One Month Into War in Ukraine: This Was Russia’s Biggest and Most Obvious Mistake

March 24 marks one month since the beginning of Russian military operations in neighbouring Ukraine, a conflict which has significantly raised previously high tensions between Moscow and the Western world and marks potential turning point in world order as the two have increasingly sought to decouple their economies. The war has seen over 1300 Russian military personnel killed in action and many thousands more wounded, but has also resulted in the capture of very large swathes of Ukrainian territory and the effective destruction of the Ukrainian Air Force, Navy and air defences leaving high prospects for faster Russian progress on the ground in the coming weeks. Russia’s military performance has been mixed, with the country nevertheless taking ground far faster than the United States could in Iraq or other countries have against similarly large and heavily armed adversaries as Ukraine. Much the same can be said of its economic performance, as denying Western firms the formerly deep penetration they had into Russian markets is likely to harm Western and particularly European economic interests as much as escalated economic sanctions harm Russia itself. While the Russian Rouble initially crashed under Western sanctions, reports that Moscow was considering selling oil to European countries in the currency led to its value quickly rising. One aspect of Russia’s performance, however, appears to have been a major and seemingly obvious error which is likely to cost the country heavily. 

Russia has throughout much of the 2010s run budget surpluses, meaning the treasury’s revenues exceed the state’s expenditures and allowed it to create reserves much of which were stored in foreign currency or precious metals. As of February 2022 these amounted to $643 billion - or close to a decade worth of military spending - which provided a key means of providing stimulus to the economy should it come under Western pressure. While these reserves remained a major asset for Russia that strengthened its position considerably in the case of confrontation with the West, Moscow made a key error of leaving the bulk of its reserves - some $300 billion - in banks overseas that could be affected by Western economic warfare. The result was that Western powers quickly froze over half of Russia’s hard earned reserves, leaving Moscow in a far weaker position than it would have been in otherwise and significantly reducing its ability to reinvigorate its economy with spending. 

Western powers freezing Russian reserves was far from difficult to predict, with multiple precedents set against countries which had previously been targets of Western economic warfare. The Bank of England, for example, has for years frozen almost $2 billion worth of Venezuelan gold reserves, which is expected to remain the case until a Western aligned government is returned to power in Caracas. Britain has also frozen Iranian funds for over 40 years, which Tehran may well never see returned to it. Similar cases can be seen across the Western world, including not only freezes but also outright appropriations of adversaries’ assets from Canadian government confiscation and sale of Iranian government owned properties to Belgium’s confiscation of Libyan government funds. Russia has not only seen a long period of high tensions with the West since 2014, but also had several months to prepare for a possible escalation of conflict over Ukraine as tensions with the West began to worsen from October 2021. The seemingly grave error was one committed not only by the Russian government, but also by the country’s elite who were very heavily invested in hostile Western countries resulting in vast sums and assets, ranging from luxury properties to yachts, being seized by Western governments in a massive and largely self inflicted loss of wealth. This alone amounted to tens of billions of dollars, with more Western countries notably Poland poised to seize more real estate and other assets owned by Russians. Russian investments across the non Western world, from Thailand and Indonesia to Latin America and Africa have seen no similar moves against them.

There remains a significant possibility that Russian assets which are frozen and in Western hands will never be returned. Western powers may well claim that appropriating them serves as compensation for Russian economic retaliation, or provide the funds to the Western aligned Ukrainian government as war reparations should Western courts deem this fitting. Canada's sale of Iranian assets to compensate victims of terror attacks, despite a very tenuous link to Iran, is one of many notable precedents. Russia will have not only denied itself a large portion of its wealth, but also enriched its adversaries should this be the case. The targeting Iran, Venezuela, Libya and other Western adversaries provided multiple warnings of the consequences of leaving assets within Western reach at times of high tensions, and Russia’s failure act on these is very likely to be its greatest single error of the Ukraine war. Invested into the military, even one tenth of the $300 billion lost could have served to reinvigorate key weapons programs such as the Skhval Class destroyer, Su-57 fighter or T-14, tank, among other less prominent examples, with Russia’s decision to prioritise a budget surplus over financing these and other projects having long stymied military modernisation. In fields in the civilian economy ranging from infrastructure to education and research and development, the benefits of $300 billion of investment could have been tremendous. With these funds now lost, Russia has been left without its reserves and without the many benefits that higher levels of government spending could have provided. 

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