Lack of Substantive Peace Talks Continues Russian Economic Downturn
Vadim Shtepa
Executive Summary:
Russian President Vladimir Putin’s claim that he is unwilling to negotiate with “terrorist” Ukraine in early June caused a downturn in Russian markets as investors responded to the decreased chance of peace in the Kremlin’s war against Ukraine.
The Russian economy’s militarization has not been sufficient to offset the economic damage from the war, and income from Russian oil exports is at its lowest level since February 2022 and continues to decline due to Russia’s international isolation.
Top Russian officials and business leaders at the St. Petersburg International Economic Forum were vocal about the economic crisis in Russia as Putin continues to prioritize his imperial ambitions over the Russian economy.
The breakdown of negotiations between Russia and Ukraine and the prolongation of Russian President Vladimir Putin’s war against Ukraine will continue to degrade Russia’s struggling economy (see EDM, May 19; Region Expert, June 17). Russia insists that Crimea, which it annexed in 2014, as well as four other Ukrainian regions—Donetsk, Luhansk, Zaporizhzhia, and Kherson—legally belong to it. The Kremlin demanded that Ukraine cede control of these territories as a condition for peace amid negotiations led by Vladimir Medinsky, one of the primary inventors of the revisionist history that Russia used to justify its full-scale invasion of Ukraine (Meduza, June 2; President of Russia, accessed July 2; see EDM, June 5). Ukraine is unreceptive to these terms, demanding, in turn, that Russia agree to an unconditional ceasefire. The Russian and Ukrainian conditions for peace are presently mutually exclusive, and negotiations have inevitably reached an impasse (see EDM, June 3, 4).
The Kremlin’s unwillingness to negotiate in good faith is contributing to a significant economic downturn in Russia. The ruble exchange rate and Russian stocks fell sharply after Putin’s statement about Russia’s unwillingness to negotiate with “terrorist” Ukraine. Putin’s statement followed Ukraine mining and damaging the Crimean bridge, drone strikes on Russian airfields, and explosions on Russian railways in early June (The Kyiv Independent, June 3; The Moscow Times, June 4). Putin focused on the railway explosions in his remarks, accusing Ukraine of targeted strikes on civilian trains in Russian regions, including Kursk and Bryansk (TASS; The Moscow Times, June 4). Putin’s claim that Russia is stepping away from negotiations because of Ukrainian “terrorism” is a stark reversal of reality. If it were not for Russia’s full-scale invasion of Ukraine in 2022, accompanied by a vast array of war crimes—from executions of civilians in Bucha to targeted bombings of residential buildings throughout Ukraine—the Ukrainian Armed Forces would likely have never carried out offensive military actions inside Russia (The Kyiv Independent, April 22, 2022).
The Kremlin’s war against Ukraine creates massive uncertainty in the Russian market, denying it the stability it requires for growth. According to Natalia Milchakova, a leading analyst at Freedom Finance Global, “mutual sharp statements of the Russian and Ukrainian sides cause concern in the investment community about the prospects for negotiations on a peaceful settlement” (The Moscow Times, June 4).
The rapid militarization of the Russian economy has not been sufficient to offset the economic damage generated by Putin’s war against Ukraine (Nastoyashee Vremya, October 23, 2023). Russian military spending is not contributing to the development of the civilian economy. It requires constant investment, taking money from other struggling sectors of the economy, creating an unsustainable and uncertain economic system (see EDM, February 12, June 26, August 20, October 3, 2024, March 4).
The export of oil and other natural resources remains Moscow’s main source of income. The income from these exports is at its lowest level since February 2022. It continues to decline due to international isolation stemming from the war against Ukraine (Centre for Research on Energy and Clean Air, June 13). The export of Russian wheat, for example, decreased by almost 80 percent in June of this year compared to June 2024 (Interfax, June 16).
The end of the most recent Israeli-Iranian conflict has again lowered the price of oil, with Russian oil falling by $10 per barrel (see EDM, June 16, 30; RBC, June 26). Over the past few years, the People’s Republic of China remained willing to purchase Russian oil, albeit at substantial discounts that cannot fully compensate for Russia’s loss of the European oil and gas market (The Moscow Times, July 24, 2024; see EDM, November 13, 2024). Additionally, U.S. senators introduced a bill in May to impose 500 percent tariffs on imported goods from countries that continue to import Russian energy (U.S. Senator Lindsey Graham, May 21). One of the bill’s co-sponsors, Senator Lindsey Graham, claims that “If China or India stopped buying cheap oil, Mr. Putin’s war machine would grind to a halt” (U.S. Senator Lindsey Graham; RBC, May 27).
Even high-ranking Russian officials and businesspeople acknowledge Russia’s economic decline. For example, Elvira Nabiullina, the head of Russia’s Central Bank, states that Russia’s resources are practically exhausted (The Moscow Times, June 19). Nabiullina made this statement at the recent St. Petersburg International Economic Forum, where many Russian officials surprised observers by criticizing the Kremlin’s current economic policy in statements that would have been unthinkable a year ago (see EDM, June 23). The Russian economic reality apparently demands a degree of acknowledgment beyond the propaganda template. Russian Minister of Economic Development Maxim Reshetnikov stated that Russia is “on the verge of a recession,” and German Gref, the chairman of Sberbank, Russia’s largest bank, reported that serious investments in Russia have ceased (Meduza, June 20; The Moscow Times, June 25). Chairman of the State Duma Budget Committee Andrei Makarov stated that no economic growth can be expected in conditions where the country perceives itself as “surrounded by enemies” (Klerk, June 24). Major Russian businessmen, such as Mikhail Gutseriyev, have expressed similar views. In a recent article, Gutseriyev wrote that “isolation, or even more so, a conscious refusal to cooperate internationally, does not in itself create sovereignty; rather, it creates backwardness” (RBC, June 25).
Because Putin prioritizes imperial ambition over economic development, he continues to cut economic programs, even in the face of a downturn driven by his war against Ukraine. Putin has responded to reduced oil and gas revenues by cutting programs in areas such as industrial development, scientific and technical research, civil aviation, and shipbuilding (The Moscow Times, June 24). The significant increase in food prices has led to a crisis among the poor, especially among pensioners who can no longer afford the price of living and are unable to work (Kasparov.ru, June 17).
Ceding territory to Russia is an evolving and extremely controversial topic in peace discussions. Putin, with his imperial worldview, is unlikely to relinquish his claim on Ukrainian territory soon, meaning that ceasefire negotiations inevitably end in deadlock. In clinging to his imperial ambitions, Putin keeps Russia internationally isolated and damages the Russian economy. The cracks are showing in Russian society, as strike movements emerge due to wage cuts and people go hungry (Kasparov.ru, June 17; The Moscow Times, June 25). As in 1917 in Russia, social and economic demands may one day prove stronger than imperial ambition.
This article was originally published in Eurasia Daily Monitor.
Vadim Shtepa is the editor-in-chief of Region.Expert (www.region.expert), the only independent media outlet on Russian regionalism and federalism. Since 2015, he has been living in Estonia due to persecution in Russia for his political views.