Opinion |

What Putin Wants, Russia Is in No Position to Provide

Its creaky economy can’t support the Russian leader’s outsized ambitions. He should take his cue from China

David Rosenberg
David Rosenberg
And if Putin cuts off Europe's gas supply? Gas flame at Rosneft in Prirazlomnoye, Russia
And if Putin cuts off Europe's gas supply? Gas flame at Rosneft in Prirazlomnoye, RussiaCredit: TATYANA MAKEYEVA - AFP
David Rosenberg
David Rosenberg

What does Vladimir Putin want? Yes, we know the laundry list of demands concerning NATO and other security matters. But what does he really want – where is he trying to take Russia? What is the grand strategy behind threatening Ukraine, meddling in American elections, sending Russia’s air force to Syria and modernizing Syria’s army?

If it is to use this to leverage Russia into superpower status, perhaps not quite on par with the United States and China but at least a competitive No. 3, then he is not going to succeed. Indeed, Putin is going about it in exactly the wrong way.

To put a spin on an overused adage: It’s the economy, Putin.

Putin thinks otherwise, which he has made clear on many occasions, most notably in a 2021 address to Russia’s Federal Assembly, where he spelled out his view on global competition among nations. “Who will take the lead and who will remain on the periphery and inevitably lose their independence will depend not only on the economic potential but primarily on the will of each nation, on its inner energy,” he explained.

Yet after more than 20 years of Putin in power, the metrics of the Russian economy more closely approximate a Third World country than a developed one. Russian industry isn’t globally competitive, nor is its technology. It offers little in the way of services, whether in finance or entertainment.

Last year, 42 percent of its exports were fossil fuels and another 9 percent diamonds and other gems and precious metals. It’s also a big exporter of farm goods, but not processed foods. In other words, it produces raw materials, but doesn’t have the innovative capacity or economic efficiencies of a truly competitive economy. It exploits what God gave, and that’s it – except for arms.

Oil and gas have been enough to make Russia the world’s 11th-largest economy, but that’s less impressive than it seems. Oil and gas can lift a country’s aggregate GDP, but for a country the size of Russia, that’s not nearly enough. On a GDP per capita basis, Russia falls to a humiliating No. 57 in the world, behind countries like Romania and Malaysia.

“National will” and “inner energy” are certainly important in mobilizing populations and for success on the battlefield. But even the most dedicated soldier needs a gun and in the 21st century, an array of high tech weaponry as well.

But Russia can’t carry the cost of that. Moscow has been rebuilding its armed forces for years but in 2019, its defense spending amounted to just $65.1 billion, according to the Stockholm International Peace Research Institute. That same year, the United States spent 11 times as much and China four times as much.

The bigger American and Chinese economies can afford to be generous with their generals. SIPRI estimates that in 2019 the U.S. devoted 3.4 percent of its GDP to defense and China spent just 1.9 percent. Russia spent 3.9 percent on defense that year and the absolute amount was smaller than what its rivals spent. Reaching anything close to American or Chinese levels would be utterly impossible. There aren’t enough bucks for the bang.

The laybarge Fortuna performing a tie-in during Nord Stream 2 pipeline construction off the German coast. The pipeline would double natgas supplies from Russia to GermanyCredit: HANDOUT - AFP

Russia has one economic asset, which is vast reserves of fossil fuels. Putin has exploited them in the past to achieve his political aims. Now he could do so again – by reducing or even cutting off Russia natural gas exports to Europe if the West imposes sanctions – though only if Russia itself is willing to pay the price of losing an important export market.

Turning off the gas spigot would cost Russia upwards of $200 million a day, or about $20 billion if the embargo lasted three months. With $600 billion in foreign currency reserves, Russia could afford to do it.

But Putin shouldn’t be so confident that the embargo would hurt Europe the way he hopes.

As The Economist reported last week, Europe has gas in storage equal to as much as four months consumption; it has access to liquefied natural gas shipped from the U.S. and other places; and the continent has developed a network to ship gas internally, meaning the countries hardest hit by a Russian embargo could tap supplies from their neighbors.

So Putin’s gas weapon – the only arrow in its economic quiver – isn’t all it’s cracked up to be.

To his credit, Putin seems to be a student of history. He is a firm believer in Russia’s historical greatness, and someone who mourns the day the Soviet Union collapsed. Thus, he should be asking himself how the collapse happened in the first place. How did a country with a population bigger than America’s, rich in natural resources, a strong system of education, a powerful army and more than its fair share of top-notch scientists and engineers end up imploding?

What the USSR never got right was the economy. On paper, it looked good for many years in the middle of the 20th century. Stalin orchestrated a process of rapid industrialization, but his model worked only so long as the regime could devote more and more human labor and natural resources to generating growth. The Soviets never succeeded in raising productivity, delivering goods to consumers or (apart from weapons) converting its science and technology into practical uses.

In the end, even though it spent heavily on its military, it struggled to keep up with the United States.

Putin’s Russia isn’t a command economy of the Soviet type, but it’s dysfunctional in its own way: corrupt, monopolistic and suffering from poor governance. It’s not a good place to do business. Perhaps Putin prefers it that way because a powerful capitalist class represents a center of power that he would have to negotiate with; better to keep the economy in control of cronies answerable to him.

If Putin were wiser, he would be taking his cue from China, which has spent the last decade building up its economy to the point now that, if it chooses (and under Xi Jinping, it appears to indeed be choosing), it can become a military and political power as much as it already is an economic one. Indeed, China is now in a place where it sees the opportunity not just to challenge the U.S., but to supplant the United States and Europe in leading the global agenda.

Even if it gets its way with Ukraine, Putin’s Russia doesn’t have what it takes to leverage the victory. It will remain a second-tier power.

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