Home / Articles / The War’s Impact on Russia’s Economy and Ukrainian Politics
Editor’s Note: This article by FPRI scholar Mitchell Orenstein is a product of a workshop on “The Global Order after Russia’s Invasion of Ukraine,” hosted by the University of Pennsylvania’s Perry World House on April 14, 2022.
Moscow grossly underestimated the economic costs of launching its war in Ukraine. Lulled by the limited sanctions that greeted its invasions of Crimea and Donbas in 2014, and a false sense of security provided by its hundreds of billions of dollars in reserves, President Vladimir Putin appears to have believed that he could ride out any sanctions that a divided West could muster. He seems not to have understood the shock wave that a full invasion of a European state would produce in the West and the massive unity of the European Union’s economic response. He did not anticipate Germany’s about-face in its relations with Russia or the sudden attractiveness of NATO membership to Finland and Sweden. Russia’s invasion of Ukraine appears to be a catastrophic blunder by Putin, one that puts Russia and his regime in great peril.
On April 6, 2022, the White House stated, “Experts predict Russia’s GDP will contract up to 15 percent this year, wiping out the last fifteen years of economic gains. Inflation is already spiking above 15 percent and forecast to accelerate higher … Supply chains in Russia have been severely disrupted. Russia will very likely lose its status as a major economy, and it will continue a long descent into economic, financial, and technological isolation.” This seems like a reasonable projection. However, there remain a number of uncertainties, such as whether Russia will be forced to default on its debt; whether its foreign trade, particularly in oil and gas, will be banned; whether it will continue to be able to count on India and other developing countries for economic support and sanctions busting; and how great Russia’s currency reserves actually are and whether these include oligarch assets, for instance, or other hidden treasures of Russia’s mafia state networks.
Moreover, after the revelation of war crimes at Bucha, Western leaders have stiffened resolve to punish Russia, primarily through damaging economic sanctions. Yet, Europe mostly has held back from the ultimate sanction: eliminating gas imports from Russia. Fifty percent of Russia’s export earnings come from oil and gas, and its primary clients are in Europe. Every day, with every atrocity, Europe gets closer and closer to making the decision to cut the tether to Russia’s energy supplies, a decision that would have long-term strategic ramifications and harm Russia’s economy, at least until it could establish new customers and transit routes. Once the European Union takes this decision, it is hard to see why it would go back. While recently re-elected Hungarian strongman Viktor Orbán says he will veto an energy boycott, a consensus is building in Europe for taking the one measure that, more than any other, would undermine Putin’s ability to finance this war in the medium term. A few countries, including Germany, have already banned Russian oil and seek to become independent from Russian gas as well. Russia recently cut off gas shipments to Poland and Bulgaria.
The logic of sanctions is that the worse Russia’s economic situation gets, the greater the likelihood of a political reaction from within that would challenge Putin’s delusional leadership. The first month of the war was characterized by extreme disarray, both in politics and on the battlefield. Russian military and government leaders seemed disoriented. Defense Minister Sergei Shoigu dropped out of sight for a few weeks. Putin fired the heads of the foreign intelligence bureau of the Federal Security Service, as multiple generals died on the battlefield and Ukrainian farmers towed away disabled Russian tanks. Some reports indicated that Russian leaders had fled to a deep nuclear bunker beneath the Ural Mountains, while Ukrainian President Volodymyr Zelensky remained in charge in Kyiv. Some Russian oligarchs indicated their dismay with the invasion and its results, believing that Putin had thrown away 20 years of Russian prosperity in a single act. While a palace coup or popular uprising remains unlikely, neither are impossible, and Russia’s politics will remain volatile while living standards collapse, despite a crackdown on dissent and free speech.
Putin re-oriented the army towards a concentration of forces in Eastern Ukraine, preparing a new offensive there. In some ways, this is already a defeat, due to the rapid scaling down of military objectives, from a total takeover of the country to an effort to expand Russia’s occupation of Eastern Ukraine. Yet, as security analyst Sergei Karaganov states, Russia needs to win this war, however defined, and adopting a narrower definition may work. A lot depends on events on the ground. If Putin succeeds in holding onto expanded territory in Eastern Ukraine and can claim victory, that is one thing, but if the Ukrainian army succeeds in pushing Russia back, it will deny Putin an opportunity to declare victory, and he will become more vulnerable politically. Expect Putin to drag out the conflict as long as possible.
This war has already been a tremendous political success for Ukraine, though extremely costly in terms of lives lost, property damaged, and cities destroyed. In it, Ukraine has won recognition as a state on the international stage. Most nations are forged in war, and Ukraine has turned this terrible attack to its long-term advantage by introducing itself to the world as a powerful state. It has demonstrated itself to be a democracy, a European nation, possessed of a powerful civic nationalism that transcends the Ukrainian-Russian speaking language divide to include a wide diversity of ethnic identities: Polish, Jewish, Armenian, and Greek. With its popular and telegenic president, Ukraine has left an indelible mark on the world stage. Most notably, after decades of skepticism from core EU states, Ukraine proved itself to be a part of Europe, of European values, and therefore a potential future member of the bloc. That will change Ukrainian politics permanently.
Ukraine will become a more confident country in the future, more deeply embedded in Europe. It will orient its government towards the project of Western integration, applying for EU membership and taking all the steps it can to achieve it. Zelensky has set a decisive direction for Ukrainian politics, as an attempt to integrate as closely as it can with the West to win security and economic advancement.
A critical piece of this will be reconstruction efforts. Already, Ukrainians are pouring back into Kyiv, seeking to rebuild their economy and their city, which experienced substantial damage, although nothing close to the extent of bombed out cities like Mariupol. Western and other funding will be needed to reconstruct cities, bridges, and other infrastructure.
Expect much of the initiative for rebuilding Ukraine to come not only from the government, but also from civil society organizations, which have played a massive role in refugee relief and national defense and may play a central role in rebuilding as well. Ukraine’s liberal and nationalist civil society has been building for decades. The Euromaidan movement of 2013–14, like the Orange Revolution before it, was a civil society movement, organized by individuals and groups outside of the state. While civil society flexed its muscles in 2006 and 2014, it was not able to fully control events after, but its strength and importance has grown during the war. Citizen volunteers have solved many of the problems of the current war, organizing relief for targeted cities. They have also formed the backbone of its territorial defense forces and volunteer battalions. It is hard to imagine that civil society will allow itself to be marginalized from Ukrainian governance and reconstruction in the future. Civil society has the power and legitimacy to play a greater role now.
At the same time, Ukraine’s empowered civil society will face competition within Ukraine’s peculiar domestic politics. For decades, oligarchs have dominated different cities around the country, feeding on the state or state-provided rents. Oligarchs have tended to strengthen their position when state leadership is lacking, and the destruction of so much of Ukraine may create opportunities for them to rise again and consolidate power, as the government will not be able to manage herculean tasks like the reconstruction of whole cities without partners and funding.
Vladimir Putin has called Ukraine the “anti-Russia” and to a certain extent that is true. Ukraine has shown the world what can happen when Eastern Slavs internalize typically Western values of nationalism, democracy, and civic identity. It can defeat Russian armies made up of brain-washed, drunk, and corrupt conscripts. A new Ukraine demonstrates for all to see that Russia has taken a wrong turn by submitting to a modern Ivan the Terrible. A different type of Western liberal identity is possible, even in the heart of what was once Kievan Rus. Even after the depredations of neoliberal shock therapy that cost Ukraine so much. Despite economic collapse and corruption, Ukraine developed a powerful civil society to match the unique opportunity to sustain national independence after 1991. Now, Ukraine has lessons on democratic transition to teach the rest of the world, first of all to Russia and Belarus.
The views expressed in this article are those of the author alone and do not necessarily reflect the position of the Foreign Policy Research Institute, a non-partisan organization that seeks to publish well-argued, policy-oriented articles on American foreign policy and national security priorities.