severely damaging Russian economic growth, cutting Russia off from some critical technology flows, and limiting the extent to which Russians can do business abroad. It may not, however, stop the Russians from continuing their war in Ukraine.

Russia Is In Sanctions Hell

The sanctions have left Russia in a dreadful position. Many of its foreign reserves of currency have been frozen, ruining years of accumulation and preparation. In short order, Russia may default on its sovereign debt.  This represents almost as much of a threat to the international financial order as it does to Russia, although Russia will certainly suffer long-term consequences.

Russia is also struggling to complete contracts for energy because of nervousness in freight and energy shipping companies. And countries at war do sometimes simply run out of money.  In World War I the Entente came perilously close to insolvency, finally rescued only by the largesse of the Wilson administration. In the Russo-Japanese War, Japan traded away many of its gains on the battlefield because its sources of funding (London and New York) had largely dried up. Russia isn’t quite in this dire of a position.

However, Russia is not bankrupt in the sense that it has no financial assets. It has substantial reserves of hard currency and gold including some $300 billion in foreign currency and gold reserves held domestically or in friendly countries. Its export economy is primarily based on energy, making it possible to earn hard currency (especially as Europe continues to buy Russian gas), arrange barter agreements, and conduct business in non-dollar denominated currencies. Its armed forces depend largely on its own defense industrial base, meaning that it can pay for equipment with its own currency. It can strike deals with the only country that matters as far as military support, the People’s Republic of China. Indeed, Russia appears to have prepared for some time for the possibility that it might be cut off from the global financial system.

Above and beyond the sanctions, the war will take an economic toll. Russia reportedly expected the conflict to last only a few days, and thus to have a limited economic impact. Even had that plan worked out, the costs of the mobilization and the long-term deployment of forces along Ukraine’s border would have strained the Russian defense budget.

But the situation has turned out much worse than the Russians could have anticipated. Russian forces remain engaged in the field and have failed to inflict a decisive defeat on the Ukrainian army. Russia is running through pre-war stocks of munitions, food, and vehicles at an alarming and very possibly unsustainable rate. Estimates of the monetary cost of the fight range from $500 million per day to some $20 billion. The accuracy of these claims depends on what you count as a cost; including the full price of the equipment destroyed gets you closer to the high estimate but does not necessarily reflect the immediate burden on the Russian economy.

The short answer is that Russia can keep fighting for a very long time, because it can cover most of its needs from its own defense industrial base and because it can still export energy to a few key partners. This is quite different from saying that Russia’s economy won’t suffer from the war; military production displaces civilian production, workers tend to work harder for a currency that’s worth something, and the inflation that will likely result from a wartime economy will almost undoubtedly generate social unrest. But Russia can manage its own money supply and its domestic financial system through tools that Moscow possesses and that Washington cannot readily interfere with. The Russian government’s ability to print money means that the domestic economy will continue to function in some fashion, notwithstanding the impact of the sanctions. Iran, for example, has managed very moderate growth despite an almost complete cut-off from the global financial system.

Still, the prospect of a long war means nothing at all positive for the Russian economy. War diverts young, productive workers from economically useful tasks to soldiering, which often involves dying or suffering permanently disabling injuries. The need to feed the war machine will distort Russia’s economy by shifting production away from economically viable industries.  Hyperinflation may result from the printing of too much money to chase too few consumer goods. If the war ended tomorrow it would take Russia years to undo the damage to its economy, and there is no indication that the war will end tomorrow.

Now a 1945 Contributing Editor, Dr. Robert Farley is a Senior Lecturer at the Patterson School at the University of Kentucky. Dr. Farley is the author of Grounded: The Case for Abolishing the United States Air Force (University Press of Kentucky, 2014), the Battleship Book (Wildside, 2016), and Patents for Power: Intellectual Property Law and the Diffusion of Military Technology (University of Chicago, 2020).

Written By

Dr. Robert Farley has taught security and diplomacy courses at the Patterson School since 2005. He received his BS from the University of Oregon in 1997, and his Ph.D. from the University of Washington in 2004. Dr. Farley is the author of Grounded: The Case for Abolishing the United States Air Force (University Press of Kentucky, 2014), the Battleship Book (Wildside, 2016), and Patents for Power: Intellectual Property Law and the Diffusion of Military Technology (University of Chicago, 2020). He has contributed extensively to a number of journals and magazines, including the National Interest, the Diplomat: APAC, World Politics Review, and the American Prospect. Dr. Farley is also a founder and senior editor of Lawyers, Guns and Money.