Opinion: Vladimir Putin isn’t just losing in Ukraine — he’s set Russia’s economy back 40 years

To win a war you need will and means. I am cautiously optimistic that Ukraine has a bit of both in its struggle with Russia.

Ukraine will grow with every mass grave of murdered civilians found and every Ukrainian village liberated. For Ukrainians, the war is no longer about territory, but about the survival of a country — whose invaders believe Ukraine has no right to exist (I wrote about it here).

The means of the Ukrainian military have increased significantly over the past few months. In addition to getting more modern equipment from NATO, Ukrainians have also enjoyed a transfer of more weapons from the Russian side to Ukraine than was provided when NATO drove Russian troops out of Kharkov. Ukrainians know how to use this equipment and can start using it right away.

Russian President Vladimir Putin’s underlying strategy is weak:

First, the war was won by force – not so well this time.

Second, frighten the West economically. So far this hasn’t worked. Europe is filling its natural gas reserves and, by saving, it is confident it will survive the winter.

The last card Putin left was the threat of nuclear war. As far as I know, tactical nukes are of little help from a military standpoint, but they do have a significant psychological impact. The West drew a red line, telling Putin that if he used nuclear weapons, the Russian military would face conventional forces. The Russian military is no match for NATO.

general mobilization

Putin’s military mobilization could destabilize his regime. When I was growing up in Russia, my parents were terrified of my brothers and I was drafted into the army when I was 17. The war in Afghanistan is over; the parents of me and the other boys feared not for our lives, but for our sanity. Being drafted back then was like serving three years in prison. Older soldiers often abused younger ones.

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I can only imagine the pain Russian parents go through, fearing that their son will be drafted into the army and sent to the front without proper training or equipment in two weeks to be cannon fodder for Ukrainian artillery.

Every grieving parent makes Russia’s political system less stable. There could be mass protests in Russia tomorrow or years from now, but the odds of that happening are multiplied if parents live in fear of their son’s future.

I have many reasons to be grateful to my father for immigrating to the United States 31 years ago, and today I have a new reason: I don’t have to worry about my 21-year-old son Jonah (who was born in the United States) being drafted to die in this senseless war.

Because of sanctions and the voluntary withdrawal of Western companies from Russia, Russia ends up frozen in time like Cuba.

Russian economy

The war set the Russian economy back 40 years. On the surface, Russia today looks very different from the Russia I remember in the 1980s. This Russia has beautiful, modern supermarkets that, to my surprise, are still stocked with food.

However, due to sanctions and the voluntary withdrawal of Western companies from Russia, Russia will eventually be frozen in time. When I say this, I think of Cuba. The situation in Cuba today is the same as it was in 1959 when Castro came to power and the West imposed a trade embargo.

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Yes, Russians will miss McDonald’s and Coca-Cola, but that’s not a huge loss. Even more painful is the loss of advanced technologies—semiconductors, software, complex manufacturing. Russia hardly has this. Today, a car or a washing machine cannot be built without semiconductors. That’s why Russian car production has fallen by half since the war began, and washing machine production has dropped from 600,000 to 100,000 a month.

The wild card here is China. China has some of the technology Russia needs, such as oil drilling equipment and aircraft spare parts. Will China risk being sanctioned by the US and Europe if it exports such products to Russia? I have no idea. After Visa and Mastercard cut Russia off from their networks, essentially preventing Russians from using the ruble outside of Russia, China stopped letting Russians use their own credit card network.

Sanctions have crippled Russia’s ability to produce enough weapons to fight wars. Furthermore, Russia needs every weapon it can get to replace what it loses. Russia has started using tanks from the 1970s. In the end, this war is a miserable TV commercial for Russian weapons. India used to import half of its weapons from Russia. Now, the US and Europe are likely to be India’s sole arms suppliers – another positive for defense contractors. After the war, Russia will sell weapons to rogue regimes such as Iran and North Korea, but its arms market has shrunk sharply since February.

Before the war, the Russian economy was doing pretty well. Instead of thanking their leaders for this, Russians should give their eastern neighbor a warm hug. China’s insane growth (by any modern standards) has driven demand for all commodities (China is a commodity-starved country). The prices of most commodities have increased a lot, and Russia has benefited from it. Putin immediately got on board, taking credit for Russia’s economic rebirth.

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However, aside from mastering the production of goods and food with the help of Western technology, Russia achieved very little on its own. Russia even imports steel from Germany for its tanks.

An important consequence of the war was the departure of Western oil companies from Russia. In addition to providing funding, they also bring technology and know-how. Both are now gone. Russia is the world’s third-largest oil producer after the United States and Saudi Arabia, producing 11 million barrels per day. The recession we are about to enter will reduce demand for petrochemicals, though not by much. (Historically, recessions have reduced the growth rate of petrochemical demand, but not caused the decline.) Oil and gas supplies from Russia will not grow and may shrink. Europe will have a challenging winter, but the Russian economy looks set to face an existential challenge.

Vitaliy Katsenelson is CEO of investment firm IMA. his most recent book, Soul in Play – The Art of Living a Meaningful Life, dealing with the most important investment you will ever make—in yourself. For more articles by Katsenelson on investing, life, music and other topics, visit ContrarianEdge.com or listen to Investor.FM.

more: Why EU Ban and G7 Price Cap on Russian Oil Won’t Guarantee Oil’s Lasting Rebound

Also read: What Russia’s retreat from strategic southern Ukraine city of Kherson tells us about the state of the war

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