21 June, 15:39
There is one project that, in recent years, has fed the Kremlin more reliably than oil and gas: the war.
War not as a political tragedy, not as a catastrophe, but as a business venture, a joint-stock company with a transparent model. On the input side, cheap if badly rusted Soviet stockpiles, the cheap blood of contract soldiers and convicts, a fat oil rent. On the output side, territory, fear, a society mobilized under chauvinist slogans, and a colossal flow of money seeping into the right pockets.
At first the company paid its dividends on schedule. Today it has entered its terminal phase. And the most curious part is not that it is loss-making, but that it keeps being pumped with money precisely because it is loss-making.
Begin with the symptom the Kremlin hides behind fairy tales about "world-beating" S-400s swatting drones like flies. The Russian military analyst Aleksei Chadayev, a thoroughly system man, is sounding the alarm: the entire defense of the rear is a rusted colossus on feet of clay. The Kremlin believed that big Iranian mopeds would do for everything and never bothered to develop autonomous mid-range drones of 150 to 200 kilometers, lost in the fantasy of remote control in a country where the connectivity simply does not exist. The result was foreordained. Ukraine has pulled ahead on range and on autonomy alike, and Ukrainian air defense handles the Russian "Gerans" ever more confidently, methodically raising its kill rate.
Then comes pure kinetic idiocy. The protection systems were cobbled together at random, each oligarch bolting onto his own refinery whatever he could, while interceptors are still forbidden to carry a warhead. The logic is lethal in the most literal sense: a Russian drone or gunner downs a Ukrainian UAV by ramming it, the machine carries on for another kilometer and a half and falls almost intact, fully armed, straight onto the grounds of a fuel depot, where it detonates to maximum effect. Mobile fire teams huddle right up against the installations because they have no way to detect a target in advance. Radar cannot see what flies below fifty meters, and Ukrainian drones creep along the lowlands. Turn the radar's sensitivity up and it goes mad with flocks of false targets, birds and rubbish. Turn it down and it lets the real ones through. Ukraine closed this gap long ago with a network of acoustic sensors; Russia has nothing of the sort, not even close. And against strikes from the water, against Novorossiysk and St. Petersburg, there are no solutions at all: the drones arrive right at the pier.
The interceptors themselves are raw, and to bring them to a usable state you need thousands of cheap mock drones for the test ranges, which also do not exist. Chadayev braces himself with his Z-patriotic "work on, brothers" and calls for "repelling the strikes on the rear," but it sounds like advice to a pauper to stop being lazy and go earn a million dollars.
Remember that rear. Because this is where the central economic paradox of the whole construction lies hidden. The war has begun to devour its own feeding base. The burning refineries are not flashy clips for the feed; they are the degradation of the very oil rent that finances the war. The most profitable project of prewar Russia, oil and gas, is now being torched to feed the unprofitable project of war. The snake is eating its own tail, and Chadayev's material explains why this will go on for a long time: the protective architecture is structurally incapable of sealing the rear, however much you pour into it.
And pour they do, generously. First-quarter military spending reached 5.9 trillion rubles, 30 percent more than the same quarter a year earlier, when it stood at 4.5. The growth came above all from the classified line, which leapt 43 percent, from 3.4 to 4.9 trillion. Of the quarter's 12.8 trillion in total federal spending, an unprecedented 38.2 percent was classified, and under the budget law roughly 85 percent of that darkness goes to the military.
The numbers were assembled and published by Janis Kluge, and they mock the promises. The Kremlin planned to squeeze the war down to 6.2 percent of GDP against last year's 7.8, yet in a single quarter it burned through 2.5 percent of the full year's expected GDP. The military swallowed 46 percent of all budget spending. Nearly every second ruble spent went to the war.
But the real horror lies not in the spending, it lies in its ratio to revenue. New oil sanctions, a strong ruble and a slowing economy yielded just 8.3 trillion in taxes for the quarter. Which means that between January and March the war consumed two-thirds of all budget revenue. Two-thirds.
The closure of the Strait of Hormuz and the war in the Middle East will toss Moscow something, but the effect will be modest and temporary, and it will not come close to the extra 3 percent of GDP that will be needed if spending really climbs to 9 or 10 percent. It is entirely possible that the Finance Ministry simply shifted part of last year's spending into this one, so as not to disgrace itself against its own deficit targets. And against this backdrop Putin imperturbably fixes the army's authorized strength at 2,399,130, a million and a half of them servicemen, as though the problem were the staffing table and not the question of who pays for all of it.
And it is paid for now with debt, and here the story turns genuinely diagnostic. The yield on Russian bonds is climbing toward annual highs, around 14 to 15 percent on the ten-year OFZ, because the market is pricing the risk, and the price keeps rising. The cost of servicing the debt has swollen to nearly 9 percent of all federal spending, double the 2021 share. The deficit today is covered almost entirely by borrowing, because the cushion is gone: the liquid part of the National Wealth Fund has shrunk by a factor of two and a half, and currency reserves sit at a multi-year low. Borrowing abroad is impossible under sanctions; even China has slammed the door on yuan-denominated bonds. A fresh law allows the state debt to grow without touching the budget law, which is to say the lid has been formally lifted off the pot.
Why are these the symptoms of inevitable catastrophe?
For the humanists, let me put it in the language of theory. Giovanni Arrighi described the autumn of any cycle of accumulation by a single sign: the system stops expanding materially and begins to sustain itself financially, borrowing from the future at an ever more extortionate rate of interest.
This is exactly what we are watching. The Kremlin no longer extracts a profit from the war; it borrows to keep the war going, and pays for it with rising yields, with the eating of reserves, with inflation. The bond market has simply put a price tag on terminal risk. Autumn is not a hypothesis. Autumn is in the quotes.
And now the central question. It is customary to assume that Putin is stupid and short-sighted enough not to see his company folding, and so keeps shoving money into it out of inertia.
The diagnosis is nearly right, but one word needs replacing. Putin sees everything. He simply can no longer get out of the process.
Blindness has nothing to do with it. The trouble is that this enterprise, "Aggression Against Ukraine," has no stop button that would not mean immediate bankruptcy. The war is not a line item in the regime's expenses, it is its legitimizing project and its redistribution machine at once. To halt it is to collapse a war boom that is wildly profitable for the shareholders, to send demobilized men back to impoverished regions without their payments, to cut off the coffin money now pumping live cash into the depressed periphery, and to expose the very political contract the war itself glued together. So they are eating through the last of their financial stability not out of stupidity. They are dousing the fire of war with gasoline, because the alternative to this madness is to declare default right now.
And here it is worth dissecting the phrase "the profitability of war."
For an enterprise like the joint-stock company "Russian Federation," war is a ruinous business, and it has long been deep in the red: costs strain vertically upward, the return runs downward, Russia is eating itself for lack of any other source of income.
But as a private trough for the silovik-comprador bloc, for the Rotenbergs, for the defense subcontractors, for the keepers of the classified line, the war was profitable from the very first day and remains profitable to the point of obscenity. That is why the investment never stops.
Putin's elite does not put its own money into the war. No. They put in the money of the natives of Moscow's colonies, the taxpayers' funds, the money of future generations by way of debt, and the lives of the mobilized, and they skim the foam off this colossal flow for themselves.
The classified share of the budget, swollen to 38.2 percent and jumping 43 percent, is the fingerprint at the crime scene: the more of the marginal ruble that vanishes into the dark zone, the more of it settles with Putin's elite.
Losses nationalized, profits privatized.
Russia is going bankrupt while its controlling shareholders, at that very moment, collect dividends of cosmic proportions.
So the most honest formula is this. The joint-stock company "RF" is not "a firm that fails to notice its own bankruptcy." It is a firm whose management is personally enriched by the insolvency proceedings, and is therefore vitally interested in dragging the doomed affair out for exactly as long as anything is left in it to carry off. The terminal phase is not denial. It is the butchering of the carcass of a dead bull that, out of sheer momentum, is still walking.
One caveat, so as not to mistake the wish for the inevitable. The terminal phase, in Arrighi's sense, means the model is exhausted and can continue only by consuming its own substance. That is by no means the same as claiming the collapse will come tomorrow. The system is capable of limping along for a good while yet, cannibalizing everything else for the war's sake: civilian industry, the ruble, the roads, the hospitals, the demographics.
The Hormuz oil window is, for the moment, tossing kindling into the fire of war. But that does not mean it too will close next week.
The Kremlin's main resources are exhausted, and that means every further day of war is bought at the price of the future, and the bill for it has already been issued, only the payment has been deferred onto descendants already condemned to poverty.
And meanwhile, as the regiment that believes in a nuclear Santa Claus approves staffing tables and counts its classified trillions, Ukraine's autonomous mid-range drones are methodically turning the Russian fuel system to ash. This is the very case in which the engineers defeat the shamans. And a burning fuel depot is not just a fire. It is a loss billed to the Kremlin's most profitable project by the hand of the one who unleashed this senseless and useless war.