At least for now, Vladimir Putin sees no threat to his rule. His war with Ukraine has bled his country but has bought him the loyalty of a rising class that spans multiple economic sectors.

The most obvious is Putin’s close circle. The withdrawal from the Russian market has created opportunities for his favored oligarchs who acquired foreign assets at deep discounts or simply seized them. What looms for Russia, however, is a further concentration of wealth and power. As in any oligarchy, this means a restriction on competition, poorer investment efficiency, a constraint on innovation, escalating inequality, stagnant economic growth, and overall the further decay of society.

There is also the trickle-down effect to his top-down-driven system. It is not just the 100 plus billionaires he created who have benefited from the war. Lesser entrepreneurs have profited and flourished. The need to evade Western sanctions has created a national industry.

Oil exports are a financial lifeline for an economy that depends on their sales for its survival. The number of vessels in Russia’s shadow fleet of oil tankers is unknown but estimates range from 600 ships and upwards. The “dirty” navy has cost Russia roughly US$10 billion since the beginning of the war and filled anonymous coffers. Yet, such costs appear justified for a country where roughly half of its export income comes from oil.

The environmental threat of this aging and deteriorating fleet is a global concern. Moreover, the link between these ships and a series of attacks to sabotage submarine communication and energy lines has raised alarms and further estranged Moscow. Russia’s flouting of international sanctions has rallied Europe, NATO, Taiwan, and the US Treasury’s Office of Foreign Assets Control (OFAC) to crackdown on the Kremlin’s defiance and provoked discussions about imposing further sanctions.

A tightening and upward ratcheting of sanctions could spell disaster for Putin. The price of oil is central to Russia’s fortunes and security. The looming trade war triggered by the Trump administration’s call for sweeping tariffs has already forced a decline in the price per barrel as markets poise for a potential global economic downturn. The Kremlin may be content with its sanction busting shadow fleet for now, but inevitably it needs market stability.

Western-trained technocrats are also part of the fight against Western sanctions. Creating subsidiary companies to resell sanctioned technology to Russia and using jurisdictional arbitrage to circumvent banking restrictions are essential to Putin’s effort for countering Russia’s economic isolation and halting its decline.

An example of the primacy placed on the role of such experts is the appointment of Kirill Dmitriev as special envoy for economic affairs. Dmitriev is a Harvard trained financier and a former investment banker at Goldman Sachs. He previously headed Russia’s sovereign wealth fund (RDIF). Biden’s Treasury Department describe the RDIF  as “a slush fund for President Vladimir Putin and is emblematic of Russia’s broader kleptocracy.”

This year, as a prominent figure in current Russian—US negotiations, sanctions were lifted on 2 April to allow him to visit the United States for a meeting with Steve Witkoff, his US counterpart. Dmitriev’s discussions have involved various joint business ventures including minerals agreements and nuclear power stations for Elon Musk’s space projects. For unclear reasons, he was at the meetings in Riyadh in February to take part in Ukraine peace negotiations with the US delegation.

Other beneficiaries of the war economy are among the junior ranks in research and development. Due to repressive policies, scientific development in Russia has been crippled. Leading scientists not only fear damage to their reputation but also the threat of arrest and imprisonment. The war has bankrupted the scientific community of its most brilliant minds and created opportunities for a generation of lesser technicians and careerists, thus putting Russia’s future at risk.

Other opportunists include the hundreds of thousands of white-collar professionals in IT, finance, and business services who filled the breach left by the more experienced practitioners who have sought opportunities and havens abroad. In April, Alexander Gabuev of the Carnegie Endowment for International Peace wrote in Foreign Affairs; the “Kremlin’s financial outlays have thus created a large group of people who owe their material advancement—and their career prospects—to an unjust war.”

Those ranks include the hundreds of thousands of public-sector workers and bureaucrats who have used the conflict in occupied territories to further their own careers. Authoritarian tactics have also required more staffing and opened opportunities in counter-intelligence, law enforcement, and in the security organs of the state. These positions incentivise large numbers of arrests and convictions and thereby create a vicious cycle of more repression, loss of manpower to unproductive activity, and high inefficiency costs.

The above excludes the tragic loss of lives at the front. As many as 800,000 casualties have occurred. Total losses could reach one million in the not too distant future, with a territorial gain so trivial it would take 80 years at the current rate for Russia to conquer the whole of Ukraine. In the process, Putin has had to pay off the mobilised troops, support services, and arms industry workers at bonus rates.

Forty percent of Russia’s economy is devoted to the war. These investments do not produce sustainable economic growth. They do not represent final goods and do not generate more funds. Opportunity costs of war are steep and result in fractal out-turns. Excessive military spending was one of the reasons the USSR eventually imploded.

As the economy militarises, a monetary overhang looms. The reckoning will be unforgiving as the concentration of central power increases, entrepreneurial innovation and competition languishes, and Russia faces an impending demographic catastrophe.

Putin may have bought himself a political base, but he has also set in motion the conditions for economic collapse—similar to the events that took place under the tsars and the Soviets. Unless there is a momentous breakthrough or a sea change in the current world order, we may be preparing for a revisit of Russia’s past.

Jack Jarmon was USAID technical advisor for the Russian government during its economic transition period in the mid 1990s. He has authored and co-authored five books, which are currently core texts for international and security studies programs in the US and abroad. He has taught international relation courses at the University of Pennsylvania and Rutgers University and lectured at major universities and war colleges. 

This article is published under a Creative Commons License and may be republished with attribution.