The Economic Battlelines

Matthew Klein looks at Russia’s growing economic troubles:

Real gross domestic product growth has already slowed from 5.1 percent in 2011 to just over 1 percent in 2013. Car sales fell by 5.5 percent in 2013, despite the Russian government’s introduction of subsidized auto loans. If that weren’t bad enough, European demand for natural gas — about 30 percent of which comes from Russia — has been steadily falling since 2010. Additional supply could come on line in the coming years from the U.S. and Israel at the same time as Russia expands its own production capacity. The net effect could be a glut that would lower prices and further reduce Russia’s access to hard currency.

Its neighbor is much weaker:

To put the Ukraine’s economy into some perspective, let’s go to the CIA World Factbook.

The annual gross domestic product of the country is $175.5 billion. That is about 4 days of GDP in America. Indeed, the entire stock-market capitalization of the Ukraine is about the size of Walt Disney Company. Ukraine’s per capita income is a touch higher than Egypt’s. In other words, it is not very economically significant.

And for now, Ukraine relies heavily on Russia for fuel:

Ukraine depends on Gazprom for the vast majority—70 percent in 2011—of the gas needed to heat homes and keep its industry functioning. This is a matter of no small import given its usually harsh winters. “Ukraine just hasn’t paid attention to the gas problem at all,” [Fiona] Hill [of Brookings] said. “It’s had too many people getting rich acting as middlemen for Russian gas.”

It might take Ukraine three to five years to bring its gas sector up to speed, she added. But Clifford Gaddy, a Brookings Institution economist who specializes in Russia, pointed out that “Ukraine . . . has not found alternatives to Russian gas, and it will not be able to. They are too expensive. Gas is and will always be a Russian lever.”

Update from a reader:

I think it was very useful to present some quantification of the differences in the economies and militaries of Russia and Ukraine, but those numbers are quite misleading as markers for how a shooting war between Russia and Ukraine might proceed.

First, while the Economy of Russia is vastly larger, the Russian economy is freakishly reliant on the Ukraine. The modern economy of Russia is built primarily on the export of natural gas (e.g., oil and gas exports provides 50% of all government revenue) and 2/3 of their exported gas transships the Ukraine. The Russian economy that would be fighting a shooting war with Ukraine would be much weaker than the one assessed in 2013 because those gas lines would certainly be shut down, possibly for a protracted period. A true war with Ukraine … even one with a relatively quick “victory” for Russia, will result in a severe economic contraction Russia if the Ukrainian nationalists destroy pipeline infrastructure. Put another way, the value to Russia of the gas that transships Ukraine is worth more money than the entire economy of the Ukraine.

Second, while all of Ukraine’s (limited) military resources would be devoted to defending its territory, Russia has simmering territorial or political conflicts with nearly all of its neighbors, as well as a perceived threat from the United States. Russia may have 40,000 armored fighting vehicles, but it cannot use them all in the Ukraine without wars opening up on other fronts. Similarly, a large part of Russian military spending is for weapons systems that are designed for conflict with the US and could not be used against Ukraine (e.g., nuclear subs, ICBMs).

If Ukrainians chose to fight an invading Russian Army, they could extract a stunningly high cost both militarily and economically from Russia. My view is that Putin’s movement of unmarked troops and agitators into Crimea/Ukraine makes tactical sense only as a test to determine if Ukrainians would actually chose to fight an invasion by Russia. Putin is putting a toe in the water to determine the temperature. If he can get Ukrainian military commanders in to surrender without firing a shot, then an invasion is likely. If not, he has still not risked that much.