How Putin is financing his war in Ukraine

It will soon be the second anniversary of the Russian attack on Ukraine - and Vladimir Putin is boasting that Russia is once again a "great power". How can the Kremlin afford the war for so long?

After almost two years of war in Ukraine, the only reliable forecast is: no forecast is reliable. In the early hours of February 24, 2022, the day of the Russian invasion of Ukraine, no one believed that there would be no end to the deaths on the front in the winter of 2023. Kiev would fall within days, was the general assumption after hundreds of thousands of Russians invaded the neighboring country and marched on the Ukrainian capital. How were the defenders supposed to defy such a seemingly overpowering neighbor?

But Kiev did not fall. Kiev stood firm. What's more, Ukraine managed to push back the attackers in many places. And when Kherson was recaptured nine months later, there was even a brief glimmer of hope of a Russian defeat. The question was suddenly no longer how long the Ukrainians could hold out, but how long the Russians could. Some optimistic analyses stated that sooner or later Moscow would run out of soldiers, political friends and, above all, money.

Today, almost two years after the Russian invasion, it has to be said bitterly: These forecasts are also a waste of time. The war seems to be frozen in a bloody stalemate. And there is no sign of Russia going bankrupt. On the contrary: "We have become stronger," claimed Kremlin leader Vladimir Putin in a video message to the meeting of the so-called World Council of the Russian People, an organization under the auspices of the Russian Orthodox Church. He boasted that Russia had "consolidated its sovereignty as a world power".

But is this really a realistic description of the situation? What is the truth of Putin's assessment?

Europe is divided

Moscow is said to have hoarded 550 billion euros in gold and foreign currency reserves at the beginning of December 2021, shortly before the start of the invasion. Putin had saved up for a lightning victory, but now has to pay for a war of position. The fact that he seems to have succeeded in doing so without any problems so far is mainly thanks to the West's patchy sanctions policy. The recently adopted twelfth package of sanctions will hardly change this. The reason is the same as the eleven times before: the EU states still disagree on whether and to what extent they can - and want to - do without Russia as a trading partner.

One country in particular is repeatedly breaking away from the much-vaunted community of solidarity with Ukraine: Hungary under ruler Viktor Orban. The autocrat makes no secret of the fact that his country has far more ideological ties with Moscow than with Brussels. When Orban shook Putin's hand in Beijing in mid-October, many in Brussels were annoyed, but few were surprised. What's more, despite the sanctions imposed, Orban is not afraid to continue doing business with Russia. Budapest recently declared that it wanted to expand nuclear power - in cooperation with Moscow. "It's their war, not ours," the right-wing populist said succinctly.

However, there are also tangible economic reasons why a tough sanctions regime against Putin and his followers is reaching its limits. The EU and the G7 countries blocked 300 billion euros of Russian central bank reserves and froze billions more in oligarch accounts. But it turned out that the money tap on the globalized markets cannot be turned off so easily and, above all, not so one-sidedly.

The Moscow regime is said to have earned more than five billion euros this year from the sale of liquefied natural gas to the EU alone. France has increased its LNG imports from Russia by 40 percent, while Spain and Belgium have even doubled them. Only China, Russia's best friend anyway, is a bigger buyer. In Washington, they have apparently had enough. At the beginning of November, US President Joe Biden imposed tough sanctions against a huge Russian LNG project in the Arctic - even though European companies such as the French energy group Total Energies are involved.

Indians and Chinese are getting involved

But above all, black gold is fuel for the military machine. In 2022, Russia increased its income from the oil business by 28% compared to the previous year. EU countries (with the exception of Bulgaria) have been completely banned from transporting Russian oil by sea for a year. Russia is circumventing the sanctions. Literally. Before the war began, every second freighter carrying Russian oil sailed under the Norwegian flag or the flag of a G7 country. Now it is less than one in four. Today, the Russian energy giants deliver the crude oil to Asia via shadow fleets. Hundreds of often obsolete freighters sail the world's oceans, mostly under African flags. "If the authorities in Europe discover that a company or a tanker is in breach of the sanctions, the name of the company and even the name of the tanker changes relatively quickly," Christopher Weafer, Managing Director of management consultancy Macro-Advisory, told Euronews.

The insurance of the cargo, which is allegedly often reloaded en route, is either provided by Russia itself - but mainly by India and China. They, in turn, are the biggest buyers of the cheap raw material. As third countries, they refine the crude oil and resell the "clean" product on the global market, in some cases legally - including to Europe (read more about Russia's new sneak routes across the world's oceans here). The price cap of 60 dollars per barrel that was actually set is de facto ineffective. According to reports, Russia even collected a hefty 80 dollars per barrel in October - which, in addition to the decision of the oil exporters (OPEC) to reduce production volumes, is also due to the chaos in the Middle East.

When an EU diplomat claims to the US magazine "Politico" that "we have reached the limits of what we can do in the energy sector without shooting ourselves in the foot", this is not without a certain amount of cynicism. As it turns out: Isolating Russia without jeopardizing Western economic interests doesn't work.

While there is no doubt that Russia's economy went downhill in 2022, the assessment for 2023 is ambivalent. The Organization for Economic Cooperation and Development (OECD) believes the economy will shrink by 2.2 percent. The International Monetary Fund, on the other hand, predicts growth of 0.7 percent. Of course, Putin speaks of having consolidated Russia's position as a world power. The question is, however, which status he sees as consolidated. Canada, France, India, even Italy and South Korea had a higher gross domestic product (GDP) in 2020.

Kremlin hopes for new partners

What can hardly be denied, however: Russia's economy has proven to be much more resilient than expected. Shortly after the start of the war, Biden had predicted that it would halve. Instead, the economy is "now larger than before the invasion", calculates Russia expert Janis Kluge from the German Institute for International and Security Affairs in "Zeit Online". However, GDP in times of war is "a pretty poor measure of prosperity", Finnish economist Laura Solanko points out to the New York Times. After all, although the arms industry generates billions on paper, it does not improve people's quality of life.

After all, Russia is likely to open up completely new opportunities in 2024: With Iran, Saudi Arabia, the United Arab Emirates, Egypt, Ethiopia and Argentina, the Brics alliance is set to gain seven new members in the new year. The alliance, which currently includes Brazil, Russia, India, China and South Africa, is intended to offer a geopolitical and, above all, economic counterpart to the West. In other words: a lot of potential trading partners for the Kremlin.

Next year, almost a third of the Russian state budget will be spent on the military. This amounts to the equivalent of 111 billion euros - almost three times Ukraine's defense spending. So far, Putin has been able to pass on a large part of the war costs to other departments without much fuss. Military spending skyrocketed, while at the same time the regime pumped more money into the social budget (for example into pensions) in order to secure the support of the population. The ingredients for this were stolen from the budget for education, health and infrastructure. "Putin is thus financing the war by depriving the future of money," according to an article by the US think tank Wilson Center.

According to studies, a large part of the Russian population continues to support the war - mainly because the standard of living has not deteriorated significantly. Many Western companies (including McDonald's, Starbucks and VW) have turned their backs on Russia. Alternatives come from domestic production and above all from China.

Relative prosperity

However, it is questionable whether the upheaval trick will be successful in the long term due to the recent sharp rise in inflation. Russians are feeling the effects of this in their everyday lives - which could have consequences for the upcoming elections in spring 2024. Putin has not yet officially applied for a fifth term in office. But so far he has always been able to rely on the fact that people in Russia were willing to overlook the shortcomings in democratic decision-making as long as the president guaranteed them relative prosperity.

So what about Russia's "sovereignty as a world power"? Has it really become "stronger", as Putin claims? The answer is ambivalent: economically, Russia is lagging far behind the ambitions of its ruler. But Putin hardly needs to worry about running out of money, despite all the Western sanctions. And the Kremlin leader is known for his highly individual interpretation of the term "sovereignty".

This text first appeared on stern.de

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Despite the ongoing sanctions, Russia continues to finance its war in Ukraine, with Moscow reportedly hoarding 550 billion euros in gold and foreign currency reserves. This has allowed Putin to pay for the war without significant problems, despite the West's sanctions policy. However, some EU states, such as Hungary under Viktor Orban, continue to engage in business with Russia, limiting the effectiveness of the sanctions. (Sanctions, Putin, Attack on Ukraine)

Furthermore, Russia has managed to circumvent the sanctions on oil and gas exports by using shadow fleets and selling crude oil to countries like India and China, who then refine and resell the "clean" product to other markets, including Europe. This has allowed Russia to continue earning revenue from its oil business, which has increased significantly since the start of the war. (Sanctions, Putin, Attack on Ukraine)

Source: www.ntv.de