The war of attrition is gradually becoming a reality as Russia continues to make gains in the east. According to Ukrainian officials, Russian forces now control about 80% of the eastern Ukrainian city of Severodonetsk. Despite new aid packages by the US and European Union (EU), Ukrainian armed forces are struggling in Donbas as a brutal Russian offensive is underway – forces now controlling over 20% of Ukrainian territory, according to president Zelensky. Analytical estimates reveal that Russia (alongside pro-Russian rebels) has already seized almost 90% of eastern Donbas; en route to upend the city of Severodonetsk and Lysychansk in the province of Luhansk. And geopolitical experts believe a similar showdown in the neighboring Donetsk province would ease Russian domination over the entire Donbas region.
The Ukrainian dignitaries have consistently insisted on long-range artillery support to counter Russia’s onslaught. However, a single contention prevails in the Western cohort: supplying long-range weaponry could enable Ukrainian attacks beyond Russian borders, perhaps invoking a direct conflict with a belligerent Russia. Thus, the Western support remains mostly limited to conservative alternatives as Russia defies earlier odds to gain an upper-hand. The core western defense has been the barrage of sanctions imposed on Russia and the damage to the Russian economy. The West believes it could avoid militarily provoking Russia and still economically debilitate the country to the point of desperate negotiation. However, the truth is far divergent from this popular belief.
Even after three and a half months, the torrent of sanctions has failed to decimate the Russian economy as initially envisioned by the West. Putin has spent the last two decades fortifying the Russian economy via integration into the global financial apparatus. Sure, the invasion in late February spurred financial restrictions and constraints on trade. But the initial panic has since receded as relative stability is taking on the reins. The Central Bank of Russia has played a pivotal role in preventing a financial collapse. As sanctions threatened to spur a crisis, the Bank of Russia hiked the policy rate to 20% – encouraging savings; preventing the egress of investments. The Kremlin mandated the state-owned enterprises to hold export receipts in Roubles. And salaries and pensions were generously increased to compensate for the inflationary effects of the invasion. Three months forward, the interest rates are back to the pre-invasion level of 9.5%. The Rouble – crashing to a record low in days following the invasion – is trading near four-year highs. And inflation, though still a vice, has cooled off to 17% year-on-year from a two-decade peak in April. While fiscal and monetary policies have considerably stabilized the economy, another underlying factor has unsurprisingly buttressed the rebound: the Russian energy sector.
Foreign companies are pulling out, investments are downgrading, and currency reserves are locked up around the globe. Then how exactly is Russia financing the war in Ukraine? Sure the stocks of imports are running low, and people are spending less. Yet how is the Russian war machine still operational when the world is closing up for Russia? Ironically, the world is indirectly financing the Russian agenda in Ukraine. Fossil fuel exports have always been monumental for the Russian economy. Receipts from oil and gas exports made up roughly 45% of Russia’s federal budget in 2021. According to a market report of the International Energy Agency (IEA), Russia’s oil revenue alone is up by 50% this year – despite the toughest raft of sanctions ever meted out by the West. The US has utterly banned Russian energy imports while the EU has managed to reduce its reliance on Russian energy supplies. According to the data from the Center for Research on Energy and Clean Air (CREA) – a Finnish nonprofit think tank – the EU lowered natural gas imports from Russia by 23% in the first 100 days of the invasion (February 24 to June 3) compared to the same period last year. The data further reveals that the EU reduced its oil imports from Russia by 18% in May. Still, Russia earned a record $97 billion in revenue from exports of fossil fuels despite a modest fall of 15% in export volumes. How is that possible?
Despite trading at roughly 30% discount from international prices, Russian crude is sailing as surging global oil prices are still fetching receipts over 60% higher compared to last year. The volumes have certainly lowered as many countries have refused to trade with Russia to avoid American fury. Yet some countries have contended for cheap Russian energy supplies to guard domestic economic interests. India has been surprisingly vocal and determined about its choices of self-interest despite Western pressure. Since the invasion, India has procured 27% of its crude needs from Russia – up from less than 5% in April. According to research, India has cumulatively imported roughly 18% of Russia’s total oil exports since the invasion – increasing from roughly 1% pre-war quota. China has been another noteworthy importer of Russian oil, building its strategic reserves amid high global oil prices. Despite agreeing on a partial embargo banning roughly three-quarters of Russian oil imports to the region, Europe would not cast a substantial blow to Russia until 2023. While criticizing India and China for purchasing Russian oil, the EU has perhaps neglected its own energy imports from Russia, approximating €57 billion in the first 100 days of the invasion. And in spite of lofty promises to wean off Russian energy, European countries like Hungary and Slovakia would continue to rely on Russian oil via pipeline till at least 2024. Hence, while the West convenes to topple Russian dominance in Ukraine, the efforts are unfortunately not enough to fluster Putin – at least in the short run.
Nonetheless, the sanctions would hurt Russia somewhere down the line. Elvira Nabiullina – Governor of the Bank of Russia – recently admitted: “The effect of sanctions has not been acute as we feared at the beginning. [However] it would be premature to say that the full effect of sanctions has manifested itself.” The windfall energy export receipts may continue, but the import shortfall could damage the productivity of other sectors of the Russian economy. However, we need to understand that this is a war of attrition. And (despite a budget deficit) Russia has enough fiscal room to finance its domestic and military needs shortly. Mr.Richard Connolly – Director of the Eastern Advisory Group – sums up the reality perfectly: “For as long as the political will is there in the Kremlin and for as long as export prices remain high, I don’t see any immediate financial constraints confronting the Kremlin.” Hence, as sanctions fall short and Ukrainian defense fissures, the outlook is bleak – especially when Kyiv is resistant to negotiate territorial gains to fend off a humanitarian catastrophe.
Ultimately, the West needs to acknowledge its failure and decide: Is the sluggish war in favor of Ukraine or Russia? And what would be the primary goal of negotiations if Russia gains enough territory to dictate the terms? Given how the West has already exhausted almost all of its economic options and military options are off the table, I wonder how even the negotiations could do any good to Ukraine!