Russia is positioning itself for a prolonged war economy as President Vladimir Putin redirects vast resources towards military and security expenditures. At the 27th St. Petersburg International Economic Forum (SPIEF), it was revealed that Russia is spending more on its military-industrial complex than on social programs for the first time. Putin has significantly boosted defense spending, allocating around 110 billion euros to the defense budget and an additional 34 billion euros to national security agencies. This emphasis on military spending represents 38.6 percent of all Russian budget expenditures, which amounts to eight percent of the gross domestic product.
Contrary to the grim predictions of some Western analysts, Russia's economy has managed to remain comparatively robust despite the sanctions. However, concerns are growing that the heavy investments in the defense sector will have detrimental long-term effects. Prof. Dr. Michael Rochlitz of the University of Oxford noted that these investments are unlikely to yield positive economic benefits in the future. Furthermore, Russia's economy is taking a hit from plummeting gas exports, exemplified by Gazprom's dramatic decline in deliveries to Europe—from over 174 billion cubic meters in 2021 to just 28.3 billion cubic meters in 2023.
Sanctions are also impacting Russia's financial sector. The USA has threatened to implement harsher measures against financial institutions aiding Russia, compelling many banks, including those in China, Turkey, and the UAE, to distance themselves. According to Vladislav Inozemtsev, the sanctions have essentially closed off capital outflows and made financial transactions exceedingly difficult. Russia's former finance minister, Mikhail Zadornov, and Oleg Vjugin, former deputy head of the Russian Central Bank, have both compared the economy to a 'closed steam boiler'—full of money but with restricted use.
Meanwhile, US President Joe Biden is attempting to assure global support for Ukraine in its conflict with Russia. Meeting with Ukrainian President Volodymyr Zelensky at the G7 summit in Italy, Biden reinforced the West's commitment to Ukraine's defense against Russian aggression. Biden announced new sanctions targeting over 300 entities aiding Russia's war efforts and hinted at significant economic and military support for Ukraine from G7 nations.
These plans include a potential US-Ukraine bilateral security pact focused on long-term military training and cooperation. Additionally, a $50 billion aid package aimed at rebuilding Ukrainian infrastructure is under negotiation. These initiatives underscore the West's strategic intent to 'Trump-proof' Ukraine's support network, especially as Biden's administration faces potential political upheaval in the upcoming elections.
Despite these efforts, Russia's advances on the battlefield remain a concern. The Hudson Institute reported incremental Russian progress in eastern and northeastern Ukraine, accompanied by extensive attacks on civilian infrastructure in Kyiv. Experts warn this could pose a threat to Europe's territorial integrity, emphasizing the technical prowess and resilience of the Russian military.
Ukraine's situation is further complicated by shifting political dynamics in the West, with rising far-right influence in Europe and the potential return of Donald Trump to the US presidency. This political uncertainty fuels concerns about the consistency of Western support for Ukraine. However, ongoing initiatives and Biden's diplomatic engagements demonstrate a robust commitment to sustaining Ukrainian resistance.
- The collapse in oil and gas exports has been particularly severe for the Russian economy. Gazprom’s 2023 gas exports to Europe dropped to 28.3 billion cubic meters, significantly lower than the 174 billion cubic meters recorded in 2021.
- The financial sanctions imposed by Western countries added another layer of economic stress. Many international banks, including those from China, Turkey, and the UAE, have ceased dealings with Russian financial institutions, exacerbating the financial isolation.
- In parallel, the increased military spending by the Russian government is contributing significantly to the national budget, with a striking 38.6 percent of all Russian expenditures now channeled towards defense and security.
- US President Joe **Biden**'s visit to Europe, aligning with the G7 summit, underscores a concerted effort to bolster Western unity in the face of Russian aggression. Key outcomes include new sanctions and substantial economic aid packages for Ukraine.
- New commitments by the US and its allies, including long-term military training and financial support, are crucial steps aimed at fortifying Ukraine’s defense capabilities against ongoing and future threats.
