“We have nuclear weapons, who is going to attack us?” That was the brilliant retort by a young Russian lady to a foreign journalist’s question about the rationale for Russia’s war on Ukraine. Putin has always cited Ukraine’s potential membership of NATO as his reason for going to war, insisting that such an outcome would pose an existential threat to Russia. But as the lady’s response shows, there are some Russians who don’t buy his argument, and think the war makes zero sense.
Many parts of Ukraine now lie in ruins so on the surface, Ukraine is the loser in the war—thus far. What is not readily visible, however, is the severe damage that the war is doing to the long-term health of Russia as a nation.
Putin has essentially put his nation on a wartime footing. According to a recent report by The Economist magazine, Russia’s 2024 budget raises defense spending by almost 70% to $115 billion, three times the amount in 2021. The report says that this year’s spending on the military will represent nearly a third of overall national expenditure, and will be three times higher than outlays on education, healthcare, and the environment combined. In total, Russia is expected to spend 6% of GDP on defense.
That is a shockingly high percentage for prosecution of a senseless war. One of the most contentious issues within NATO over the last couple of decades has been the failure of many member countries to devote the agreed-upon target of 2% of GDP to defense spending. A majority of the members have consistently spent well below the target, instead choosing to focus resources on social spending and other domestic priorities. That surely doesn’t sound like an alliance that was building up its offensive capabilities in preparation for an attack on some adversary. That young lady the journalist met on a Russian street was just an ordinary person, and certainly no authority on geopolitics, but she seemed to have a much better insight on this war than many of the experts who continue to blame NATO expansion for it.
This clearly unsustainable level of military spending is bad enough, but even worse is the fact that Putin is choking off the primary source of Russia’s foreign revenues. In 2021, prior to the war, revenues from the oil-and-gas sector accounted for 45% of Russia’s federal budget. That share declined to 34% in 2023, and there is every indication that the trend will worsen over time.
Sanctions imposed by the Western alliance following the Ukraine invasion have deprived Russia of access to the Western European market, which used to be the primary destination for its oil and gas products. Russia has been forced to turn to China and India, countries that will only buy those exports at deeply discounted prices. Some of the discounts have been as large as $40 per barrel at times when Russia could have been selling its oil at market prices close to $100 per barrel.
Bloomberg magazine recently reported that 14 tankers transporting around 11 million barrels of Russian oil had been left idling on the seas. The ships were headed for India but according to the report, the Indian government was refusing to buy the oil “because the prices weren’t cheap enough.” Such heavy discounting, and the $60-per-barrel Russian-oil price cap imposed by the G7, mean that Russia is throwing a lot of money away for no good reason.
The situation is much worse for its natural gas exports. The extensive pipeline network that transported Russian gas was predominantly connected to the Western European market. Nord Stream 1, a nearly 770-mile pipeline under the Baltic Sea, moved gas from Russia to Germany, from where it was distributed to other parts of Europe. It carried 55 billion cubic meters (bcm) of gas each day. The parallel Nord Stream 2 pipeline, with the same length and capacity, was weeks away from being put into service when Putin launched his disastrous war. Both lines have been shut down—likely permanently.
The Power of Siberia gas pipeline to China is Russia’s only major avenue to market currently. At nearly 2,500 miles long, it is over three times longer than Nord Stream. Its 38 bcm per day capacity is just under 35% of the combined capacity of Nord Stream 1 and 2. Power of Siberia was also a lot more expensive to build. It cost about $50 billion, versus around $22 billion in total for the two Nord Stream pipelines.
Unlike oil that is easily loaded onto ships and sent to markets by sea, moving natural gas anywhere requires pipelines. With so little pipeline capacity available to it now, Russia’s only other option is to liquefy the gas and ship it. But Russia is a minnow in the global liquefied natural gas (LNG) industry, relative to the big players, the U.S., Qatar, and Australia. Russia doesn’t have anywhere near the capacity it needs to make liquefaction for export a viable alternative. It has been trying desperately since 2019 to build Power of Siberia 2 to double its pipeline exports to China, but that project is stalled because the two sides cannot reach agreement over price and other contractual terms. So much for the “no-limits friendship.”
Ironically, what Putin has managed to do successfully is to hand Russia’s previously lucrative natural gas market to its archenemy, the U.S. Determined to wean themselves off Russian gas, Germany and several western European countries have hurriedly spent billions of euros to build LNG-import terminals. That has quickly turned the U.S. into the top exporter of LNG to Europe. The U.S. has also surpassed Qatar and Australia to become the world’s top LNG exporter. Having made those enormous capital investments, it is highly doubtful that western European appetite for Russian gas will ever return.
In 2021, the U.S. produced just over 90 billion cubic feet (Bcf) of natural gas per day. Russia produced close to 70 Bcf per day that year. It is certainly producing less than that now. In contrast, U.S. production has now jumped to around 105 Bcf per day to meet the increased overseas demand.
And then there are the thousands of Russia’s best and brightest young men who fled the country, perhaps permanently, to avoid conscription. As a country that was already experiencing demographic decline, the loss of talent on such a massive scale will set Russia back even further for decades to come.
There is much talk in the media and elsewhere that sanctions have failed to meaningfully impact Russia’s ability to wage its war in Ukraine. That may be true in the short term. The sanctions regime is wreaking havoc on all sectors of Russia’s economy. Some Russian airlines are now forced to fly planes that are over 50 years old because the country’s aviation industry is hobbled. It took decades of decay for the Soviet Union to collapse, and Putin seems to be a poor learner of history. It is quite ironic that in his desperation to make Russia great again, he is repeating the very mistakes that caused the Soviet empire to implode.
Political leaders go rogue all the time. The difference in autocracies is that single individuals can completely ruin nations because there is often no one or nothing to check them. For the sake of my many Russian friends, I pray that wise leadership emerges in their country soon before it is too late.