Toni Ervianto,The writer is an international economic, politics and security problems analyst. The writer had achieved master degree at the University of Indonesia (UI) in 2012 and previously he was took bachelor degree at the Jember University (Unej) in 1990. (Foto: Ist)
By: Toni Ervianto*)
INDONEWS.ID - Since President Putin’s order was invaded Ukraine on February 24th 2022, Russian ground troops moved in quickly and within a few weeks were in control of large areas of Ukraine and had advanced to the suburbs of Kyiv. Russian forces were bombarding Kharkiv, and they had taken territory in the east and south as far as Kherson, and surrounded the port city of Mariupol. But they hit very strong Ukrainian resistance almost everywhere and faced serious logistical problems with poorly motivated Russian troops suffering shortages of food, water and ammunition. Ukrainian forces were also quick to deploy Western supplied arms such as the Nlaw anti-tank system, which proved highly effective against the Russian advance. By October 2022, Russia withdrew completely from the north.
Attacks by Russian forces were reported in major cities across Ukraine, including Berdyansk, Chernihiv, Kharkiv, Odesa, Sumy, and the capital Kyiv. The Office of the United Nations High Commissioner for Human Rights (OHCHR) verified around 9.2 thousand deaths of civilians in Ukraine during the war as of June 2023. A separate page looks into the background of the conflict. The war resulted in a humanitarian crisis, as thousands of Ukrainians were internally displaced or fled abroad. Neighboring Poland recorded the highest number of border crossings from Ukraine, at around 12.7 million as of June 2023, followed by Russia, Hungary, and Romania.
More than a year since the invasion, Ukraine is now hoping its latest counter-offensive can turn the war in its favour. The war has been creating void and murky economic situation in Ukraine and Russia. The war has been aiming catastrophe and devastating impacts for both countries and around the world.
The comparison of Russia’s and Ukraine’s military capabilities and their budgets
Russia`s military capabilities outnumbered those of Ukraine for most indicators as of 2023. For example, the number of aircraft at the disposal of the Russian Army was close to 4.2 thousand, while the Ukrainian Armed Forces possessed over 310 aircraft. Russia`s naval fleet was nearly 16 times larger than Ukraine`s. Moreover, Russia was one of the nine countries that possessed nuclear weapons. As of early 2022, Russia held the world`s largest inventory of nuclear warheads. Ukraine`s Army counted approximately 500 thousand military personnel as of 2023. Of them, 200 thousand were active military staff. Furthermore, 250 thousand soldiers were part of the country`s reserve forces. To compare, Russia had approximately four times more active military personnel and the same number of reserve military personnel. Russia`s active soldier count was the fifth largest worldwide. Ukraine`s Armed Forces possessed less than 1.9 thousand tanks as of 2023, which was more than six times less than Russia`s. To support Ukraine during the Russian invasion, several Western countries made commitments to deliver tanks to Ukraine, including Leopard 2, Challenger 2, and M1 Abrams. Furthermore, Ukraine received other types of armored vehicles from Western countries, such as M133 armored personnel carriers from the United States and Mastiff (6x6) protected patrol vehicles from the United Kingdom.
As of 2023, NATO had approximately 3.36 million active military personnel compared with 1.33 million active military personnel in the Russian military. The collective military capabilities of the 30 countries that make up NATO outnumber Russia in terms of aircraft, at 20,633 to 4,182, and in naval power, with 2,151 military ships, to 598. Russia`s ground combat vehicle capacity is more competitive, however, with 12,566 main battle tanks, to 12,408. The combined nuclear arsenal of the United States, United Kingdom, and France amounted to 5,943 nuclear warheads, compared with Russia`s 5,977.
Russia spent approximately 86.4 billion current U.S. dollars on its military expenses in 2022, having increased its spending by 31 percent from the previous year. Over the observed period, the highest military expenditure of the country was recorded at nearly 88.4 billion current U.S. dollars in 2013. Russia had the second most powerful army in the world after the United States. Furthermore, with over 4.1 thousand objects, Russian followed the United States in the ranking of countries with the largest military aircraft fleet. In terms of active military personnel, Russia placed fifth with 830.9 thousand staff.
Ukraine`s military expenditure multiplied by over seven times between 2021 and 2022. In 2022, when the Russian invasion of Ukraine began, Ukraine was estimated to have spent 44 billion current U.S. dollars on defense. The country`s military spending accounted for around one third of the gross domestic product (GDP) in 2022.
During war against Ukraine, Russia has nearly doubled its defense budget plan after spending more in the first half of 2023 than originally targeted for the entire year, Reuters reported Friday, citing a government document it obtained. Defense spending has increased every month since President Vladimir Putin sent troops into Ukraine in February last year. In June, Russia stopped the disclosure of detailed data on its budget spending, casting the government`s finances deeper into secrecy.
The 5.59 trillion rubles ($59 billion) spent on defense in January-June this year marks a 12% increase from the originally targeted 4.98 trillion rubles ($54 billion) on defense spending for all of 2023, according to the document cited by Reuters. Almost 1 trillion rubles went toward military salaries, more than double the amount paid in the first six months of 2022, the publication said.
Russia has nearly doubled its defense spending target to 9.7 trillion rubles ($102 billion) for 2023, according to Reuters. The extra spending, combined with the effects of Western sanctions and a collapse in energy sales to Europe, have pushed Russia’s budget into a $28 billion deficit in the first half of 2023. Russia’s national defense budget for 2023 was officially announced at 4.98 trillion rubles.
War’s impacts on economic sectors
The International Monetary Fund was forecasted that the Russian economy, predicting 0.3% growth in 2023. The January 2023 budget deficit comes after Russia posted the second-highest gap in its recent history in 2022. Russia forecasts its budget deficit to reach 3 trillion rubles ($43 billion) in 2023, with at least one-third of state spending expected to go to defense and security. Bloomberg Economics economist Alexander Isakov said Russia’s 2023 budget deficit could more than double to 6.9 trillion rubles ($97 billion).
Russia`s budget deficit surged to 1.76 trillion rubles ($24.8 billion) in January 2023, the Finance Ministry said as Western sanctions cut into oil and gas revenues and the country raised its wartime spending. Revenues fell 35% to 1.356 trillion rubles ($19 billion) while spending rose 59% to 3.117 trillion rubles ($44 billion) compared to January 2022. Revenues from oil and gas were down 46% at 426 billion rubles ($6 billion), while non-oil and gas revenues down 28% at 931 billion rubles ($13 billion). Western price caps and embargoes weighed down on Russia’s oil and gas revenues, with Russia’s Urals blend trading at under $50 a barrel in January 2023 — down 42% from January 2022.
As Russian officials play down the economic impact of President Vladimir Putin’s order to invade Ukraine, the emergence of end-of-year data from 2022 in recent weeks has painted a mixed picture of the economy’s performance. There were some positive signs: inflation receded after hitting a peak in April, while oil and gas revenues reached record levels. However, at the same time, remittances skyrocketed last year as a flood of people left the country, banking profits fell and the country’s budget deficit reached record levels.
Russia saw a budget deficit of 3.3 trillion rubles ($47 billion) last year, the second highest in the country’s recent history. The 2.3% budget gap was exceeded only in 2020, when it hit 4.1 trillion rubles ($58 billion), or 3.8% of GDP, during the coronavirus pandemic.
Russia forecasts that its budget deficit could reach 3 trillion rubles ($43 billion) this year, while analysts say it could go as high as 4.5 trillion rubles ($64 billion). Amid the Ukraine war, at least one-third of the country’s expenditures are expected to go toward defense and security. Revenues from the sale of oil and gas grew 28% last year to reach a total of 2.5 trillion rubles ($36.5 billion).
The war has helped to drive consumer prices upward, particularly after the first wave of Western sanctions in early 2022. However, inflation declined in subsequent months, recording a year-end total of 11.9%. Economists like Milov have noted growth in the prices of some consumer goods in recent months. The Central Bank drastically hiked interest rates at the start of the war, but rates have since been gradually lowered, ending the year at 7.5%. The Central Bank predicts consumer prices will grow 7% in 2023.
Money transfers from Russia have skyrocketed as a result of hundreds of thousands of Russians leaving the country in protest against the war and seeking to evade conscription. Former Soviet republics — some of the most popular destinations for emigrating Russians — saw remittances increase up to 600% in 2022.
After posting record profits of 2.4 trillion rubles ($34 billion) in 2021, Russia’s banks had a much less lucrative year in 2022. They ended the year with profits of just 203 billion rubles ($2.9 billion) in the face of an outflow of depositors and Western sanctions hitting bottom lines. The Central Bank said last month that banking sector profits could exceed 1 trillion rubles in 2023.
The portrait of global energy after more than one year of Russia’s invasion
One year on from Russia’s invasion of Ukraine, the global energy landscape has changed dramatically. Regions around the world have experienced soaring prices that have hit consumers hard, all against a geopolitical backdrop with energy security at its heart. What’s more, the world’s dependence on fossil fuel consumption, including the price and resource volatility that entails, has come into sharp focus.
The economic disruption caused by the war in Ukraine has amplified calls for an accelerated energy transition. A shift that would move countries away from highly polluting fuels, often supplied by only a handful of major producers, to sources of low carbon energy such as renewables and nuclear. Not least in Europe, where the ripple effects of the war have been felt acutely and Russian gas has historically dominated imports. A mild winter and lower-than-expected demand have seen the region’s gas stocks remain relatively stable through the coldest months of the year. While this has helped to ease the impact of supply cut-offs from Russia, the outlook for winter 2023 may be more challenging. The EU faces a potential shortfall of almost 30 billion cubic metres of natural gas this year. But the gap can be closed and the risk of shortages avoided through greater efforts to improve energy efficiency, deploy renewables, install heat pumps, promote energy savings and increase gas supplies.
Energy prices have been volatile since mid-2021. The price of fuels in the EU has risen as a consequence of Russia’s unprovoked and unjustified aggression against Ukraine, which has also led to concerns related to the security of energy supply. Russia’s decision to suspend gas deliveries to several EU member states has further impacted the situation.
The European Union’s commitment in the March 2022 Versailles Declaration to phase out Russian fossil fuel imports “as soon as possible” is set to transform the continent’s energy and gas markets in the years to come, with implications for global trade and market dynamics.
The EU`s reliance on Russian gas has grown steadily over the past decade. The bloc`s gas consumption declined only marginally over this period, but production has fallen by two-thirds since 2010 and the gap has been filled by rising imports. As a result, Russia`s share of total EU gas demand increased from 26% in 2010 to an average of over 40% through 2018-2021. The IEA was among the first to raise concerns about this rising dependence.
Russia more than halved its pipeline gas supplies to the EU in the past year. But the European gas market proved to be resilient as nations were able to fill their storage sites to above 95% capacity by ramping up non-Russian supplies and rapidly reducing consumption. Consequently, Russia`s share of European gas demand fell from 23% in 2022 to below 10% in January 2023.
With the Versailles Declaration agreed in March 2022, the EU leaders of the 27 member states agreed to phase out the EU’s dependence on Russian fossil fuels as soon as possible. On 30-31 May 2022, the European Council agreed on a ban on almost 90% of all Russian oil imports by the end of 2022 - with a temporary exception for crude oil delivered by pipeline. On 24 November 2022, the Council agreed on the content of new measures aiming to secure and share gas supply in the EU. The new measures will improve solidarity in case of a real emergency and gas supply shortage; ensure a better coordination of joint gas purchases limit volatility of gas and electricity prices; set reliable gas price benchmarks. On 5 August 2022, the Council adopted the regulation on reducing gas demand by 15% through a written procedure. The adoption followed the political agreement reached in July. On 27 June 2022, the Council adopted a new regulation on gas storage, which was presented by the European Commission in March of the same year. The rules aim to ensure that EU member states’ gas storage facilities are filled before the winter seasons and can be shared with those member states not owning storage facilities. On 6 October 2022, EU countries adopted an emergency regulation to address high energy prices and help citizens and businesses that are most affected by the energy crisis. The regulation includes three emergency measures: reducing electricity use; capping revenues of electricity producers and securing a solidarity contribution from fossil fuel businesses. On 19 December 2022, EU energy ministers agreed on new rules to set a market correction mechanism which aims to protect citizens and the economy against excessively high prices. The regulation aims to limit episodes of excessive gas prices in the EU that do not reflect world market prices, while ensuring security of energy supply and the stability of financial markets. In December 2022, the Council decided to set an oil price cap for crude oil and petroleum oils and oils obtained from bituminous minerals which originate in or are exported from Russia, at USD 60 per barrel. The price cap on Russian oil aims to limit price surges driven by extraordinary market conditions and drastically reduce the revenues Russia has earned from oil after it unleashed its illegal war of aggression against Ukraine. It will also serve to stabilise global energy prices while mitigating adverse consequences on energy supply to third countries. In February 2023, the Council decided on additional measures to cap prices, namely two price caps for petroleum products falling under CN code 2710 which originate in or are exported from Russia.
Impact on global food security and affordability
Russia`s military aggression against Ukraine is having a direct impact on global food security and affordability. Thanks to the common agricultural policy (CAP), the availability of food, feed and fertiliser is not a major concern in the EU. The EU is largely self-sufficient and its single market can be expected to prove its role in absorbing shocks, ensuring food security for EU citizens and guaranteeing income support for European farmers. Nevertheless, the reduction in imports of maize, wheat, rapeseed and sunflower oil and meal from Ukraine has an impact, particularly on feed prices and for the EU`s food industry. With high market prices and inflationary trends resulting from the war in Ukraine, the main concern in the EU remains affordability. At the European Council meeting held on 23-24 June 2022, EU leaders stressed that Russia is solely responsible for the global food crisis and urged it to immediately stop targeting agricultural facilities and allow the export of Ukrainian grain. On 20 June 2022, the Council adopted conclusions on the Team Europe response to global food insecurity. Ministers stressed that: Russia’s unprovoked and unjustified war of aggression against Ukraine has disastrous consequences for people in Ukraine, and also globally.
Russia`s war of aggression has dramatically aggravated the food security crisis. EU sanctions against Russia are specifically designed not to target food and agricultural products. The Council called on member states to work together to tackle global food insecurity via four strands of action: solidarity through emergency relief and support for affordability; boosting sustainable production, resilience and food system transformation; facilitating trade by helping Ukraine export agricultural via different routes and supporting global trade; effective multilateralism and strong support to the central role of the UN Global Crisis Response Group to coordinate the global efforts. EU leaders discussed food security and affordability also at the Special meeting of the European Council, which took place on 30-31 May 2022. They strongly condemned the destruction and illegal appropriation by Russia of agricultural production in Ukraine and called on Russia to end its attacks on transport infrastructure in Ukraine; lift the blockade of Ukrainian Black Sea ports and allow food exports, in particular from Odesa.
Human security problems
The invasion of Ukraine has had a significant impact on the mobility of people and goods in the EU across all modes of transport. Among the main issues are fuel supplies and fuel prices, as well as logistical challenges linked to border crossings and airspace restrictions. In addition, imports of goods and the large influx of Ukrainian refugees towards EU countries have led to operational challenges for the sector.
In terms of solidarity with Ukrainian refugees, member states have implemented a number of measures, such as establishing transport and information hubs at the main border crossings and facilitating humanitarian aid transport. EU transport ministers fully support the Commission`s initiatives in this regard: the solidarity lanes to optimise supply chains and controls between Ukraine and the EU and create new transport routes; an emergency plan to strengthen transport resilience in times of crisis; An agreement to temporarily liberalise certain road freight operations between the EU and Ukraine and Moldova entered into force in early July 2022.
Global bankruptcy and its potential on the coming years
European companies have suffered at least 100 billion euros ($110 billion) in direct losses from operations in Russia since Moscow launched its invasion of Ukraine, the Financial Times (FT) reported. A survey of major European companies showed that a total of 176 companies that have posted annual reports for 2022 and financial statements this year recorded various losses from their Russian operations, FT said. British, German and French companies recorded the biggest losses — upwards of 20 billion euros, according to FT.
Analysts interviewed by the publication say Russia’s recent decisions to seize control of European corporations suggest “more pain ahead” for companies that chose to remain in Russia. Since December, Russia has forced foreign companies leaving the country to sell their assets to Russian buyers at a 50% discount and charged them an exit fee of at least 10% of the transaction value.
According to FT, the three biggest oil and gas groups BP, Shell and TotalEnergies recorded 40.6 billion euros ($44.5 billion) in losses. But higher energy prices helped them report 95 billion euros ($104 billion) in profits in 2022, the publication said. More than half of the 1,871 European-owned companies operating in pre-war Russia have remained in the country after Moscow’s invasion of Ukraine, according to FT’s analysis of data from the Kyiv School of Economics.
*) The writer is an international economic, politics and security problems analyst. The writer had achieved master degree at the University of Indonesia (UI) in 2012 and previously he was took bachelor degree at the Jember University (Unej) in 1990.