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Ukraine’s vibe shift is bad news for Russia’s economy

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War in Ukraine

Ukraine’s vibe shift is bad news for Russia’s economy

As Kyiv’s battlefield fortunes change, policies long favoured by the west could now do real damage to Moscow

* Martin Sandbu
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!People shop for food at an outdoor market with makeshift stalls, surrounded by damaged buildings with large murals and broken windows

*Shoppers buy food at a makeshift market in Kyiv following a Russian missile strike this month. Despite the war, business expectations in Ukraine are improving

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Martin Sandbu

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If last year’s most consequential “vibe shift” was Donald Trump’s triumphant return to the White House, a strong contender for this year’s is surely the change in the relative standing of Russia and Ukraine.

Since Vladimir Putin’s full-scale war of aggression, Ukraine has mostly been seen as on the back foot. Admiration for Ukrainians’ bravery and Volodymyr Zelenskyy’s leadership did not change global policymakers’ overall impression that time was on Russia’s side, due to its sheer size and resources. Even among those helping Kyiv with money, weapons and sanctions, few have thought of more than levelling the playing field. This year, that has been changing. Both on the battlefield and in the economy, it is Russia’s grip that is seen to be slipping.

Ukraine’s extraordinary innovation in military technology is now undeniable. The much-quoted figure that Russia suffers 30,000-40,000 casualties a month at their hands has been internalised in governing circles around Europe. Estimates suggest that Russia has been losing territory (albeit marginally) for the past three months. The sudden demand for Ukrainian anti-drone warfare capabilities by US allies in the Middle East underlines Kyiv’s significant status upgrade.

So does its growing ability to attack Russia, including Moscow, whose residents can no longer pretend Putin’s war is not happening. Strikes on refineries have limited Russia’s ability to export. Operations against the illegal government of occupied Crimea have forced it to declare a state of emergency after blackouts and fuel shortages.

A similar shift is visible when it comes to Russia’s and Ukraine’s relative economic strength. It has been clear for some time that Russia has maxed out its economic capacity. Inflation — probably higher than official rates suggest — reflects that there are no resources left idle. The struggles of non-military industries to finance their operations show that the state has shifted as much labour and capital towards waging war as it can manage through normal economic policies, without resorting to all-out forced mobilisation.

Those policies are now running out of road. The deficit is slipping: the governme