Cracks In Russia’s War Economy

Though Russia’s war machine is slipping, the proposed peace plan by the United States does not take advantage of the economic pressure on Moscow, asking Ukraine to make several concessions. (Photo by Andrew Harnik/Getty Images)

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Russia’s war machine is showing unmistakable signs of strain. After nearly four years of fiscal overreach caused by injecting trillions of rubles into the Russian economy, the Kremlin can no longer disguise its distress. American envoys met in Geneva on Sunday, November 23^rd with Ukrainian officials to discuss a permanent ceasefire, however, this is no time to go easy on Moscow, as U.S. sanctions seem to be working.

Abroad, Washington is tightening the sanctions noose, striking at oil revenues that keep Moscow’s war machine running. On the battlefield, Ukrainian drones are systematically attacking Russian refineries and petrochemical plants, which generate the revenues necessary for the war efforts. At home in Russia, widening budget shortfalls will make it harder to incentivize volunteers. As the finances falter, so do Moscow’s strategic options. This reality is what the 28-Point Plan as originally proposed completely missed. By making impossible demands on Ukraine, Steve Witkoff and other architects of the plan ignored the hard facts and failed to leverage the current pressure the United States is exerting on Moscow. To compel the Kremlin to finally negotiate in earnest, Washington should keep that pressure on, get the sides talking, and press for real compromises, hopefully arriving at terms both can agree to in the interests of peace. Forcing Ukraine’s surrender, however, is not in U.S. strategic interests.

Global Sanctions Squeeze Moscow’s Oil Lifeline

Earlier this month, President Donald Trump gave the green light to a long-delayed Russia sanctions package currently before the House of Representatives. The measure is crafted to squeeze countries that continue to bankroll Moscow. The goal is straightforward: cut off the revenue streams that sustain the Kremlin’s war in Ukraine and hasten the erosion of Russia’s wartime economy.

This marks yet another escalation in Washington’s gradual economic siege of Russia. As recently as October, the Treasury Department blacklisted Rosneft and Lukoil, along with dozens of their subsidiaries, and ordered all transactions wound down by November 21. This move targets the heart of Russia’s energy system. Rosneft and Lukoil account for nearly half of Russia’s crude exports and a major share of federal revenue.

The Russian energy sector, despite Vladimir Putin’s wishful thinking, is under mounting pressure. By September, total fossil-fuel revenues had fallen 4 percent to about $629 million per day, the lowest level since the invasion began, while oil and gas income plunged 26 percent year-on-year. Seaborne crude was the lone outlier, edging up 1 percent in revenue and 3 percent in volume. October erased even that sliver of relief. Total revenues slipped again to roughly $603 million per day, and seaborne crude stalled at about $206 million per day, with no deliveries from Rosneft or Lukoil recorded in the final week of the month.

The pillars of Russia’s crude export market, China and India, have become the prime targets of secondary sanctions. In October alone, China paid an estimated $4.2 billion (currency converted) for Russian crude, while India purchased roughly $2.9 billion. Yet the ground is shifting. In the final week of October, China’s state oil giants — Sinopec, PetroChina, Sinochem, and Zhenhua Oil — canceled spot cargoes and froze new purchases. Pipeline deliveries to northern China, however, continue uninterrupted. India is following a similar trajectory. Major refiners — Reliance Industries, Bharat Petroleum, Hindustan Petroleum, Mangalore Refinery and Petrochemicals, and HPCL-Mittal Energy — have already halted direct purchases from Rosneft and Lukoil.

Budget Deficits Deepen as Mobilization Costs Spiral

To keep the flow of volunteers to fight Ukraine steady, the Kremlin must keep money flowing as well. Lots of money: that is the core of its war model. In the third quarter alone, more than 135,000 Russians signed contracts with the Defense Ministry, bringing the year’s total to almost 263,000, with roughly 29,000 recruits each month.

The numbers mirror previous years, as Russia continues to fight a war of attrition and treats manpower as expendable. The army’s tactic is similar to World War Two: to push forward endless waves of soldiers, absorbing extreme losses in exchange for marginal advances, and pay families postmortem compensations. Sustaining this strategy depends entirely on a continuous and costly stream of volunteers drawn in by increasingly lavish payments.

But that model is becoming impossible to maintain. Enlistment bonuses for new recruits now run about 2 million rubles, or $20,000, straining regional finances. Since October, over two dozen Russian regions have slipped into deficits. Under mounting pressure, governors have begun slashing payments. Wealthier regions like Samara and Tatarstan cut bonuses from 3.6 million rubles and 2.7 million rubles down to the federal minimum of RUR 400,000. Less prosperous areas such as Bashkortostan and Mari El have followed suit, reducing payouts from RUR 1.6 million to RUR 600,000 and from 2.6 million to RUR 400,000, respectively.

Russia’s Endurance

The original terms of the peace deal that Secretary of State Marco Rubio brought to the Geneva talks missed these calculations entirely. Moscow’s war machine is losing momentum at both the federal and regional levels. Sanctions are biting into Russia’s energy sector, draining the oil revenues that bankroll the Kremlin’s campaign. At the same time, regional budgets can no longer absorb the soaring enlistment bonuses needed to keep the recruitment pipeline open.

Allegedly drafted by Steve Witkoff and Putin’s envoy Kirill Dmitriev, the original 28-Point Plan assumed that Ukraine is running out of time. It included measures that would violate Ukraine’s sovereignty, and press Kyiv to cede territory not yet occupied by Russia, reduce its military from current levels by some 200,000 personnel to cap it at 600,000, and permanently renounce NATO membership — in effect, leaving Ukraine exposed to renewed Kremlin aggression once Moscow has had time to regroup, rest, and refinance its war. The sanctions regime against Russia is producing results, but they will only be effective if Washington keeps the pressure on. Even if we assume that the Ukrainian military was on the brink of collapse – which it is not – Russia would still have to run a race between victory on the battlefield and defeat at home. This is not a race it won in 1856 in the Crimea, in 1905 in Manchuria, in 1917 in World War One, or in Afghanistan in the late 1980s. Russia’s increasingly wobbly cash shortage and squeezed energy sector add up to a grim prognosis for Russia’s prospects.