Russian stock values on the Moscow Exchange’s benchmark RTS Index fell on Tuesday to their lowest value since February 2021.
As Kommersant reports, since last week, the Russian markets have lost 13%-15% in value. Things are not moving in the right direction: The RTS ended Tuesday 7.3% down on Monday’s close. The market tremors are seen by analysts as a response to escalating concern over the prospect of a new Russian invasion of Ukraine and associated Western sanctions threats.
Those concerns are deserved.
As I reported on Monday, the new deployment of Russian troops to Belarus allows Putin to launch a multidirectional invasion and encirclement of Kyiv. At a minimum, the Russian military buildup forces Ukraine to hold its forces in high readiness posture and divide them between various prospective fronts. My annotated map below indicates the possible Russian offensive routes. Further adding to the concern, Russia has announced a new deployment of Su-35 air superiority fighters to Belarus.
Rogan Ukraine map jan 17For reasons as much ideological as strategic, Putin remains highly likely to attack Ukraine. Still, these economic jitters will be of significant concern to the Kremlin.
While the Russian economy has been buffeted by high energy prices (energy forming the centerpiece of its export economy and foreign capital income), the economy remains structurally weak. Kommersant also reports that capital outflows increased by 42% in 2021 to a level of $72 billion. Foreign direct investment in Russia grew in 2021 but remains low and would be hit hard by a new war with Ukraine. High inflation is also diluting the incomes of already impoverished workers and pensioners.
Although Putin may see a war with Ukraine as a way to defray domestic political pressures in favor of nationalist sentiment (one of his top allies openly suggests as much), a bloody or drawn-out war with Ukraine will risk his declining (but still high) domestic popularity. A poor economy will further undercut the Kremlin’s authority.
The opportunity, then, for Western policymakers is clear.
The United States should take a lead in warning that an invasion of Ukraine will result in wide-ranging sanctions on Russian capital, including Russian capital abroad (i.e. Putin’s oligarch cadres in London), and the Russian energy export markets. President Joe Biden should warn that these sanctions will be unilateral where necessary. Such a course offers the best prospect of altering Putin’s strategic calculus as to the cost-benefit analysis of waging another war in Europe.
