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US Says Ukraine War Putting ‘Considerable Strain’ on Russia’s Economy

Vladimir Putin’s war in Ukraine is damaging Russia’s economy, driving up domestic consumer prices and forcing Moscow to spend a third of its budget on defence, the US Treasury department has said. Rachel Lyngaas, the department’s chief sanctions economist, said the combination of war, US allies’ sanctions and Moscow’s policy response was “putting Russia’s economy under considerable economic strain”.

The comments appeared in a draft text, seen by the Financial Times, of one of the most comprehensive assessments of the financial consequences for Russia of the president’s decision to send troops into Ukraine last year.

Russia’s invasion and occupation of parts of Ukraine were now “contributing to rapidly growing expenditures, a depreciating rouble, increasing inflation, and a tight labour market reflecting a loss of workers” in its economy, Lyngaas wrote.

Russia’s economy would be more than 5 per cent bigger if Putin had not launched the war in Ukraine, Lyngaas argued, adding that the country was underperforming other energy exporters, including the US. Moscow was spending more than $100bn on defence, or almost a third of its total planned expenditures in 2023, according to the Treasury department. The huge outlay comes at the same time as the Kremlin has paused some planned public salary increases despite inflation running at 7.5 per cent — far above the central bank’s target of 4 per cent.

The Treasury’s assessment, in a blog post to be published on the department’s website on Thursday, comes as the US government has warned that funds for Ukraine could run out by the end of the year, after Congressional Republicans last week blocked a White House request for an additional $60bn in security assistance for Kyiv.

There is also mounting scepticism that western sanctions, including the G7 effort to cap the price at which Russia can sell its oil and petroleum products, are working as planned. The Financial Times recently reported that Russia was circumventing the price cap and that almost all of its crude was being sold at a figure above the prescribed level.

However, the Treasury claimed that the cap, coupled with the EU embargo on purchases of seaborne crude, “helped reduce Russia’s export earnings by forcing sizeable discounts on Russian exporters where the embargo lowered demand”. Western sanctions were forcing Moscow to resort to “a costly realignment of its supply chains to import lower-quality substitutes”, it said. Russian authorities have said that the country’s economy continues to blossom despite sanctions and the heavy extra spending to fund its invasion of Ukraine, with Putin saying last week that gross domestic product would expand by 3.5 per cent this year.

The Russian leader also pointed to a 7 per cent increase in wages, record low unemployment, and a rise in real disposable income this year as examples of the economy’s resilience. However, the country’s GDP is partly driven by the military-industrial sector, which absorbs economic resources including a labour force already overburdened by war and distorts the economy, say analysts. The recent pay rise is mainly due to war-related social benefits and high salaries in the defence industry — but wages still remain lower than before Russia annexed Crimea in 2014, according to data from the country’s higher school of economics.

The Treasury also noted that emigration had hit historic highs, with 668,000 people leaving the country in 2022. Recommended War in Ukraine US hits Turkish and Chinese companies over Russia trade “Russians are voting with their feet . . . This permanent loss in human capital [will] further weaken Russia’s growth potential; the Russian government is acutely aware of this, offering subsidised mortgages to get skilled workers to stay,” Lyngaas wrote.

The Treasury introduced fresh sanctions measures on Tuesday to coincide with a visit to Washington this week by Ukraine’s president Volodymyr Zelenskyy. The measures take aim at companies in Turkey, the UAE and China, which officials believe are helping supply Russia with sensitive technologies. “Russia is now more isolated, relying on individuals and entities willing to resupply its military and perpetuate its heinous war against Ukraine,” wrote Lyngaas.

Source : FInancial Times