Why Putin has plunged Russia’s economy into ‘the death zone’

0:01Sky News, the full story first.

0:11The war with Ukraine is finally having an effect on Russia's economy, and perhaps fatally. This is why.

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0:57The Ukraine war has now been going for more than four years. And for almost all of that time, people have been predicting that the Russian economy would collapse, which of course it hasn't. But we are now seeing signs that it's getting awfully tricky for Vladimir Putin. The view of one expert. Russian economy is like a climber who's stuck above 8000 meters. It is the attitude which mountaineers call the death zone. At this height, the human body cannot survive for long. It consumes itself faster than it can recover. Our Moscow correspondent Ivor Bennett has been sent to St. Petersburg to see the realities of the slowdown.

1:36It also happens to be where Vladimir Putin is hosting his international economic forum, a sort of Russian Davos. Well, the problems with the Russian economy are pretty glaring when you walk around cities like St. Petersburg, where I am, because of the sheer number of businesses that have gone bust. All over the place, you see shuttered shops. On the main street, there are all these to let signs and empty windows. And it's not just here. It's in Moscow, too, other cities around Russia. And how's about this for a statistic? In the first three months of this year alone, across the country, more than 200 ,000 small and medium-sized businesses had to close their doors.

2:15It's an astonishing number and more are expected. And the reason this is happening is because all the pressures they face. Business owners here have been telling me this week that they have higher costs, they've got high interest rates, they've got lower demand and higher taxes. And that last one has been the real kicker recently. At the start of this year, the government raised VAT and lowered the threshold at which companies have to pay it. And that massively increased the tax bill for several firms and pushed them to the edge, and in some cases over the edge. And the reason the government did this, hiked taxes, was to help pay for the war in Ukraine.

2:52It's now well into its fifth year, and it is draining Russia's resources. And the more revenues dwindle, the harder the sums get to add up. And that is why here at Vladimir Putin's flagship annual economic forum, growth is the central theme. The problems in the economy are now impossible to ignore. Thanks, Ivor. Plenty to get into with our military analyst, Michael Clarke. Michael, let's just start with that which we've been hearing from Ivor. And it does strike me that there is something of a contradiction going on here. You've got businesses closing, you've got high interest rates, you've got strain across huge parts of the Russian economy.

3:31And yet, Russia still able to launch a strike on Ukraine the other day, costing an estimated 400 million pounds. I mean, how can they do that? Yeah. I mean, during May, they launched more than 7 ,500 drones at Ukraine. The biggest monthly total. The biggest monthly total before that was about 6 ,300, something like that. So their air attacks are building up. The Russians are still able to throw money and people and equipment into this war, even though it isn't doing them a lot of good at the moment, because they're not obviously being successful on the ground. They're actually losing space, or they're gaining a little bit of space, but they're losing more elsewhere as the Ukrainians counterattack them.

4:10They can still do it because about 40 % of all government spending is now war spending. And the economy wasn't in great shape before this war began in 2022. So now 40 % of it is war spending. And the way that's happened is that when economies go into a more of an all-out war, which 2022 was, a special military operation, really was a mobilization. They do quite well to start with because war spending boosts the economy, boosts wages in the armaments industries. IMF figures had them at three and a half, even up to 4 % growth in 2022-23, which surprised everybody. Their growth now on their own estimate is down to half of 1%, and it might actually be lower than that.

4:49You know, when you spend a lot of money on war, you do get the short-term benefits, but you bend the economy out of shape. And the way it's been bent out of shape in particular is that the Russian banks were told by the government that all of their available credit had to go to the arms industries. So as the arms industries geared up to expand their tank production, shells and everything else, they needed cash. And that cash was credit and the banks gave them credit. But all of the credit available in Russia, in the whole financial system, has gone to the war economy and none of it virtually is available for the entrepreneurs, the businesses, the startups, so that the economy is starved of credit in the non-war sector.

5:29And you can do that for a while. And if it's short, sharp wars, you get a benefit from. But you don't get a benefit from a war that now has lasted longer from their point of view than the Second World War. But are we then making a mistake to assume that economic weakness automatically translates into military weakness? I mean, a country can have, because clearly Russia possesses it, a struggling civilian economy while still maintaining, you know, what looks to me to be a pretty effective war machine. Oh, yes. It depends on the sacrifices that the rest of the population are prepared to make. And of course, in Russia, they don't get much choice about the sacrifices they're prepared to make because nobody asks them.

6:03But the discontent which economic privation creates is certainly there. And it's hitting the economy now because in 2022, there was a sense that this special military operation would be over quite quickly. It didn't affect people in Moscow and Petersburg. Insofar as it affected anybody, it was the people in Siberia who were sending all the troops. They were where the recruits were coming from. But now, no question, it's affecting the whole of society, including the Moscow elite and the oligarchs and the Petersburg elite. And so it's beginning to have a nationwide effect on morale throughout the economy, which is not to say that the Russians can't keep on fighting.

6:37They can. You can fight a long time if you keep squeezing the rest of the economy. But of course, you mentioned St. Petersburg there. And one thing that has happened very, very recently, not just Vladimir Putin holding an economic summit there, Ukraine striking an oil refinery just down the road. I mean, it's a pretty pointed statement by the Ukrainians and undoubtedly will have some form of psychological effect. Yes. And the Ukrainians intend it to have that effect. It builds on the fact that the Victory Day parade in the early part of May was scaled right back for security reasons because of counterterrorism and the danger of terrorist acts from Ukraine.

7:12And Zelensky in Ukraine very He mischievously said, we will grant them a truce so that they can have their parade as if it was in his gift. But it shows. I mean, it was humiliating. And a lot of the world press have said, well, maybe after the war into its fifth year now, the Russians really can't run a parade in Moscow because they haven't got all of the equipment there in Moscow. And they're too nervous about the possibility of some major Ukrainian strikes. So the fact that Ukraine has used its long-range drones, not Western weapons, their own home-produced drones, which are really pretty effective and cheap.

7:47The fact that it used those drones to strike so deep into Russia is having both a material effect on their war machine, but a moral effect on the people of Russia, particularly in Moscow and Petersburg and Nizhny Novgorod, all of these places that felt that they were not really part of the war before. But I suppose this brings us back to the economics of it all, because along with that strike in the oil refinery, we've seen other oil facilities, air bases, military industrial targets. you know, deep inside Russia. The aim to me doesn't seem, it's certainly not about acquiring territory, but it is about increasing the economic cost of this war for Vladimir Putin.

8:24Exactly, yeah. So I think that what the Ukrainians have done is they're doing three things. One is that they're trying to affect the oil industry and they've had some effect on that. I mean, you know, there's petrol is being rationed, it's not being exported now, prices are going up. So they're affecting the domestic oil and petrol industry in Russia, which still has quite a lot of harm to the Russian economy in general, as you can imagine it would. That's the first thing. Second thing is that having the psychological effect by hitting at the cities and so on, and, you know, making it clear that nowhere is safe in Russia, that if you can bomb us, then we can bomb you with our own weapons, not Western weapons.

8:59That's a really important distinction which the Ukrainians always make. Why is it an important distinction? Why does it matter that this is stuff that Ukraine has made itself? Because the Russians, if they felt that Western weapons were being used to bombard their homeland, they would say, look, NATO is a using the Ukrainians to hurt us. So this is NATO attacking us. And the point is the NATO allies are not happy about that. And they've put all sorts of restrictions on the use of Ukraine's donated weapons. I mean, they have used some of them inside the Russian territory in Kursk and in one or two other limited strikes.

9:27But in general, if the Ukrainians produce their own weapons, then it's their war to fight. And so they are having that psychological effect. And by attacking with drones, relatively ineffective drones, all the airports around Moscow, they were able to close the airport repeatedly. So that inconveniences the Russian population. I mean, Moscow, it's a city of nearly 20 million people, more than twice the size of London. It's got, I think, five, six airports. And by closing them regularly, it just messes people up and it reminds them that they're in a war. So that's the second reason, psychological.

9:58And then the third thing the Ukrainians are doing is that they are attacking logistics. This is very specific. They're going behind the lines, 50, 80 kilometers, and they're using their drones now, which are really very effective, to attack the logistics. So it's much more difficult for Russia to bring all this stuff forward onto the front lines, which is why they're not doing very well. Is there any sign, though, that this is actually working? I mean, an economic problem becoming a military problem for Vladimir Putin. I mean, what would our military planners, Ukrainian military planners, be looking out for to signal that the money is running out?

10:29What are the key metrics? Weapon shortages are not obvious because the Russians are getting weapons from North Korea and they're getting lots of components from China. Not so many weapons from Iran now. They were at one time. But the Russians aren't obviously short of weapons and the weapons, like for Ukraine, have become cheaper to produce. It's a drone war with relatively cheap drones. But they do have a manpower problem because they're recruiting fewer than 1 ,000 men a day and they're losing more than 1 ,000 men a day to death and serious injury. So the recruitment figures we know are only about 30 ,000 a month.

11:03And the Ukrainians are trying to put their casualty figures up to 50 ,000 a month, because they figure that if they can kill or maim 50 ,000 a month, and they think that's a realistic goal, then they can actually prevent manpower coming onto the front in ways that presently overwhelm Ukrainian defences. The Ukrainians are trying to work out what are the attrition rates of Russian forces that will actually make them desist, make them actually lose territory or stop trying.

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12:14How long can countries sustain this war economy before the cracks that we've just been talking about start to appear? I mean, a lot of it depends on what sort of government you're talking about. I mean, a democracy couldn't sustain this for very long. Handy for Putin. Exactly. Autocracy is a lot longer. But let's take the big example, say, which was Germany in the Second World War. So it was subject to strategic bombing from really the beginning of 1941 through to 1945. And the critics of strategic bombing always point out that the German war economy was at its most efficient and its biggest in 1944.

12:50So at the time after the D-Day invasions, I mean, as the Allies were moving in on Germany, that's when its economy, its war economy was running most efficiently. But Albert Speer, of course, who was the industry minister, he always said to Hitler, you know, we can't keep this up. And the point is that it reached a plateau in 1944 with massive, manic production. And in early 1945, the fact that they bent the economy out of shape to create this incredible production surge from 43, 44, it just cracked. Point is that certain sorts of government can find ways of keeping a bad economy pushing the military machine for quite a long time.

13:30And you would guess that might be the case in Russia unless – I mean, it's the Julius Caesar moment. The people are not going to rise up against Putin because they can't. But the oligarchs around him, most of whom have thrown their lot in with him, will eventually, eventually have to find some way of making him step down or getting rid of him or find some way of changing his mind. But there's no indication that he's going to change his mind. Do you know what my problem is with that analysis? And Michael, I rarely say this to you, but I can remember what maybe the best part 15, 20 years ago, people inside the Ministry of Defence telling me very directly the Russian economy is tanked.

14:09It's on its way out. This is the beginning of the end. There does seem to be some Lazarus-like quality to the Russian economy. Yeah, and it's a big economy. It's a physically big country. It is a country of 140 million people, so it's depopulating. But as they say, all the people are in the West, all the food is in the South, and all the resources are in the East. It's not terribly well integrated as a working economy. And it's a federation. So it is an internal empire, which gives it lots of crisis points, lots of tensions, particularly if you look at the Caucasian republics, who have never been that happy with the rule of Moscow.

14:42But the fact is, it is a big economy and big economies can stagger on for a long time. And I would be very sceptical about people saying, oh, you know, the Russian economy is going to collapse like a house of cards. I mean, this thought was around in 2022, 23. And I read a lot of material then and all the good economists saying, forget the house of cards. You know, big economies do not collapse like houses of cards. But they get to the point where political change becomes inevitable. And that political change is often messy. But the economy still doesn't collapse. I do wonder whether we are now entering a phase in this war where economic endurance matters just as much, if not more, than success on the battle.

15:20Oh, it does, for sure. You know, we've lived through an era, you and I, of relatively short wars, short, sharp wars, which either work or don't. But we're now in Europe, we're now back to open-ended wars. I mean, wars of attrition, which is what this is, which is why I think it's shocked so many people. And this is the return, I always say, of industrial warfare to Europe. And the side that will prevail is the side that can mobilize its economy well enough and deploy it to the battlefield for long enough. The Russians are trying to do that themselves with help from North Korea and China and some other countries.

15:52And Ukraine is trying to do it with help now only really from the Europeans. And we'll see who can do it. But the Ukrainians also, they've been very inventive, but they haven't actually mobilized quite as much as you might imagine. for a country fighting for its life. They haven't mobilized their young people as clearly and as efficiently as we might have. What do you mean by that? You cannot be conscripted into the forces until you're 25. It used to be 27, and they had a big argument about bringing it down to 25, because they take the view, and you can understand this, that the 18-year-olds, the 19, 20-year-olds, they're the lifeblood of our society.

16:25They shouldn't be sent to the front. But, I mean, in the rest of Europe, we sent our 17 - and 18-year-olds to do the fighting for us on the assumption that they're single, you know, they're young, they're vigorous, they want to fight, etc, etc. They haven't turned their economy as quickly or as completely to a war economy as the Russians have done. So it's interesting that the Ukrainians are doing pretty well in terms of innovation and their inventiveness and their spirit to keep on going. But if you're sitting in Kiev right now, I mean, looking at the state of the Russian economy, does that give you genuine grounds for optimism?

16:57I'm cautiously more optimistic for Ukraine than I was this time last year, because what we all said would be the strains in the Russian economy are coming through and the Russian war machine is stuttering, which is not to say it's not a powerful war machine, but it is stuttering. And the Ukrainians are finding ways of becoming much more efficient in the way they are prosecuting the war at the front. I'm a bit more optimistic that if they are determined to carry on, which they seem to be determined to carry on, if they are determined to carry on, then they have a realistic prospect of, as it were, fighting the Russians to some sort of standstill this year.

17:34And you know, the great irony of all of this is that if it wasn't for President Trump's election in the United States, Russia would be in deep, deep trouble. I mean, Putin is very lucky that Trump was elected. He's very lucky that the Gaza war started. He's very lucky that the Iranian war started. I mean, that's released the pressure in three successive ways that otherwise would have become, I think, pretty intolerable by now. Okay, just continue just one last time to channel Vladimir Putin for me, Michael. What worries Putin most right now? It's the battlefield. All the evidence is that Putin does nothing on the domestic front anymore.

18:10He's, like all war leaders, he's a warlord and he's obsessed with the war because he dabbles too much, just like Hitler. He tells generals what they should and shouldn't be doing. He dabbles about what should be happening on the front line, apparently. It is said that the vast majority of his time goes into what he would think of as the management of the war, because this is his war. This is his place in history for good and or bad in Russian history. He'll either go down as another great Russian leader, which is what he wants, or he'll go down as an absolute disaster. Michael, thanks very much.

18:43Thanks very much for listening. Do remember to get in touch with your thoughts on today's episode, or perhaps you have some ideas for topics that you'd like Michael and Ivor to cover in the future. The email address, why at sky.uk. We're back tomorrow.

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