Don’t buy what Putin sells

Vladimir Putin wants the world to believe that Russia’s economy is doing fine, and that he has the wherewithal to prosecute the war in Ukraine indefinitely.

He’s bluffing. His aggression is costing him dearly, and the West should exploit this vulnerability to the fullest.

Before invading Ukraine—two years ago, on Feb. 24—Putin had painstakingly built Russia’s fiscal and financial defenses, a crucial element of his own grasp on power. At just 16 percent of gross domestic product, sovereign debt was among the smallest of any nation. In the second year of the pandemic, the government was already running a budget surplus (in contrast to large and persistent deficits in the U.S. and Europe). It had accumulated a $175 billion National Wellbeing Fund and more than $500 billion in international reserves at its central bank.

Now, Putin has radically changed course, both to fund the war and to prop up the economy amid Western sanctions. Military spending has gone from 3.6 percent of GDP in 2021 to an estimated 7.1 percent.

The war’s consumption of able-bodied workers has driven the unemployment rate to an extreme low of 2.9 percent, forcing civilian industries to pay more for scarce labor. To keep inflation in check, the central bank has had to hike its benchmark interest rate to 16 percent, further squeezing the private sector. Military spending won’t keep adding to GDP growth: Just maintaining it at the current level would require big sacrifices in other important areas.

Worse for Putin, he’s rapidly eroding the defenses he constructed to protect the economy and himself from unexpected shocks. Much of the central bank’s reserves are frozen in the West. The National Wellbeing Fund’s liquid assets have declined by nearly half since the beginning of the war, to about $55 billion.

The government is running an annual budget deficit of about $17 billion, and its borrowing capacity is of limited use if domestic banks are the only available lenders. Those same banks are increasingly exposed to losses as sky-high interest rates weigh on corporate borrowers.

This war will almost certainly end in negotiation. For the West, the goal should be to ensure the most secure and independent Ukrainian state possible—and to deter others from attempting similar land grabs. To that end, it should make the most of Putin’s economic vulnerability, including by tightening sanctions and arming Ukraine.

Given the political will, Western nations have ample resources to outlast him—an advantage they should use to stop the bloodshed as soon as feasible.