By Eric Vandenbroeck and co-workers

Russia Vows Retaliation

Recently we posted an article about the real risk of escalation in Ukraine. Russia now has vowed retaliation after claiming to have shot down eight US-made ATACMS missiles fired by Ukraine on Saturday morning.

Moscow sees the use of such missiles, which have a range of up to 300 kilometers (186 miles), as a major escalation.

The country’s air defenses shot down the eight ballistic missiles alongside 72 aircraft-type unmanned aerial vehicles (UAVs), Russia’s Ministry of Defense said. It added that “these actions by the Kyiv regime, which is supported by Western curators, will be met with retaliation.”

The statement said several drones were destroyed in the Leningrad region in the north-west and one in Kursk, where Ukraine launched a surprise attack late last summer.

The outgoing US President Joe Biden approved Kyiv’s use of ATACMS in November – saying in part it was in response to Russia expanding the conflict by deploying North Korean troops.

 

A Form of Russian Collapse?

Although Russia is still growing in GDP, the economy is not in a firm shape. The inherently flawed economy could not sustain long-term warfare for the Kremlin. Before the war, Russia relies on the export of energy and raw materials for financial resources.  Indeed, there has been a trade surplus for the Russians over the years; the fluctuating international energy prices still crucially impact the annual income of Russia. The 2014 oil price dip and its aftermath prove Russia’s insatiable income status as the Russian economy suffered a recession.  Russia’s reliance on imported manufactured goods indicates an unbalanced industrial distribution since the Soviet times. Moscow’s economic structure is not suited for a long war. 

Also, the cost of modern warfare was a bill Moscow could not pay for. One of the most prominent examples in this case is Russia’s military actions in 2015 in Syria. The war has quickly drained Russia’s storage of ammunition. The cost itself is four million US dollars per day. This is just the Air Force operation on a relatively smaller scale.  The bill for the current war in Ukraine could only be significantly more enormous as more troops and more operations are required on the frontline.     

The fragile economy also reflects on the military expenditures.  Russia’s military expenditure remained at a low level until 2022. The low spending meant that some vital upgrades could not be fully initiated. The most advanced tanks, such as T14, were only considered for deployment until the beginning of the Russia-Ukraine war. The Russian Navy and Air Force are also falling behind in equipment upgrades. Looking at the Victory Day parade in the past years, it becomes apparent that Russia lacked the storage and production capacity to bulk up its military. This still relates to the flaws embedded in Russia since the beginning.  

The sanctions proved to have a long-term effect on Moscow’s economy. The initial impact of sanctions has been questioned since all the economic indicators were stable in Russia. Yet, the long-term effect of the sanctions only started to show much later. Russia’s exports have declined significantly. Its oil and natural resources must be sold to other buyers below the market prices. These methods strained Russia’s ability to generate revenue.  Meanwhile, Russia’s access to foreign currency was also restrained as sanctions were introduced, forcing the Moscow Exchange to suspend trading in Euros and US Dollars. The sanctions limited Russia’s ability to mobilize financial resources to go into the war. 

The threats of secondary sanctions also forced other countries to limit their trade relations with Russia. Chinese banks, for example, have already stopped issuing US dollar letters of credit to Russians since the beginning of the war. Smaller Chinese banks have also stopped accepting transactions based on the Chinese Yuan with Russia. These are all based on the fear of secondary sanctions from the US.  Russia’s trade with Central Asia is also under tight scrutiny.  Kazakh and Uzbek companies have already been hit by sanctions related to Russia. The tight scrutiny also meant that Russians faced more difficulties using Central Asian banks for transactions. Russia’s international trade channel shrinks further as more parties collaborate with the sanctions. 

The spilling effect of war itself further evaporates Russia’s thin economic resources. These spilling effects include the lack of manpower and uncontrolled government spending. These effects could damage the Russian economy both now and in the future.  

The uncontrolled government spending makes the Russian economy grow on the surface. The military expenditure has increased significantly since the war started. Defense spending could make up to 40% of Russia’s expenditure in 2025. The government also provided generous subsidies to companies, from transportation to oil refineries, to sustain the economic activity. Moscow’s transfer payment to other parts of the nation is also significant. For regions like Chechnya, Moscow subsidies are the lifeline of regional fiscal capacity. All of these expenses eat up Russia’s vital economic resources. Moscow has already increased taxes to fund its war. The irresponsible spending could only drag Russia into a financial quagmire. 

The spilling effect of war also led to a lack of manpower in the economy. Sustaining an economy requires manpower. As Russia reports that 73% of the companies are experiencing labor shortages, the future production capacity and growth become exceptionally uncertain. Since the beginning of the war, almost one million Russians left the country to live abroad. These Russians are highly educated and hold key knowledge for the function of the economy.

Putin and the Moscow government wanted to create the image that Russia is still that polar bear that the world feared for years.  However, the war in Ukraine revealed the actual color of the Russians. Moscow’s money bag is far shallower than the world thought. From the beginning, the flawed economy and the long-lasting effects of the sanctions had already hindered Russia’s potential in the war. The impact of war on the economy almost announced the doom of Russia’s economy. The numbers on the surface may seem stable, but Moscow may undergo an economic collapse soon.

 

Russia’s new nuclear-capable ballistic missile

Russian President Vladimir Putin has threatened to respond to Ukrainian strikes using ATACMS with Russia’s new nuclear-capable ballistic missile “Oreshnik.”

Residents and bomb squad members stand in front of a house destroyed by a Russian missile strike on Saturday.

Last month, Putin suggested that it could be fired at the capital Kyiv as a test of Western-supplied air defense systems.

The first and only launch of the experimental weapon targeted Ukraine’s Dnipro region on the morning of November 21.

The Ukrainian drone attacks forced temporary restrictions to be introduced at an airport in St. Petersburg, Russian state media agency TASS reported.

The governor of Leningrad oblast, Aleksandr Drozdenko, said in a statement on Telegram that the “night and morning of January 4 were record-breaking in terms of the number of UAVs destroyed,” with four shot down over his region.

A Ukrainian security official, Andrii Kovalenko, said a seaport in Leningrad was targeted, calling it an “instrument of economic and military survival for Russia in isolation.”

Meanwhile, Russia launched a total of 81 drones at Ukraine overnight on Friday into Saturday, according to Ukraine’s Air Force Command, including Iranian-made Shahed drones and “various types of imitation drones.”

Ukrainians shelter in a metro station in Kyiv during Russia's large-scale missile attack.

Some 34 Shahed attack UAVs and other types of drones were downed, according to a statement, although the downed drones caused damage in the Chernihiv and Sumy regions.

Ukraine enters the year on the back foot in the conflict, which began in February 2022, with Russia making gains on the eastern frontlines.

Russia’s defense ministry said on Saturday that its forces had taken control of the village of Nadiya in Ukraine’s eastern Luhansk region. Donetsk, the hub of Pokrovsk is under growing Russian pressure as Ukrainian forces lose ground to the south and east of the town.

Ukraine is also concerned that the incoming Trump administration could cut vital military aid; Trump himself has vowed to end the conflict.

Over 1,000 days of war, Russian President Vladimir Putin has repeatedly warned Kyiv’s Western allies of dire – potentially nuclear – consequences if they “escalate” the war by giving Ukraine the weapons it needs to defend itself.

Ukrainians attend a memorial in Kyiv

Putin’s threats became even fiercer this month after the Biden administration finally permitted Kyiv to launch longer-range American weapons at targets deep inside Russia. In response, Putin updated Russia’s nuclear doctrine and fired a new, nuclear-capable ballistic missile at Ukraine. The message was taken as a clear threat to Ukraine’s backers: Don’t test us.

 

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