4 November 2023
Ukraine’s top general has admitted the fightback against Russian aggression has reached a deadlock, and the prospect of “a deep and beautiful breakthrough” is unlikely. A deadlock is exactly what Russian president Vladimir Putin wants, because it allows him to plant the idea of perpetual stalemate in the minds of western leaders who, staring at a difficult economic outlook for 2024, want a settlement. There are still leaders who rightly care about Kyiv’s need to push Russian troops back to the internationally recognised border. Joe Biden is one who believes the billions of dollars handed to Ukraine are an investment in world peace.
It would be tragic if Biden became a lonely figure. Britain and France are still on board, though their weapons resources are running low. The European Commission is a staunch defender of Ukraine and preparing to welcome it as an EU member. Can the same be said of Italy and Germany?
A prank call by two Russian comedians to Italy’s prime minister, Giorgia Meloni, extracted the admission from her that “a lot of tiredness” was creeping in to her thinking about the next stages of the war. She hinted that the west needed to “find a way out”. Appeasement seemed uppermost in the mind of a previously staunch supporter of Kyiv.
Many Germans are beginning to question sending more hardware to Ukraine, reflecting a growing sense of unease about the war and its impact on the cost of living. On the one hand, German energy suppliers are reporting that gas reserves are full, which provides a sense of calm. On the other, these reserves can run low quickly and the price of natural gas has risen by about 70% in the past three months. The prospect of a return to high-priced energy and soaring inflation gives business leaders the jitters. Industrial conglomerates across Germany which burn huge amounts of fossil fuels are already signalling that they will need to make cuts in output and employment unless prices come down permanently.
There is also speculation that Putin is being allowed to evade oil sanctions with his “grey” ships, which ply their trade under the radar. Why? To keep the price of Brent crude below $100 a barrel.
While the Ukrainian army is bogged down as winter approaches, the Ministry of Defence says Russian air defence has suffered significant losses
Russia is also a canny manipulator of offshore tax havens to bamboozle western authorities – including the UK government – enabling the transfer of funds that would otherwise be locked up and out of Moscow’s reach. An investigation by Finance Uncovered, the BBC and the Seychelles
Broadcasting Corporation, published last week, found hundreds of companies linked to Russia had circumvented the UK’s Economic Crime and Corporate Transparency Act.
Tim Ash, a fellow at the think tank Chatham House, has argued that the $400bn of Russian capital tied up in western banks and markets should be seized and given to Ukraine for its war effort. At the moment, the funds are merely frozen.
In what he expects to be the first of many such decisions, the international court of arbitration in The Hague ruled last week that Russia must pay $267m in damages to DTEK, Ukraine’s largest private energy company, in compensation for assets in Crimea that Russia seized when it illegally annexed the peninsula in 2014.
Without foreign exchange, Russia will struggle to maintain its war effort. Last month, to prevent Russian companies and wealthy individuals taking roubles out of the country, the central bank was forced to issue capital control restrictions. Interest rates also jumped to 15%.
The bank raised the cost of borrowing to combat rising inflation. Its governor, Elvira Nabiullina, said she had no choice but to counteract the inflationary effect of war spending.
Russia’s defence budget has risen to the equivalent of 3.9% of GDP this year, from 2.7% in 2021. It will jump by more than 70% in 2024, reaching about 6% of GDP, according to a Reuters assessment of official plans.
And hardware supplied by the US to Kyiv is making a difference. While the Ukrainian army is bogged down as winter approaches, the UK’s Ministry of Defence has issued an intelligence update saying Russian air defence has suffered significant losses. This suggests that if the west can stay the course, Russia’s capability will crumble.
War in the Middle East is a huge distraction and splits the sympathies of some countries – notably Turkey, which has courted Arab countries for foreign investment.
Ash is among many to argue that the cost of letting Russia grind Ukraine into a defeat will be much higher than that of helping Ukraine prevail. A victorious Putin will pull every lever to bring about economic and political chaos among his enemies. Ukraine’s allies must hang together and stay the course.
Phillip Inman is economics editor of the Observer and an economics writer for the Guardian. He is the author of Managing Your Debt, a Which? essential guide; and the Guardian e-book The Financial Crisis: How Did We Get Here?