The global costs of Putin’s war

| June 11, 2022

The death, destruction and disruption caused by Russia’s war in Ukraine suggest that short-term savings achieved by running down defence capabilities in peacetime can incur huge costs in the longer run. The cost of investing in military capabilities to deter coercive authoritarian regimes could be far cheaper than the costs of war.

While the invasion has cost Ukraine dearly in human, economic and physical terms, Russia, too, is enduring great cost, probably in ways that President Vladimir Putin didn’t anticipate. Europe will endure higher energy costs for some time. Around the world, food insecurity will be exacerbated for those least able to manage it, potentially leading to political instability.

It’s difficult to know what level of European defence spending could have deterred Putin, and military equipment alone is not enough. Resolve and a willingness to use those capabilities are just as important.

The greatest cost to Ukraine is the loss of lives caused by Russia’s invasion. Civilian and military casualties carry substantial intangible and financial costs.

Ukrainian President Volodymyr Zelensky provided a figure of 2,500 to 3,000 military personnel dead by mid-April. For the same period, US intelligence agencies estimated that between 5,500 and 11,000 Ukrainian soldiers had died, with more than 18,000 wounded.

The Russian estimate of Ukrainians killed in action was more than 23,000 by mid-April. Estimates for civilian deaths also vary. The UN gave a figure of 3,930 by 23 May, but said it believed the number to be far higher. The mayor of Mariupol stated that more than 10,000 civilians had died there by mid-April.

As of 23 May, more than 7 million of the 41.9 million Ukrainians were refugees in other countries, while 7.1 million had been internally displaced. This disruption and the destruction of major infrastructure have generated considerable food, water and electricity shortages across the country.

The Ukrainian economy has been hit hard by the conflict and mass exodus. The World Bank projects a 45% GDP contraction this year, predicated on collapsing investment, mass displacement, shipping blockages, declining exports and imports, loss of incomes and equipment losses.

Reconstruction will place a huge strain on Ukraine’s post-war economy. The Kiev School of Economics’ economic calculations show it’s suffering around US$4.5 billion in damage to civilian infrastructure each week. Zelensky referred to a US$600 billion reconstruction bill in early May.

The dire situation won’t affect just Ukraine, but also countries caring for its refugees. Poland estimates the cost of hosting 3.5 million refugees this year at €24 billion. The Economist Intelligence Unit estimates that supporting 5 million refugees could cost Europe around €50 billion in 2022.

Ukraine’s 29 May estimate of Russian dead was 30,000. Moscow gave a figure of 1,351 by 25 March. British estimates for Russian military deaths by 23 May suggest 15,000. The number of seriously wounded is likely to be at least double the killed-in-action figure.

Pentagon estimates from 26 May calculate that Russia had lost roughly 1,000 tanks, 350 artillery pieces, 36 fighter-bombers and more than 50 helicopters.

The World Bank projects that sanctions and the cost of wartime operations will cause Russia’s real GDP growth to shrink by 11.2% this year and inflation to jump from 6.7% to 22%.

In response to sanctions, Russia has banned some exports, seized foreign-owned businesses and assets such as aircraft, and prevented foreign investors from selling their stocks. But nationalising foreign-owned businesses won’t necessarily keep them going, seizing aircraft won’t keep Russia’s aviation industry flying, and spares from the US and the EU are under sanction.

The rouble initially depreciated by 30% against most major currencies. It has recovered due to action by the Russian central bank and measures such as requiring foreign purchasers of Russian oil and gas to pay in roubles. However, a strong rouble isn’t useful if there’s nothing to purchase with it.

Russia is the world’s second largest crude oil exporter after Saudi Arabia, and it’s still raking in oil and gas revenue for now, helping to fund its war effort. Western European customers are seeking to diversify away from Russian energy imports, either to other suppliers or to renewables, and many plan to ban or at least limit their Russian energy imports as soon as possible.

The Kiel Institute for the World Economy has traced at least €64.6 billion in 37 government-to-government commitments to Ukraine from 24 January to 10 May this year, of which the US is providing over 65%. At least 25 nations are providing military equipment. International aid has included goods and money to assist with military logistics, refugee support and settlement, energy resources, economic packages, medical equipment, emergency services equipment and other humanitarian goods. Australia has provided $285 million in military and humanitarian aid.

Military supplies have escalated from shoulder-fired missiles to long-range weapons such as 155-millimetre howitzers and armoured vehicles. Javelin anti-tank missiles cost US$178,000 each.

Supplying Ukraine has revealed many European countries’ meagre holdings of modern equipment. Many have provided weapons no longer in frontline use, and some was unusable.

Even the US will need to restart or expand its own production lines, particularly for its low-stock and older items. This a major issue, as the US has donated roughly a third of its Javelin stock (around 7,000 Javelins). Current production rates are low and it will take years to replenish stocks.

While Western militaries don’t have troops in Ukraine, they’re supporting Ukrainian forces including by providing intelligence, which adds the higher cost of effort by surveillance aircraft.

It’s clear that Putin didn’t feel deterred by NATO’s military power. That failure of deterrence is, in part, a consequence of many NATO states enjoying a post–Cold War peace dividend. That, along with an unwillingness to take Russian revisionism at face value and an overreliance on American taxpayers to foot the security bill, was behind past low military spending. Many NATO members pledged in 2006 to commit 2% of GDP to military spending but have fallen short. NATO reaffirmed the 2% benchmark in 2014 after Russia annexed the Crimea, but only three members met it.

Russia’s invasion of Ukraine prompted many NATO countries to pledge substantial increases to their military spending.

Japan is also likely to increase its defence budget, a trajectory that pre-dates the invasion of Ukraine but has no doubt been reinforced by it.

The disruption to trade caused by the fighting, sanctions and Russia’s blockade of Ukraine’s Black Sea export lanes continues to generate extensive flow-on costs around the globe. World Bank data from April indicates that Thailand, Vietnam and low-income countries have experienced some of the sharpest declines due to their reliance on imported energy for key sectors, while major net exporters of crops or energy, such as Nigeria, have experienced export surges.

The Russian occupation of Ukrainian ports and blockade of Ukraine’s shipping are having a dramatic impact on global food prices. Surges are primarily a response to the gap left by reduced Russian and Ukrainian exports, which previously accounted for nearly 25% of global wheat exports and 15% of corn and fertiliser exports. Wheat prices have jumped by 40%. Many countries have sought to secure their own food supplies. India, for example, banned wheat exports in mid-May, citing concerns over heatwaves reducing stock and the war in Ukraine raising domestic prices.

The war and resultant policies have potentially created conditions for significant political and social instability. Higher prices are predominantly affecting food importers such as Somalia, which bought 90% of its wheat from Ukraine and Russia.

The price increases have driven the global food crisis to famine levels. Before the Ukraine conflict, many low-income nations were already at risk of famine due to war, extreme weather conditions in Africa, high livestock prices, increased food demand after Covid-19 and global supply-chain disruptions. Just prior to the war, the UN estimated that more than 140 million people were suffering from acute hunger and urgently required food assistance.

The disruption to the interconnected global economy is also affecting prices for raw materials and metals. Russia is a large exporter of aluminium, iron, steel, copper and nickel. While some can be sourced elsewhere, the war is likely to result in substantial cost increases and interruptions.

The war’s impact on production and sanctions against Russian crude oil, petroleum products and gas have generated a massive increase in energy prices. Europe has been hit hardest since it relied on Russia for 35% of its natural gas, 20% of its crude oil and 40% of its coal, but developing economies have also been hit hard.

In Australia, the average retail petrol price reached 182.4 cents per litre in late February, the highest inflation-adjusted price since 2014. Average prices in Australia’s five largest cities reached nearly 215 cents per litre in mid-March.

As a large energy and food exporter, Australia can help fill the gaps in Ukrainian and Russian production and will enjoy higher commodity prices. Australian government forecasters expect commodity exports to rise to $424.9 billion for the fiscal year to 30 June, up a third from earnings in 2020–21. That growth is likely to be driven by higher iron ore prices, which increased from projections of US$118 a tonne to US$160 in 2022.

Forecasters also project that earnings from liquefied natural gas exports will almost double from $32 billion in 2020–21 to over $70 billion in 2021–22, while the average price of coking coal is expected to increase from US$123 a tonne in 2020–21 to US$348 in 2021–22.

This article was published by The Strategist.

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