The recent banking crisis in the US and Europe gives Russian President Vladimir Putin a means of bolstering his messaging about the Ukraine war while Russian banks remain relatively insulated from potential fallout.
Confidence in the American banking system deteriorated rapidly over the last week following the second- and third-largest banking failures in US history and the Swiss National Bank had to rescue the Swiss-bank Credit Suisse from default. Economists warned a bank of Credit Suisse’s size failing could spark an economic meltdown, including having an impact on Russian oil, but as people in Western countries panicked, Putin gained an opportunity.
“What Putin wants is a narrative of disarray in the US and in Europe, whether that disarray is January 6-style protests, political polarization or economic crisis,” Michael Kimmage, who previously held the Russia/Ukraine portfolio on the State Department’s policy planning staff, told Newsweek. “He just wants to show there’s a Western decline and that the West won’t be able to support Ukraine long term.”
“None of that has to be true, but that’s a narrative that he wants to put together and these kinds of events are definitely useful for the Russian public,” Kimmage said.
Since he ordered the invasion of Ukraine last year, Putin has denounced the West as a fading power and worked to strengthen ties with nations in the East, like China and Iran. It’s a message that he’s used to calm Russian fears over the growing number of sanctions that have been imposed by the West, and one that will likely be assisted by the West’s efforts to financially isolate Russia.
The Swiss central bank offered Credit Suisse a lifeline on Thursday, fighting off a bank collapse, as the risk of the bank defaulting grew. However, even if Credit Suisse failed, and led to a subsequent economic crisis across Europe, it “would have little impact on Russian banks or the Russian financial system,” Gary Hufbauer, a nonresident fellow at the Peterson Institute for International Economics, told Newsweek. After a year of sanctions and economic isolation, Russia’s banks are now “well insulated from the West.”
In June, the Russian president lambasted the US and its allies for living in the past “under their own delusions” that everyone else is “second-class,” calling the sanctions “crazy” and “reckless.” Last month, in an address marking the first anniversary of the war, Putin accused the West of trying to “distract” the public from domestic corruption by rallying behind the sovereignty of Ukraine and placed the blame for the conflict squarely on “the West and the Ukrainian elite and government.”
Although Russia may have some advantages to being cordoned off from the European banks, Roubini told Newsweek that it’s important to remember the country has already suffered a massive economic decline due to the war and the early impact of the sanctions.
As one of the world’s top three crude oil producers, Russia historically dominated oil imports. When the US and the European Union sanctioned Russian oil, global prices soared more than $120 a barrel amid concerns of a shortfall of supplies. Should a full-blown, catastrophic economic crisis break out, both Roubini and Hufbauer agreed that it would lead to another sharp drop in prices of oil and gas, further hurting Russia’s economy.
With Russia’s economy already in so much turmoil, “the rest is noise,” Roubini said.
Putin has claimed that Russia’s GDP only contracted by two percent in 2022, but analysts have warned that the Kremlin has used statistics as part of its “information war.”
“The Kremlin communicates heavily using cherry-picked forecasts, presenting them as facts and forgetting to mention that they are massively outside expert consensus,” Agathe Demarais, the global forecasting director at the Economic Intelligence Unit, wrote in a foreign policy analysis on Monday. “Moscow also delays the release of statistics that don’t fit its narrative.”
Demarais said it’s most likely that Russia’s GDP decline will be revised closer to three or four percent. Ideal GDP growth is between two and three percent.
Putin’s maintained support within Russia for the war on Ukraine but the Russian people are feeling the economic toll of the war. A February poll from the Moscow-based research group Chronicles found those who were economically impacted by the war were less likely to be supportive of it. Aleksei Miniailo, a Russian opposition politician who launched Chronicles previously told Newsweek the economic fallout of the war was starting to take a toll on Putin’s propaganda machine.
Despite promises of a quick and easy victory, Moscow has struggled to make substantial gains in Ukraine, including a failure to capture Kyiv, and been forced to mobilize 300,000 Russian men to join the war effort. Currently, Ukraine is deploying all its resources to defend Bakhmut in hopes that it will be successful in retaking the key territory by spring. But those ambitions have stressed Western officials, who say the bombardment could be unsustainable.
Kimmage noted that the optics of civilian suffering in Ukraine had damaging impacts on Russia, and so international attention on a global financial crisis could act as a distraction from those images.
“It’s not that Putin will get out of that problem with this particular crisis, but attention will focus elsewhere,” Kimmage said. “It’s not on Russia’s subpar military performance and it’s not the civilian suffering that Russia is causing, so it’s absolutely useful to Russia.”
With fears that ammunition could be depleted, it’s clear Ukraine will continue to require aid from its allies. But if Europeans become increasingly more concerned about their own finances, there could be a shift in public opinion on sending aid to Ukraine when constituents are struggling at home, opening up an opportunity for Putin to advance on the battlefield.
“The financial turmoil will weaken Europe economically, and that will make continuing to shoulder the war effort cost harder,” Alessandro Rebucci, an associate professor of international finance and applied macroeconomics at Johns Hopkins University, told Newsweek.
European frustrations over Ukrainian spending amid other financial worries would not be a new challenge for the EU. In the fall, roughly 70,000 people protested elevated energy costs in Prague, Czech Republic, while other demonstrators in Italy, Germany and Spain all took to the streets over similar concerns.
Despite those pressures, Kimmage and Rebucci said it’s unlikely that Western powers would sway from their support for Ukraine, given that the last year has indicated their positions on the war are not driven by economic factors but rather political considerations.
The recent banking crisis in the US and Europe gives Russian President Vladimir Putin a means of bolstering his messaging about the Ukraine war while Russian banks remain relatively insulated from potential fallout.
