Vladimir Putin is all too aware that economic pressure brought down the Soviet Union as he is forced to hike defence spending and slash social benefits to fund his war in Ukraine, according to Western officials.
Despite each side hoping for a breakthrough, the war is set to “grind on” in eastern Ukraine, where Russian forces this week took the strategic town of Vuhledar, and in Russia’s Kursk region following a surprise Ukrainian incursion there.
Ukraine will be keeping a wary eye on November’s White House election given Donald Trump’s chilly attitude towards extending further US aid.
But President Joe Biden’s administration remains determined to leave Kyiv in the “strongest possible position” with the latest funding package, one Western official said.
Russian losses will continue at an average of 1,200 casualties a day, further straining the war effort given President Putin’s reluctance to widen mobilisation for fear of the impact on economic sectors where labour shortages are already rife.
Russia’s central bank last month hiked its key interest rate by a full point to 19%, highlighting the inflationary pressures unleashed by the invasion of Ukraine.
This week, draft budget documents showed the Russian government plans to increase state spending on national defence by a quarter next year to 6.3% of GDP, the highest level since the Cold War.
That will be more than twice the amount allocated for social needs, including pensions and subsidies, which is being cut by some 15%.
“So Putin knows his economy is under pressure,” the Western official said.
“He takes the advice of the central bank governor, because he is very well aware that this is what brought down the Soviet Union.
“But this is a very high interest rate, and it's not really addressing the underlying inflation, the critical shortages in componentry [caused by Western sanctions] and in manpower.”
The official stressed: “I'm not suggesting an imminent sort of financial crisis in Russia. What I am saying is that there is mounting economic and political pressure which will build over 2025.”
