"The Military Mobilization Order is a Sword of Damocles"... Could it Become Putin's Self-Defeating Move?

Oil Price Drop and Western High-Intensity Sanctions... Backlash on Russian Economy

Russian President Vladimir Putin. (Photo by AP)

[Asia Economy Reporter Yujin Cho] Russian President Vladimir Putin's mobilization order is expected to act as another headwind against the Russian economy, which is already staggering under Western sanctions. This is because mobilizing 300,000 troops requires a large-scale national budget. There are also concerns that if the relatively resilient Russian economy during the war suffers a shock, President Putin's support base could collapse.

The U.S. Wall Street Journal (WSJ) reported on the 28th (local time) that as Russia's invasion of Ukraine surpasses seven months, the military finances needed for the war are being depleted.

With President Vladimir Putin deciding to summon more than 300,000 reservists, new funds are needed to pay for supplies and training, but there is no budgetary room to allocate funds for the mobilization effort.

Moreover, as young people flee abroad to avoid conscription, the Russian economy faces new challenges such as labor shortages. Since the outbreak of the war in February, high-level talent has already been leaving the country, and this mobilization order could significantly reduce Russia's young workforce, threatening the future Russian economy. Most of the Russians currently fleeing abroad are identified as highly skilled individuals with higher education.

Janus Kluge, a Russia expert at Germany's International Institute for Strategic Studies, said, "The mobilization order is like the 'Sword of Damocles' hanging over every Russian household," adding, "It will undermine the optimism of average Russian consumers."

Another crisis factor is that energy exports, which have supported the war effort so far, are not smooth. Neil Crosby, chief analyst at OilX, said that due to Western embargoes, Russian crude oil exports decreased from 4.8 million barrels last month to 4.5 million barrels this month.

Russian crude oil is already being sold at a discount of more than $20 per barrel, but the rise in the Russian ruble's value has complicated the payment calculations for oil exports, resulting in a deficit in the Russian federal government budget last month. Accordingly, the budget surplus for this year decreased from 48.1 billion rubles at the end of July to 13.7 billion rubles at the end of last month. According to the International Financial Institute, 45% of the Russian federal budget revenue comes from energy exports such as oil and gas.

Although there is no evidence that Russia's economic collapse is imminent, the news of military mobilization has thrown the Russian industrial and financial investment sectors into panic. The WSJ reported that the Russian domestic stock market is severely shaken, with double-digit drops due to the mobilization order. Since the announcement of the military mobilization order, Russia's main stock index, the MOEX index, plunged 16.29%.

Ukraine is also suffering damage comparable to Russia, but the difference is that large-scale aid from the West continues. The United States recently announced an additional $1.1 billion weapons support package for Ukraine. This includes 18 High Mobility Artillery Rocket Systems (HIMARS), 150 Humvee vehicles, 150 tactical vehicles, and drone detection systems.

Western sanctions against Russia are also ongoing. After the merger votes held in four occupied Ukrainian territories, Western countries have announced additional sanctions.

James O'Brien, U.S. State Department Coordinator for Sanctions Policy, said at the Senate Foreign Relations Committee that "there will be more sanction packages," targeting comprehensive areas including finance, technology, human rights, energy, military, and technology used for commercial purposes. He warned, "We will work with European allies to put additional sanctions on the table."

The European Union (EU) also announced measures on the same day as part of additional sanctions against Russia, including a price cap on Russian crude oil and import restrictions worth 7 billion euros.

Ursula von der Leyen, President of the European Commission, held a press conference in Brussels and said, "We do not tolerate fake referendums or any attempts at annexation held in Ukraine, and we are determined to make Russia pay the price for such escalations." She added, "The new sanctions will hit the Putin regime and make it more difficult for them to continue the war."

According to a draft obtained by the U.S. political media outlet Politico, the additional sanctions package against Russia aims to collapse the Russian steel industry and deprive the Russian military of key technologies.

It includes the legal basis for introducing the Russian crude oil price cap agreed upon globally by the Group of Seven (G7) countries, as well as import restrictions worth 7 billion euros. Key technologies such as semiconductors, aviation, and specialty chemical raw materials to weaken Russian military power are also included in the export restriction list. Providing architectural and engineering services or legal and IT consulting to Russia is also prohibited.

Additionally, individuals such as senior officials in the military and defense industry, musicians, and arms dealers have been targeted with entry bans and asset seizures. The sanctions list includes Alexander Dugin, Nikolai Rastorguev, and Allen Rushnikov, the largest shareholder of Kalashnikov. This sanctions package will be discussed at a meeting on the 30th and will be implemented if unanimously approved by the 27 member countries.

◆Terminology

Sword of Damocles: Originates from the image of a sword hanging by a single horsehair over a king's head from the ceiling. It is a metaphor for increasing danger as power grows stronger. It became famous when President John F. Kennedy mentioned the nuclear threat in his 1961 United Nations speech.