Major military operations often take considerable time to conclude – for example, it took US forces one month to take Baghdad after launching its Iraq invasion in 2003. However, the Iraq invasion was planned as a slow and methodical affair: The Russian invasion of Ukraine appears from the outside to have miscalculated the strength of opposition. This runs the risk that ever more desperate measures will be taken to hasten the conclusion and increases the longer-term risks, both for Russia and the west.
How much pressure does Putin face at home?
Looking at the issue from Putin’s perspective, it is now an established fact that he sees Ukraine as part of a “greater Russia.” Having committed substantial resources and having put his domestic reputation on the line in order to take the country by force, the likelihood of him backing down before completing his objective is lower than a further escalation of Russia’s military effort. There have been suggestions that the sanctions against Russia will help to undermine Putin’s position as the oligarchy rises up against him. But a Twitter thread by Professor Olga Chyzh suggests this may be a naïve hope. Chyzh points out that they owe their wealth and position to Putin and if he goes, they do too. In her view, “the oligarchs are simply managers delegated with over-seeing day-to-day activities … Putin’s oligarchs have no political power whatsoever. Their domain is strictly economic.” She further notes that whilst the oligarchs may wield the economic power, it is the siloviki (strongmen) who wield the muscle capable of overthrowing Putin but since their interests are aligned with his, they have no incentive to bring him down.
However, Putin is not invulnerable. As a very informative article in Foreign Affairs, published last year, noted: “because of the compromises he has had to make to consolidate his personal control over the state, Putin’s tools for balancing the competing goals of rewarding elites who might otherwise conspire against him and appeasing the public are becoming less and less effective.” This suggests that sanctions may be effective. However, they will take a very long time to achieve their objective and are likely to do so only by making life for ordinary citizens intolerably hard.
The manpower cost of Ukrainian expansion
In the meantime, in the absence of a ceasefire – which currently looks unlikely – the war in Ukraine is set to continue. It is possible that Ukraine may be able to hold out long enough for Russia to opt for a face-saving exit strategy. That does not look to be on the cards at present, although we should never say never. Russia might instead decide to cut its losses and conquer only the territory to the east of the Dnieper River, claiming this was the goal all along. Alternatively it may double down its efforts and push through to the western border which will prove to be a long haul. Either way, having taken the territory it will prove economically and militarily ruinous to hold it.
In looking at the economics of occupation I am indebted to work by the economist John Llewellyn, conducted when he was working at Lehman’s in 2004 (available here). A study of the numerical requirements for a successful occupying force concluded that “no post-WWII occupation of a country has been successful at a force ratio of less than 20 troops per thousand head of population. And indeed some occupations … failed notwithstanding a force ratio of nearly 40.” This implies at the very least Russia would have to commit almost 900,000 personnel in order to have a chance of successfully occupying the whole of Ukraine. With an army comprised of one million active personnel and two million in reserve, this would require committing almost one-third of the available numbers to the task. Even if it were to occupy only the eastern half, Russia would still have to commit around 400,000 personnel which would be a considerable drain on resources.
Assessing the financial costs
Then there is the financial cost. The US is estimated to have spent $8 trillion in its 20-year “war on terror”, including its invasions and occupations of Afghanistan and Iraq. Even if Russia were to spend 5% of this amount, it would still require outlays of $400 billion – roughly seven years of Russian military spending – and this at a time when the economy will be under severe pressure as a result of global sanctions. Prior to the war, Russia could tap into $630bn of foreign exchange reserves. That amount has been roughly halved after western nations announced sanctions preventing access to any reserves held on their territory. Consequently reserves now amount to around 10 months of import coverage.
Despite the imposition of sanctions, however, oil and gas are exempt and European countries continue to buy Russian energy. German Chancellor Scholz stated yesterday that: “Supplying Europe with energy for heat generation, mobility, electricity supply and industry cannot be secured in any other way at the moment. It is therefore of essential importance for the provision of public services and the daily lives of our citizens.” Even though Urals crude is trading at a $25 discount to Brent, it is still around $100/bbl. On the basis that Russia exports around 4.5 million barrels per day to Europe, that amounts to $13.5bn per month in oil revenues alone. Similarly, Europe currently imports 32% of its gas from Russia (Russia met 40% of consumption needs in 2021). Last week, the think tank Bruegel calculated that at then-current market prices, the daily value of gas imports was around $755 million, or almost $22bn per month. If the world is serious about imposing sanctions, a reduction in hydrocarbon imports from Russia is essential otherwise the revenues will be used to further conduct the war.
The EU is working on a plan to cut Russian gas imports by two-thirds over the next twelve months, which is double the amount proposed by the IEA’s 10-point plan announced last week. Frans Timmermans, who leads the European Commission’s work on the European Green Deal, reckons that near-term savings could be made by cutting energy use, filling up gas storage in 2022 and finding new sources of supply, with the EU already in discussions with the likes of Egypt, Qatar, Australia and the US. If this can be realised, the flow of funds into Russia will dry up very quickly and reduce Putin’s capacity to pursue his war.
Weaning the EU off Russian energy imports will come at a significant economic cost. A paper published yesterday[1] attempted to measure the costs to Germany of ceasing to import energy from Russia. The authors conclude that “the effects are likely to be substantial but manageable. In the short run, a stop of Russian energy imports would lead to a GDP decline in a range between 0.5% and 3% (cf. the GDP decline in 2020 during the pandemic was 4.5%).” This is a big economic price to pay. But the moral price of continuing to fund Putin’s activities may be even higher.
Last word
Aside from the grief and heartache it causes, war is also an expensive economic enterprise. Even if Putin achieves his objective of conquering Ukraine, Russia will struggle to hold onto the territory unless it significantly raises its military commitment. But as the west cuts ties with Russia, leaving it increasingly economically isolated, Putin may not have to the resources to achieve this. Quite how a cornered Putin then reacts depends on whether the west allows him a face-saving way out and how his people react. It is not going to be pretty.
[1] Bachmann, R., D. Baqaee, C. Bayer, M. Kuhn, A. Löschel, B. Moll, A. Peichl, K. Pittel and M. Schularick (2022) ‘What if? The economic effects for Germany of a stop of energy imports from Russia’, ECONtribute Policy Brief No. 028
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