Kiel study sees Russia's economy at the end of its reserves

The liquid assets of the Russian state fund have reportedly fallen from 6.5 percent of gross domestic product at the start of the war to currently 1.8 percent. Oil and gas revenues collapsed in the first quarter by 45 percent compared to the same period a year earlier. The federal budget deficit in the first three months alone exceeded the government's target for the entire year, according to the study.

At the same time, corporate debt in Russia has risen dramatically since the start of the war, as banks channeled resources into war-related sectors. The Kremlin is increasingly relying on off-budget financing, a rapid expansion of credit, and indirect support through the banking system to maintain military spending.

Bottlenecks in labor, technology, and production

The researchers emphasize that while Russia can still mobilize money for the war, it is hitting limits in terms of labor, technology, and production capacity. "Die grundlegende Einschränkung, mit der Russland heute konfrontiert ist, ist nicht der Zugang zu Geld, sondern der Zugang zu Arbeitskräften, Technologie und Produktionskapazitäten," said co-author Matthew Klein. Given a record-level labor shortage and sanctions, a higher-spending policy increasingly carries the risk of generating inflation rather than boosting military capability.

In parallel, dependence on China is growing. The People's Republic now accounts for roughly 35 percent of Russian foreign trade and is responsible for around three-quarters of the increase in Russian imports of sanctioned, critical military components since 2022. "Sie liefere den überwiegenden Teil der kritischen, zivil und militärisch nutzbaren Güter sowie der militärrelevanten Komponenten, die noch ins Land gelangten," the authors write. "Moskau sei in den Bereichen Handel, Technologie und Finanzen zunehmend von Peking abhängig, während China weiterhin frei sei, die Bedingungen der Beziehung zu diktieren."

Growing dependence on China

Co-author Alicia Garcia-Herrero sees a growing imbalance in this: "Der Begriff einer ‚grenzenlosen Partnerschaft‘ verschleiert eine wachsende Asymmetrie ... Russland hat einen wirtschaftlichen Rettungsanker erhalten, aber China hat an Einfluss gewonnen." Co-author Torbjörn Becker also called for renewed efforts to constrain Russia's shadow fleet.

Political recommendations from the authors

The authors argue that Russia's growing economic vulnerability opens a window of opportunity for more effective policy measures by the West. They propose stricter export controls – particularly with regard to Chinese suppliers – as well as new measures to reduce Russian export revenues. Schularick added that higher oil prices as a result of the war in the Gulf are likely to have only temporary fiscal effects.

Course of the war and diplomatic signals

In parallel with the study, Russia's war against Ukraine continues. In a drone attack on the eastern Ukrainian city of Pavlohrad, a residential building was damaged according to Ukrainian information; a fire broke out. At least twelve people were injured. In the southern Russian region of Krasnodar, a drone attack hit the Afipsky refinery, where a fire also broke out and a gas pipeline near the facility was damaged. Authorities initially provided no information on possible casualties. According to President Volodymyr Zelensky, a domestically developed Ukrainian missile also struck a weapons factory in the Russian city of Cheboksary.

Zelensky declared June 11 the official day of the Ukrainian drone troops and announced a further expansion of these capabilities. "Die Ukraine sei das erste Land der Welt, das eine eigenständige Teilstreitkraft für unbemannte Systeme geschaffen habe," he said. According to his information, since the drone troops were established a year ago, Russian targets worth almost 40 billion US dollars have been hit; attacks on military logistics and the oil industry deep in the Russian hinterland had been particularly effective.

During a visit to Estonia, Zelensky reaffirmed that a full and unconditional ceasefire is a prerequisite for serious peace talks with Russia. He spoke out in favor of international monitoring mechanisms as well as the involvement of Europe and ideally the United States in negotiations. Former NATO general Erhard Bühler meanwhile described the alleged threat to Russia from NATO cited by Russian President Vladimir Putin as the "greatest lie" of the war and criticized Zelensky for naming a military unit after the historical UPA, whose members had committed massacres against Polish civilians during World War II.

In European diplomacy, a possible opening is meanwhile emerging: according to Foreign Minister Johann Wadephul, an agreement between Hungary and Ukraine on the protection of minorities has brought the opening of further negotiation chapters in the EU accession process within reach. (Reuters)