HOW MUCH MORE WAR CAN RUSSIA AFFORD?Economics could be the determining factor for peace in Ukraine
Like many in Washington, where I have lived for the past six decades, I wonder just what Russian President Vladimir Putin is up to in his war with Ukraine. It is a war the Russian Armed Forces, with its deep penetration into border areas of Ukraine, have waged, at great cost in manpower and weaponry. Why is Putin not accepting a ceasefire in place? Can Russia, now under strict Western sanctions, afford to keep on pushing deeper into Ukraine, as the Russian Army is doing, while leaving many urban areas, as a knowledgeable US official recently told me, looking like rubble reminiscent of Berlin at the end of World War II? An American businessman with a long record of dealing with Russia recently told me that the two largest Russian banks—Sberbank and VTB, both of which are state-run—have client loan accounts totaling $310 billion at the current American dollar rate. The banks make loans at roughly 20 percent interest to Russian businesses and for the purchase of homes. The Russian gross domestic product is $2.2 trillion without counting the black market sector that may add as much as 25 percent. This means, so the businessman says, that the Russian government’s debt is about 16 percent of its GDP, which is, “a very low number. No other G20 country has such a low debt ratio. Putin smiles. He will wait.” The businessman adds, “The. US debt to GDP ratio is now approaching 100 percent, with no real US political interest to set limits on the accelerating growth in federal government debt” that now approaches more than $36 trillion. “Both Dems and GOP are willing to loot the Treasury to pursue their much different goals. . . . The only tacit agreement between both parties is to quickly debase the dollar to the point where it is worth much less than it is today. It has the appearance of being a free resource, available without cost. We plunge ahead. The fiscally responsible world now hates the trust they had put in the dollar. “What could this chaotic outcome bring us in a quickly warming world?” The businessman asked. “The answer in the US is ‘Who cares?’” I took the businessman’s information and analysis to an economist with a long career working for the Federal Reserve System, which is responsible for America’s monetary policy, along with regulating all financial institutions. The economist told me that the bottom line of my correspondent’s analysis is that “Russia is stronger and the US is weaker than most think. I am not convinced by the data [that was emailed to me] that this is true. . . . The key is whether the Russian economy is being productive and how much of any productivity is centered in the military. . . . The Russian central bank is trying to slow inflation”—which is now at 10 per cent—and at that rate “it is likely that non-defense firms will find it hard to make a profit when loan rates are over 20 percent.” His next remark struck me as crucial: “This means the non-defense sector is likely shrinking. Defense firms can provide a short-term boost to the economy but since much of what they produce is being destroyed in the war, it won’t add to Russian wealth. “Thus,” he said, “I suspect that the Russian economy is fairly weak.” As for the Russian debt issue, the economist was skeptical: “Russia may have a low debt-to-GDP ratio, but they have to pay a lot for their debt, so their interest costs are big relative to their debt situation and many investors probably avoid Russian debt completely.. Overall, I’m not sure Putin can just ‘wait’ and ignore the human cost of the war.” The economist said was not sure, as the businessman seemed to be, that the US debt situation “is possibly explosive. I am not convinced. . . . Until recently investors thought our debt situation was manageable, although not great. However, there is a chance that the actions of the Trump administration and Congress may change that. . . . If the Republicans pass a big bill with big tax cuts and not real spending cuts, it could accelerate inflation and the weakening of the dollar. But this is likely a problem for the long run. “To me the big question for the US economy is how big the tariffs are and whether businesses expect them to remain constant once they are set. As I see it, high and unpredictable tariffs are a bigger problem than the debt situation.” Such calm analysis makes me wish I had more confidence in the instincts of Scott Bessent, a hedge-fund executive worth more than $500 million, who initially was depicted in the press, unlike most of Trump’s Cabinet choices, to be connected to Main Street America. That ended when he defended Trump’s initial decision to slap extreme tariffs on Chinese exports by saying that China “will eat some tariffs.” At this point, Bessent comes across as just another Cabinet cheerleader. I also discussed the warning of Putin’s willingness to spend billions and untold numbers of dead and wounded Russian soldiers in expanding war against Ukraine—matched by American and European billions in support of Ukraine—with the American official, who has spent decades in direct and indirect contact with senior Russian military and political officers on national security matters. The official told me that the amount of US and Russian debt cited to me by the businessman was “pretty accurate, given a few percentage points and valuation totals.” But the interpretation of the economic picture painted—wisdom and stability in Russia and chaos in America—was dead wrong. “To understand why you’ve got to go back to Economics 101. Putin has dramatically increased government spending on the war. To do this he needs more money. The Russian citizens are taxed out so [Putin] prints more money. The value of the ruble goes down so prices go up—inflation. “Russians don’t invest in stocks; they hoard in banks (a long history). Industry needs more money to expand the war machine, so they borrow from the banks. But inflation means the banks charge more interest for the loan and the interest paid goes up, but it doesn’t make the depositor richer because he has to pay more for groceries. Inflation now in Russia is on an upward curve. Inflation in the US is on a downward curve.” The overall inflation rate for April was 2.3 per cent, the lowest in more than four years, according to the Bureau of Labor Statistics. It’s impossible to measure the well-being of the Russian economy without considering the impact of US and Western European sanctions, the growth of crypto, the growing influence of BRICS, the immediate future of the dollar, and the growing lack of confidence in Trump’s America as a reliable trading partner. It is becoming clear that Trump will not be able to end the Ukraine War with a dramatic summit meeting, as was once thought. However, Russia, unlike Ukraine, is full of oil, gas, and rare earth minerals coveted by Trump, an avaricious businessman whose office now happens to be in the White House. He and Putin are once again talking. Peace and prosperity could be at hand—for some.. 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