Ukraine: the dangerous economics of the war of production

Mar 15, 2024
Ukrainian money paper bills. National flag

After two years of bloody trench warfare and aerial annihilation the economics of the war in the Ukraine are putting the means to end it yet further out of reach. With an avalanche of armaments being poured into the military vortex, the consequences of the unacceptably large losses of life and further massive destruction of people’s habitats and welfare are becoming of somewhat secondary concern to the US and Russian protagonists. Their involvement has become an existential battle between Western values and the evils of authoritarianism and western imperialism.

Such positioning does much to ensure that America (in the company of its NATO colleagues) locks itself into yet another drawn out and perhaps unwinnable war. If unwinnable, this will be in large part due to the extraordinarily successful way in which Russia has put its economy on a war footing (that should be of no surprise for a country which is the world’s second (to the US) largest arms exporter). The increase in arms output has been almost wholly responsible for the dramatic rebound in the Russian economy: from a negative growth of 2.1% in 2022 to a 3% increase in 2023. That means Russian military spending is currently running at an official rate of 5% of GDP – way above the erstwhile world champion, the US, at 3.5%. But given the highly opaque nature of much of Russia’s spending it’s accepted to be considerably higher. In 2024 some $109 billion – one third of the Government’s outlays – will be spent on ‘national defence’.

Some of the arms output increases are spectacular. Russia now produces around 10,000 artillery rounds per day; over 3,700 armoured vehicles were delivered in 2023 together with 22,000 drones. Cruise missile production is reputed to have reached around 60 a month.

There are of course some heavy costs for this war footing in terms of rising interest rates (currently around 13%) and a debilitation of the rest of the economy. But Putin’s strategic skills are much in display by recasting the war as a civilisational struggle between Russia and the West – a view now accepted by two thirds of the population. This raising of the stakes to an existential struggle has helped secure widespread popular support for Putin – he enjoys an extraordinary 65% to 85% popularity rate depending on which poll you read, with public support for the ‘special military operation’ also running at between 65% -75%.

Russia’s strengthening military position is not being matched by Ukraine. Russia’s domestic arms expenditure is three times that of Ukraine’s $30 billion supplemented last year by some $90 billion of promised Western military aid whose combined arms industry far outweighs that of Russia. But as well publicised, supplies of military aid have been spasmodic and simply have not kept up with the massive number of ammunitions used by Ukraine in the war. For the West the supply problems are bureaucratic, logistical and political. As one commentator has observed, it’s a war of production.

It’s also clear that the longer the war continues the less effective sanctions have been in stemming Russia’s oil export revenues and acquisition and production of armaments. Increasingly, much of the deficit in raw materials and machinery is being sourced from China while high tech imports are coming circuitously from China and from sanction busting countries such as Uzbekistan and Turkey. In addition, it is estimated that between 1-3 million rounds of artillery have been imported from North Korea and Iran.

Payment for arms related imports is also turning out to be progressively less of a problem. Russia’s huge forex reserves – over $550 billion in total – are being rundown only modestly. While the US boasts that some $300 billion of Russia’s forex reserves are frozen, new evidence indicates some two thirds cannot be found among the scores of countries in which they have been squirrelled away. And while Russia has been excluded from the global Swift payment system a workaround is emerging by way of the creation of a Chinese Yuan currency zone.

On the other side of the war ledger’s economics, the Ukraine has an economy which is only one fifth that of Russia. In the first year of the war Ukraine’s economy shrank by 30% and 6.5 million people fled the country. From this very low economic base in 2023 its GDP has grown just 3%.

In total, military casualty figures have been considerably greater for Russia. From an army of 1.3 million and an initial invasion force of over 300,000, Russian soldier deaths are put at around 120,000 and over 300,000 including those wounded. Ukraine’s army totals 500,000. Its losses were recently put at 31,000 deaths by Zelensky although there is a consensus among analysts that it’s closer to 70,000 and around 120,000 including wounded. Russia of course has a population four times large than the Ukraine and therefore a far large pool to draw on for fresh troops. Moreover, as the frontline balance of power evens out the considerable difference in casualty rates between Ukrainian and Russian forces is narrowing.

A further heavy impost on the Ukraine is civilian casualties and the cost of damage to its cities. Last year, the UN has put civilian deaths at 10,000. However more recent estimates put it as high as 100,000 when the exceptional loss of life from Mariupol and other recent battles is accounted for. With 10% of the country’s housing stock destroyed the total cost of rebuilding its infrastructure is estimated by the World Bank to be in the region of $486 billion.

Notwithstanding the increasingly bleak economics of the Ukrainian war there is no wavering in the assurances of enduring military support from Biden and NATO members.

Equally problematic for those looking for some form of negotiated settlement is Zelensky’s tying of his political popularity to a platform of reclaiming all of the 17% of Ukraine land area occupied by the Russians – including the Crimea – and therefore rejecting outright a negotiated settlement. That position seems not to have changed in the recent talks with Erdogan given Zelensky’s refusal to have Russia at the negotiating table. And while Putin has signalled he is prepared to enter negotiations, annexation of the occupied territories makes that intention highly problematic. The eastern occupied regions of Donetsk and Luhansk – prior to the war populated by a Russian sympathetic, Russian speaking population – are being aggressively re-Russified. That process began in 2014 when the Ukraine Government backed away from its agreement with Russia to transition the Donetsk and Luhansk regions to a form of self-government,

Since then, and contrary to international law relating to occupied territories, 1 million Russians have reportedly moved into this region and to the Crimea. There are more recent reports of an influx of around 100,000 central Asian workers into the border regions.  Russification is being pursued by devices such as making social welfare dependent on acquisition of Russian passports and the embedding of Russian administrative and educational systems. A further solidification of the separation from the Ukraine has been moves by the heads of occupied Luhansk and Donetsk to form a ‘Donbas commonwealth’.

All these adverse stalemating developments highlight the now problematic assurances the US gave Zelensky in the early triumphant days of the war that he should drop his offer to negotiate a settlement and use the backing of the West to win the war quickly and outright. In accepting that offer Zelensky abandoned his negotiating stance in which the Crimea was seen as an acceptable negotiable loss and some sort of deal relating to autonomy worked out for the occupied border regions.

With Zelensky now planning a vast strengthening of defensive battle lines the prospect now is of several years of a continuing brutal high casualty war resulting in tens if not hundreds of thousands of further civilian and combatant casualties and yet further debilitating destruction of the Ukraine’s infrastructure.

This appalling prospect has done nothing to bring a negotiated settlement to the fore as evidenced by Zelensky’s short shrift to the Pope’s recent efforts. Further upholding that reluctance are those who insist Putin will stop at nothing other than total subjugation of Ukraine – or at least a compliant regime change – and that his sights are set on an ongoing westward expansion of Russian incursions and influence. Arguably a more realistic appraisal comes from those (for example the recent article in the US Journal Foreign Affairs “Putin has already lost”) who argue that whatever Putin’s goals, the invasion’s unintended consequences have been a wholesale revitalising of NATO and a major expansion of its membership. This, it is asserted, makes any prospect of further westward Russian incursions improbable especially given the known limits of the Russian military.

If a winner take all outcome to the war is not possible, a negotiated settlement could presumably need to rest, on the one hand, on accepting an adequate Western dividend of a revival of NATO as an effective a bulwark against further Russian aggression. For some a further dividend would be the strengthening of Western Europe’s capacity to move away from free riding on the US’s defence, fend for itself and develop more independent Eurocentric policies. On the other hand, as isolationist Trump Republicans are now beginning to opportunistically argue, a loss of territory by Ukraine might have to be endured by the West as the price paid for too aggressively pushing NATO eastward and failing to include Russia in a more embracive post-cold war security architecture.

Share and Enjoy !

Subscribe to John Menadue's Newsletter
Subscribe to John Menadue's Newsletter


Thank you for subscribing!