This message continues my journey and tells the story of the current situation in Ukraine. Part I was a story and reflection involving my travels and personal observations of the journey. As I previously noted, there is still a lot of misinformation and propaganda regarding the Russian invasion of Ukraine. There are many stories and versions of why this event occurred; however, one sequence of events rings true.
This was not a spur-of-the-moment decision. The Kremlin has been planning this invasion for many years. One of the main catalysts was the conflict in the Balkans in the mid to late 1990s. Again, I remind everyone that this is not a historical piece, and I am not a historian. However, a single event during these conflicts angered Russia, particularly Putin. The declared independence of Kosovo from Serbia revealed to Putin how weak the Russian military was when he could do nothing to stop this. After an 11-week bombing campaign by the US (under the guise of NATO), Kosovo declared independence from Serbia unilaterally.
If you recall, Serbia was Russia’s staunch ally at one point. Case in point – I thought I was in Russia during my visits to Belgrade. The Kremlin has never forgotten this; in particular, Putin was seething. I ask you to go back and look at some of the language used by Putin, plus the fact that he brought this up during one of his recent discussions with the German Chancellor. Putin indicated what he was doing in Eastern Ukraine was similar to what was done in Kosovo. He succinctly stated that the West took land from Serbia and, therefore, he would take Ukraine.
However, this article will not continue with the politics of this conflict. Instead, I intend to demonstrate that Russia is entirely out of its league – economically – in fighting this war. As I have noted in previous postings, my background is in finance – commercial banking and financial markets – and therefore, I hope to bring a unique perspective to recent events. Before getting into economics, let me state there are two wars involving this conflict – the actual fighting taking place on the battlefields in Ukraine, and the second war is an economic war taking place in Washington DC, the capitals of Europe, and Moscow. This article is intended to give the average reader a broad overview of the economic war and how this is a very one-sided conflict.
First, let me provide a few broad economic indicators demonstrating that the Russian economy is the junior varsity and the US and the EU are the varsity teams. For my European colleagues, this is similar to the Premier League and the relegations of teams below that level.
In today’s financial markets, most countries measure their economic output using a term known as Gross Domestic Product (GDP). GDP is one (not the only) of the most critical measurements for looking at an economy’s good or bad performance. Most people involved in the financial markets like to see GDP rising because it means people are employed, more and hopefully better jobs are created, more taxes are paid, and workers have more money to spend. As a frame of reference, it is often quoted that consumer spending accounts for 70% of the US GDP.
The question for this article is how GDP impacts a country’s economic standing and ability to project its importance in the world. The answer assumes that the more a country produces, the higher the standard of living for its citizens will be. Now, this is where the numbers get interesting. And I promise not to go overboard with economic theory – I am a banker, not an economist.
Economic Strength
The following information is provided to give you an idea of the economic capabilities of the participants in the Ukraine conflict and how the Russian Federation is waging a war that its economy can’t support over an extended period.
Please analyze the following, as I will attempt to provide some perspective on what I have witnessed during my decades-long career, looking at various financial sectors in that part of the world. The following numbers – as of June 2022 – tell a much better story than any narrative I can provide:
| Country (States) | GDP (USD) | Population |
| European Union (27 members) | 16.6 trillion – USD | 447,206,209 |
| United States | 25.5 trillion – USD | 330,239,520 |
| Russia | 1.8 trillion – USD | 144,373,540 |
| California (US State) | 3.6 trillion – USD | 39,613,493 |
| Texas (US State) | 2.4 trillion – USD | 29,730,311 |
| New York (US State) | 2 trillion – USD | 19,299,981 |
Pretty interesting, huh? I ask that you pay particular attention to the size of the economies and the populations needed to produce the amount of goods and services. For example, the numbers indicate that Russia has almost five times the population of Texas, yet its total economic output is 25-30% less than what Texas produces. This tells you how inefficient the Russian economy is, which leads to the next logical question. Why would any NATO military planner think the Russian military is any better at their jobs than the average worker in the private sector?
The might of the Russian military is based on a myth. This fact has been validated by the results of the war in Ukraine, in which the Russian army has not realized any of its stated goals before the invasion. When looking at Russia’s economy, I always have the same question or thought. Can you name one thing Russia produces (not including natural resources) that the rest of the world is clamoring to buy? Is it – watches, computers, mobile phones, automobiles, or other luxury brand products? I have a hard time equating Russian-made and quality. An old Russian saying goes like this – they pretend to pay us, and we pretend to work. Does that sound like a motivated or productive workforce?
What jumps out (to me) is that the US and the EU can bankrupt Russia much like President Ronald Reagan did (back in the 80s) during the soviet times with increased military spending. If the US and EU policymakers pursue this path, they can put Russia in an economic vise and slowly squeeze the Russian economy. The Russians cannot keep up with the military spending of the US and the EU.
The US and EU economies are 23 times the size of the Russian economy – this is staggering. This is one of the reasons I believe the Russians are fighting way out of their league. The Russian economy is comparable with Mexico’s, with one exception – they have weapons of mass destruction. If I were a betting man, I know where I would put my money.
The Ukrainians have the skill and the will to defeat the Russians on the battlefield and let’s hope the US and the EU have the political will to inflict significant harm on the Russian economy.
I freely admit the 30-year relationship between Ukraine, the US, and the EU has always been open to abuse. It is much like my consulting career over the past 25 years – on occasions, my clients (Central Banks and Ministries of Finance) – did not fully understand what they needed or wanted from the consultants they were working with. In my opinion, that is inevitable when transferring knowledge and new ways of doing business. As a result, I always thought it was my job to help them understand there was a more productive way of doing things, and I was there to help. This is what Ukraine has hopefully realized: its survival depends on working with its partners openly and transparently.
I am going to end this message with an optimistic prediction. The supporters of Ukraine have gradually come to realize this is part of a broader confrontation. The time for giving Ukraine enough to survive is a poor strategy and a hindrance; to this point, this is what Biden, Scholz, and Macron have been willing to provide. This piecemeal strategy needs to change.
Under Putin, Russia is a corrupt society and will never be a reliable partner. I know this first hand. I have observed that Russian companies had no rationale or incentive to provide accurate and reliable information regarding their business dealings. I have seen this when looking at financial records where there were always two sets of books — one for the tax authorities and another for perpetuating financial fraud. I always looked at Russian-furnished information with a high degree of professional skepticism. The ownership of these companies was so opaque that you never knew who the actual owners were and how they obtained their wealth. Let me reiterate – most, if not all, of their wealth was not obtained the old-fashioned way – in other words, they did not earn it legitimately.
Imagine the hundreds of billions (trillions?) of dollars the US and the EU have spent trying to monitor and contain a belligerent Russia since WWII and how much more productive that money could have been used elsewhere. The resources needed to stand up to this menace (right now) are a drop in the bucket compared to what has been wasted over the past 70 years of pursuing an appeasement strategy. US Military General George Patton was absolutely correct in assessing that the Allies should proceed to Moscow and take care of what he knew would be a problem in the future. The task now for the democratic world is to deliver a knockout blow to an international bully.
I think the words of the former foreign minister of Poland and now an EU lawmaker, Anna Fotyga, are appropriate: Russia has not changed over the centuries. It is driven by the same imperial instincts, repeating the same scheme of conquest, genocide, and colonization and then seeking a silent acceptance of the status quo of bribing the international community through a mirage of economic cooperation or the illusion of a vast Russian market. The free world cannot continue to be misled into thinking that Moscow is a part of the solution to any global problems.”
As stated in my previous posting, I intend to return to Ukraine to help where I can when this war is over. To the international donor community – I welcome any opportunity where my skills and experiences are needed. Slava Ukraine!
Prepared by Terry L. Stroud – February 2023
