In Ukraine misery, Russia faces economic nightmare

We are watching an extraordinary tragedy playing out on our TV screens as two sibling countries fight a bitter war. Clearly, the main tragedy is for the Ukrainians though for Russia too, we are witnessing the destruction of a modern state.

Glasnost was economically disastrous for Russia and the client states of the USSR though since then all have built modern consumer-orientated economies that have hugely improved the living standards of the peoples.

Since Vladimir Putin’s rise to power in 2000, Russia has done particularly well building a strong economy on the back of oil, gas and commodities, joining the globalised world and becoming a respected member of the world community.

Consumer lifestyles

The Russians live well enjoying western-type consumer lifestyles with a much-improved standard of living and also a much more transparent and open society.

Regretfully at a stroke this has all changed as Putin’s extraordinary decision to invade Ukraine has transformed Russia’s status, making it and its people pariahs, and led to all sorts of consequences that Putin and his acolytes may not have considered.

As Boris Johnson said, rarely in human history has there been such a clear line between right and wrong, the quite unprovoked invasion of an unthreatening neighbour apparently being due to a possible expansion of NATO (not even being discussed) and western influence and the quite absurd claim that the government is ‘neo-Nazi’.

The misery and destruction this has caused has rightly outraged the West and many other countries, 141 of the world’s 195 countries voting for the UN motion demanding the withdrawal of Russian forces and almost all the rest abstaining rather than voting against.

Also, the risk of greater ambitions to re-establish the old Soviet Union by invading other countries, particularly the new NATO members, has become a huge concern. Unless Putin is stopped World War 3 beckons, which of course would be a catastrophe and there are enormous forces coalescing to stop his expansionism. The big question is can he win?

Firstly, consider the military situation. Certainly, the raw numbers show he has massively greater military strength than Ukraine, but is this enough? Ukraine is a country of 44 million people that is larger in area than France and Russia's invasion force is about 150,000-troops strong.

The invasion was predicated on a quick victory and an element of Ukrainian compliance, which has not happened, and the attack has generated a huge resolve to resist.

We are seeing Russia increasing the level of destruction to extreme levels, but this is largely counterproductive as the TV images have outraged the world further.

There is also a big difference between being an invading army with no clear moral compass and an entire population fighting for its existence. The lessons of history are many — Russia in Stalingrad (ironically!), Vietnam, Afghanistan, etc.

Arms deliveries

With increasing western arms deliveries and intelligence plus extensive economic support, it is almost impossible for Russia to decisively win. Meanwhile, Russian soldiers are dying in large numbers and this must be a great concern to Putin. How long will the country accept this?

Secondly, the economy will be destroyed and here the West has enormous power. Russia is about 1.5 percent of world GDP and with sanctions, much of their income and forex reserves are blocked, the rouble has crashed and in the globalised world which Russia is (or was!) a part production at many factories will cease due to lack of western components.

Payment systems have been closed down, most western companies have exited Russia (no McDonald's or Coca Cola!), commercial aviation will be crippled and even shipping to Russia is suspended by many of the major lines.

In previous eras, countries were much more self-contained though. Now no country, even the US, can survive without the international trade that globalisation has created.

Certainly, Russia has oil and gas, it being the world's number three oil producer and the largest exporter and no doubt this energy power was a big factor in Putin's decision though the trade is two ways and ceasing oil and gas supply will have a huge impact on Russia and the West will find ways to manage the disruption albeit at a high cost.

Long term, what are Russia’s prospects in this scenario? No doubt planners everywhere are focusing on establishing alternative energy sources to eliminate the risk of Russian supply.

The sanctions have only been applied for two weeks and the effects are yet to be felt. The impact will be huge in a few months and the living standards of all Russians must drop enormously as shelves empty and inflation rages. Will Russians accept this for an unnecessary war?

The third impact is geopolitical, and overnight Russia and Russians have become pariahs. Putin’s action has coalesced and encouraged cooperation and even increased the will of NATO sceptics like Finland and Sweden to join as the risk of Russia is realised that can only be resisted through joint treaties. There appears to be interesting realignments occurring with several countries.

China principally, seeing how they can benefit, though has said they have good relationships with both Ukraine and Russia and they have a balancing act to do — unconditional support will not be given.

Current pariahs like Iran, Libya, Venezuela and Saudi are also being seen in new lights as the world seeks access to their oil and though there is apparent indifference from some major players like India, as the fight becomes more barbaric there will be increasing pressure to contain Russian aggression.

At present Russian force seems to be prevailing on several fronts and the West is rightly terrified about escalation and a MAD (mutually assured destruction) outcome, which is a possibility given Putin’s extraordinary aggression and agenda.

Western power

However, Western power is overwhelmingly greater and if, God forbid, it came to a nuclear apocalypse Russia will certainly be destroyed (with us all!). Also, Ukrainians are showing remarkable resistance and a total invasion of the country will not be possible with the war becoming a proxy in the struggle to contain Russian expansionism.

At present there appears to be solid internal Russian support for the war that is nurtured by a campaign of misinformation. But consider Putin’s longer term options — a military stalemate that is hugely costly to Russia at several billion dollars per day with essentially no income coming in, a crashing economy that will soon be life-changing for every Russian citizen and a united opposition by the world's major powers that is focusing on Russian containment.

Unquestionably there is a huge amount of planning and reaction taking place in the world's capitals that we're not aware of at present as strategies are prepared to confront the greatest threat to world peace since WW2; basically both the numbers and the realities are heavily stacked against Russia.

So what next? Russia is in so deep its only option at the moment appears to be escalation to try and achieve a quick outcome that will only increase world outrage, Ukrainian resistance and the flood of refugees. However, as this plays out will the Russian people remain so supportive?

And remember that Russia and Ukraine are essentially one people with a long common history and many mixed family connections rather like England and Scotland. The relationship might be complex but it is deep. The human cost will increase hugely and ultimately Russia is on a hiding to nothing.

Even if they ‘won’ in a military context the antipathy created will be so great that they could never govern without a draconian occupation force. No question the war is a massive error of judgement and huge pressures are building to negotiate firstly a ceasefire and then some sort of truce, though as one journalist put it starting a war is easy, stopping it is very difficult.

Ask Nixon, Bush, Blair etc. and Russia has several experiences in Afghanistan, Chechnya and Georgia. Actually the only way for Russia to try and start to rehabilitate itself is to remove Putin, who is now absolutely toxic, and while he remains in power Russia is now completely isolated and will become increasingly so.

And the answer to the question what happens from here? With Putin who knows though from all perspectives the prospect of nuclear escalation is so horrific and thus unlikely and ultimately as Ukraine and the West coalesce their positions the overwhelming opposing powers will lead Russia to a forced truce, though not without some unpalatable concessions being made.

Let's hope so though don't bet on Russia rejoining the civilised world order for the next generation!

Mr Davis is Davis & Shirtliff chairman