By Eric Vandenbroeck and co-workers

The War Has Wrecked Russia's Future

Russia’s war in Ukraine has proven almost every assumption wrong, with Europe now wondering whether what is left is safe to assume. Nowhere has Russia’s invasion backfired more than in Ukraine. Contrary to Putin’s historical revisionism, Ukraine has long had a national identity distinct from Russia’s. Like Brexit, Western sanctions on Russia will play out as a slow burn, not an immediate collapse. Europe’s challenge now is to deal with Russia in a state of chaotic denial while hoping it evolves into a state of managed decline. 

Start with the lynchpin of Russia’s economy: energy. In contrast to Europe’s (genuine) dependence on Russia for fossil fuels, Russia’s economic dependence on Europe has largely gone unremarked. As late as 2021, for example, Russia exported 32 percent of its coal, 49 percent of its oil, and a staggering 74 percent of its gas to OECD Europe alone. Add in Japan, South Korea, and non-OECD European countries that have joined Western sanctions against Russia, and the figure is even higher. A trickle of Russian energy continues to flow into Europe. Still, as the European Union is committed to phasing out Russian oil and gas, Moscow may soon find itself shut out of its most lucrative export market.

In a petrostate like Russia, which derives 45 percent of its federal budget from fossil fuels, the impact of this market isolation is hard to overstate. Oil and coal exports are fungible, and Moscow has indeed been able to redirect them to countries such as India and China (albeit at discounted rates, higher costs, and lower profits). Gas, however, is much harder to reroute because of the infrastructure needed to transport it. With its $400 billion gas pipeline to China, Russia has managed some progress, but it will take years to match the current capacity to the EU. 

In any case, China’s leverage as a single buyer makes it a poor substitute for Europe, where Russia can bid countries against one another.

This market isolation, however, would be survivable were it not for the gravest unintended consequence of Russia’s war—an accelerated transition toward decarbonization. It was a gross violation of international law. Still, Putin managed to convince Western leaders to finally treat independence from fossil fuels as a national security issue, not just an environmental one. This is best seen in Europe’s turbocharged transition toward renewable energy, where permitting processes that used to take years are being pushed up. For example, a few months after the invasion, Germany jump-started construction on what will soon be Europe’s largest solar plant. Around the same time, Britain accelerated progress on Hornsea 3, slated to become the world’s largest offshore wind farm upon completion. The results already speak for themselves; for the first time last year, wind and solar combined for a higher share of electrical generation in Europe than oil and gas. And this says nothing of other decarbonization efforts, such as subsidies for heat pumps in the EU, incentives for clean energy in the United States, and higher electric vehicle uptake everywhere.

The cumulative effect for Russia could not be worse. Sooner or later, lower demand for fossil fuels will dramatically and permanently lower the price of oil and gas—an existential threat to Russia’s economy. When increased U.S. shale production depressed oil prices in 2014, Russia experienced a financial crisis. Lower global demand for fossil fuels will play out over a longer timeline, but the result for Russia will be much graver. With its invasion, Russia hastened the arrival of an energy transition that promised to unravel its economy.

Beyond a smaller and less efficient economy, Putin’s war in Ukraine will also leave Russia with a smaller and less dynamic population. Russia’s demographic problems are well-documented, and Putin had intended to start reversing the country’s long-running population decline in 2022. In a morbid twist, the year is likelier to mark the start of its irrevocable fall. The confluence of COVID and an inverted demographic pyramid already made Russia’s demographic outlook dire. The addition of war has made it catastrophic.

To understand why it’s important to understand the demographic scar left by the 1990s. In the chaos that followed the Soviet Union’s dissolution, Russia’s birthrate plunged to 1.2 children per woman, far below the 2.1 needed for a population to remain stable. The effects can still be seen today; while there are 12 million Russians aged 30-34 (born just before the breakup of the Soviet Union), there are just 7 million aged 20-24 (born during the chaos that followed it). That deficit meant Russia’s population was already poised to fall simply because a smaller number of people would be able to have children in the first place.

Russia’s invasion has made this bad demographic hand cataclysmic. At least 120,000 Russian soldiers have died so far—many in their 20s, and from the same small generation Russia can scarcely afford to lose. Many more have emigrated, if they can, or fled to other countries to wait out the war; exact numbers are hard to calculate, but the 32,000 Russians who have immigrated to Israel alone suggest the total number approaches a million.

Disastrously, the planning horizons of Russian families have been upended; it is projected that fewer than 1.2 million Russian babies may be born next year, which would leave Russia with its lowest birth rate since 2000. A spike in violent crime, a rise in alcohol consumption, and other factors that collude against a family’s decision to have children may still depress the birthrate. Ironically, over the last decade, Putin managed to slow (if not reverse) Russia’s population decline through lavish payoffs for new mothers. Increased military spending and the debt needed to finance it will make such generous natalist policies harder.

The invasion has left Russia even worse off geopolitically. Unlike hard numbers and demographic data, such lost influence is hard to measure. But it can be seen everywhere, from public opinion polls across the West to United Nations votes, that the Kremlin has lost by as high as 141 to 5. It can also be seen in Russia’s backyard. At the same time, an emboldened NATO could soon include Sweden and Finland. Russia’s Collective Security Treaty Organization is tearing at the seams as traditional allies such as Kazakhstan and Armenia realize the Kremlin’s impotence and look to China for security.

Perhaps most importantly, Russia has reinvigorated the cause of liberal democracy. In the year after its invasion, French President Emmanuel Macron won a rare second term in France, the far-right AfD lost ground in three successive elections in Germany, and “Make America Great Again” Republicans paid an electoral penalty in the U.S. midterms. (The far right swept into power in Sweden and Italy, but such wins have so far failed to dent Western unity and appear more motivated by immigration.) And this says nothing of the wave of democratic consolidation playing out across Eastern Europe, where voters have thrown out illiberal populists in Slovenia and Czechia in the last year alone. It is impossible to attribute any of these outcomes to just one factor. 

Nowhere, however, has Russia’s invasion backfired more than in Ukraine. Contrary to Putin’s historical revisionism, Ukraine has long had a national identity distinct from Russia’s. But it’s also long been fractured along linguistic lines, with many of its elites intent on maintaining close relations with the Kremlin and even the public unsure about greater alignment with the West.

Of course, one can argue that, however much the war has cost Russia, it has cost Ukraine exponentially more. This is true. Ukraine’s economy shrank by more than 30 percent last year, while Russia’s economy contracted by just about 3 percent. And this says nothing of the human toll Ukraine has suffered. But, like Brexit, Western sanctions on Russia will play out as a slow burn, not an immediate collapse. And while Russia enters a protracted period of economic and demographic decline, once peace comes, Ukraine will have the combined industrial capacity of the EU, United States, and United Kingdom to support it as the West’s newest institutional member—precisely the outcome Putin hoped to avoid. Russia may yet make new territorial gains in the Donbas. But in the long run, such gains are immaterial—Russia has already lost.

 

 

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