Russia's Very Bad, No Good Year
Hit It While It's Down
Russia is not having a great year. Putin’s three-day “special military operation” to “denazify” Ukraine will be hitting its three-year mark in just a few weeks. Doors for Russia to access the global financial system are quickly slamming shut, with the full-block designation of Gazprombank, its subsidiaries, and a host of other financial institutions last month just the latest in increasing pressure from global powers.
Hungary and Türkiye were howling for waivers that would allow them to continue purchasing Russian gas. And although Hungary claims it supposedly has found a solution to get around the latest round of sanctions by paying for Russian gas shipments via the Turkstream pipeline from Bulgaria, things are becoming more and more difficult for Russia.
Overheating Economy
Let’s remember that the vatniks have been gleefully pointing to Russia’s GDP growth as “proof” that sanctions against Russia aren’t working. And remember that those of us who have a clue about how economics works reminded the vatniks that wartime economies are deceptively robust, and that Moscow needs to continue its war because otherwise, POOF! No more economic growth!
A Foreign Policy article last month highlighted that Russia’s economy and war effort is a trainwreck waiting to occur.
Signs that the official data masks severe economic strains brought on by both war and sanctions have become increasingly apparent. No matter how many workers it tries to shift to the defense industry, the Kremlin cannot expand production fast enough to replace weapons at the rate they are being lost on the battlefield. Already, around half of all artillery shells used by Russia in Ukraine are from North Korean stocks. At some point in the second half of 2025, Russia will face severe shortages in several categories of weapons.
Rostec CEO Sergey Chemezov in October said (link in Russian) that even the arms trade is not profitable enough to service Russia’s debts. Chemezov said that the current high cost of money is "a serious brake on further industrial growth."
How long before Chemezov is defenestrated for bringing bad news for Putin?
But he’s not the only one.
Former Russian Deputy Energy Minister Vladimir Milov says says inflation isn’t the only problem the country faces.
Looking at the bigger picture, we’re approaching the three-year mark since the invasion of Ukraine, and Russia’s economy is still searching for solid ground. Import substitution isn’t working; China’s only buying our basic commodities at big discounts while keeping their market closed to other Russian products, and we’re not seeing any meaningful investment or technology transfer from China or other Global South countries.
Russia’s housing sector is also not doing well. Residential construction sector is really in trouble, according to one X resident.
So while the elites are profiting from the wartime economy, average Russians are facing incredibly high inflation, and Russia doesn’t have the manpower it needs to fight in Ukraine or workers in various sectors, such as textiles and agriculture. Salaries have risen, but between the deaths in Ukraine and the exodus of many Russians who don’t want to remain in that country, there aren’t enough workers.
The wartime economy cannot last forever, and once the war ends, what then?
Milov says Russia will have to end this war in 2025.
The solutions are actually pretty straightforward: end the war, cut military spending, get the workforce back from the front lines, regain access to international markets, and restore access to foreign loans and technology. Of course, this would require Russia to leave occupied Ukrainian territories, deal with war crimes, and pay compensation for damages.
Wartime Losses
Russia is sustaining record losses in Ukraine, prompting them to import North Korean troops to help.
The estimates of Russian losses are staggering, and even if they’re overestimated, the fact that Russia has been trafficking men from countries such as India, Nepal, and Cuba, and shipping even more North Korean troops to the front, is indicative of just how bad things are.
No amount of lies can save the fact that Russia’s “special military operation” is in trouble, even as Kremlin spokeshole Peskov tries to spin the hundreds of thousands of Russian casualties as Ukrainian in order to project a false strength to president-elect Trump.
Sorry, but no one believes you (except maybe Tucker Carlson, Scott Ritter, and Douglas McGregor) who are expecting their dire predictions to come to fruition any day now.
Losing Syria
As Syrian president Assad fled Damascus only to reemerge in Russia, most are forgetting that Assad’s fall was also a massive loss for Russia.
Putin has been cultivating his power and influence in Syria for about a decade in an effort to counter western influence there. Syria would have been just one indicator of Russia’s return to the adult table, thrilling Putin, who was enraged about the US “hegemony” in the world and advocated a multi-polar power environment (read: Russian hegemony), especially after having annexed Crimea with a tepid response from global powers.
But Putin’s obsession with Ukraine and the diversion of resources to the war there has left his buddy Assad unprotected, showing just how pathetic and paper-thin Russia’s ability to maintain its influence is. The humiliation is almost certainly going to tarnish Russia’s reputation elsewhere, and Putin’s security guarantees will be shown to be worthless (as Armenia learned recently).
The fall of Assad exposes the fact that there’s no sustainable economic or political framework behind Putin’s alleged “strategy.” His global ambitions are unsupported by capabilities and resources, and his reputation on the world stage—already tarnished by the savagery of Russia in Ukraine, the kidnapping of Ukrainian children, and the inability to keep the promise of a short-lived “special military operation”—is now somewhere in the S-bend of a particularly filthy toilet.
So what’s next?
US Treasury Secretary Janet Yellen last week signaled new sanctions against Russia before Trump takes office. Rumblings are that Russia’s Gazprom and Gazprom Neft are going to finally be included on the SDN list. The energy companies are already subject to debt and equity prohibitions. On the day of the invasion in 2022, OFAC issued the “Russia-related Entities Directive” to prohibit transactions and dealings by US persons in new debt of longer than 14 days maturity and new equity of Russian state-owned enterprises, entities that operate in the Russian financial services sector, and others.
Including them on the SDN list is already making countries who are in Putin’s pockets quake in fear. Serbian president Aleksandar Vucic told the media this weekend that the United States officially informed him of plans to introduce sanctions against Serbia’s main gas supplier that is controlled by Russia. Gazprom Neft and Gazprom own respectively 50 percent and 6.15 percent of Serbian oil company NIS.
Treasury also signaled that it would increasingly target Russia’s efforts to evade the oil price cap, its “shadow fleet” that is transporting oil priced above the ceiling and causing major environmental damage. Oil prices are on the decline, and supply is abundant. Biden is leaving office in just a few weeks, and he probably no longer feels constrained by escalation fears.
In response to these signals, Peskov issued an impotent warning that the Biden administration would leave a "difficult legacy" in US-Russia relations (link in Russian).
Russia is down, and the Biden administration is no longer worried about re-election chances. The White House likely will take the opportunity to further hobble Russia.
It has already designated Russia’s Gazprombank—the last remaining large Russian financial institution that was not sanctioned by the United States.
But more can be done. In its latest working paper, the Yermak-McFaul International Working Group on Russian Sanctions released a few recommendations on possible ways forward on energy sanctions, highlighting new steps this year to really hurt Russia and force Putin’s hand.
Reining in Russia’s shadow fleet through tanker designations to reinstate the price cap’s leverage;
Improving compliance by addressing enforcement challenges related to the attestation system;
Reducing the price cap;
Completing the EU’s ban on Russian oil and natural gas as much and as quickly as possible to deprive Russia of money and future geopolitical leverage;
Addressing the refining loophole that allows Russian oil to reach coalition countries in the form of oil products;
Imposing sanctions on the Russian energy sector more broadly, including its nuclear industry; and
Banning the provision of energy-related services to Russia by coalition-based companies.
Yes, existing sanctions have already reduced Russia’s revenues from its energy sector, but more can be done.
Enforcement challenges have kept Russia in this war and have continued pouring funds into the Kremlin’s pockets. We will almost certainly see increased efforts in that sphere. The UK and the EU are stepping up efforts to block Russia’s shadow fleet. Ukrainian intelligence is helping in that effort, releasing details about hundreds of tankers that are helping obscure the origins of their cargo and navigating international waterways without pilot assistance, increasing the risk of accidents. “Since February 2022, more than 50 incidents involving such tankers have been reported globally.”
Lowering the price cap would further reduce Russia’s revenues from oil, but enforcement is key. So is engaging with countries such as Panama, Gabon, Barbados, and others that continue to register the fleet under their flag.
A complete ban on Russian oil in the EU is going to be difficult with Hungary continuously gumming up the works, and the refining loophole is also a huge block to effective restrictions.
The refining loophole allows EU member countries to import petroleum products refined from Russian crude in third countries. By buying products made from Russian crude oil, coalition countries indirectly pay Russia prices above the price cap, making existing restrictions less effective. Initially, the loophole was allowed in order to maintain adequate energy supplies. Now that supply is adequate, perhaps it’s time to revisit.
Make no mistake, there is still pressure to be applied to Russia. Let’s do this while we have Putin on the ropes!