We have reason to fear the nukes
blogs.lse.ac.uk/europpblog
Economically speaking, Russia is a small country, says Paul De Grauwe. Its GDP was just $1,648bn in 2021, according to the IMF – about the same as the combined GDP of Belgium and the Netherlands, or about 10% of the EU. “Russia is an economic dwarf in Europe.” The question is, can such a dwarf win an intense war against a country determined to resist occupation?
Back to the USSR
If it is to do so, Russia will have to “drastically increase” military spending. Today it spends about 4% of GDP, or about 8% of US military spending. More will have to be forthcoming, but military spending is economically wasteful. Investments in machines and other factors of production make it possible to produce more in the future. Investments in tanks will “not add one rouble” to future production, but will crowd out productive investment. In other words, Russia is set to get even smaller. An alternative would be to squeeze consumption rather than investment. But the result in either case will be to further impoverish the already relatively poor population.
The Russian economy will be further hit by inflation because the incomes earned in the war industry will not be able to be spent on consumer goods, as they are in short supply. Prices will soar. The temptation then will be to introduce price controls. The result, paradoxically, will be to “fulfil Putin’s ambition: a return to the Soviet Union” and its long queues outside shops.
Russia is also underdeveloped, with the production structures of a typical African country, and highly reliant on the export of raw materials and energy, which make up 80% of Russian exports. High prices have boosted Russia’s international reserves, but these are temporary effects and those reserves have anyway been frozen by Western sanctions.
Two guns in the arsenal
Russia has, then, just two big remaining weapons in its arsenal. The first would be to cut off the gas to Europe in retaliation for sanctions. But that would destroy its main source of foreign revenues as Europe turned to alternatives.
The second is, of course, its nuclear bombs. They do not win conventional wars, but can “destroy a country in the blink of an eye”. Here lies the great risk for the rest of the world. “What will a dictator do when he realises that he cannot win the war by conventional means but by other means? That remains the most terrifying question today.”