• Economics
• United States
• Russia
• Agathe Demarais

For his part, Russian President Vladimir Putin wants to believe that he has restored Russia’s power to such heights that he is negotiating Europe’s future directly with the United States. Yet this is only part of the story. The Russian economy and state budget are under immense strain, and Putin knows that the war has become financially unsustainable. His most urgent objective, therefore, could be to get some U.S. concessions on the sanctions front.

Three financial warning signs are flashing red. First, the Kremlin’s traditional cash cow—Gazprom—is posting record losses following Moscow’s decision to close the gas tap to Europe. The firm used to bring in 10 percent of state revenues, so this is a significant shortfall. Second, Russia’s state-owned banks are increasingly reluctant to buy the country’s sovereign debt, raising questions regarding Moscow’s ability to finance its budget deficit at a time when sanctions curb its access to international markets. And third, new sanctions imposed by the Biden administration during its final weeks in the White House are biting: Russia’s liquefied natural gas plants in the Arctic have gone dark, and many Russian oil cargoes are idling for lack of fools willing to defy U.S. secondary sanctions.

To continue financing the war, the Kremlin has been drawing on the savings of its National Welfare Fund. Yet even the largest of reserves will eventually run dry, and the fund is no exception. Its liquid assets have shrunk by about 60 percent since the start of the war, although exact figures have been hard to gauge since Russia’s Finance Ministry shut down access to the relevant data. (This is a sure sign that alarm bells must be ringing in Moscow.) The Kremlin’s last-resort scenario—financial support from Beijing—is highly unlikely to materialize, which Putin surely knows. Since Trump’s return to power, China has been keen to avoid antagonizing the United States in order to avert a damaging trade war at a time when the Chinese economy is already struggling.

Moscow’s financial difficulties can only worsen, unless a sudden lifting of U.S. sanctions gives the Kremlin fiscal breathing room—by placing external debt and selling more hydrocarbons, for example. That is precisely what Putin is hoping to get from Trump, with as few concessions by Russia as Trump can be flattered into. Putin also knows that the longer the war continues, the higher the risks are that bleak economic conditions will fuel popular unrest (or, worse for him, a coup). If Trump wants to project strength, he would be better off playing the long game until Putin is in such a hurry to end the war that he makes far fewer demands.