Is Russia Actually Losing

In early July 2026, Russia's Deputy Prime Minister Alexander Novak got on a video call with Vladimir Putin to deliver the kind of update you really don't want to be delivering to Vladimir Putin. Despite the Kremlin's public insistence that everything in Russia is running with a substantial margin of resilience, Novak had to announce an immediate ban on diesel exports running through July 31st. This, you have to understand, is particularly embarrassing for Russia. Because, geologically speaking, Russia is mostly made of oil and it markets itself as an energy superpower. Novak went on to say that Russia would start importing refined fuel from abroad, including emergency gasoline shipments from India. For anyone who remembers 2003, this has strong Baghdad Bob energy. Mohammed Saeed Al-Sahaf stood in front of the cameras at the start of the Iraq war, insisting that American troops weren't anywhere near Baghdad, while the tanks rolled past behind him on live TV. Russian state TV has assembled its own version of the format. On air, troops are advancing confidently along the front line. Off air, in Moscow and in roughly half of the country's regions, drivers are queuing for hours for a rationed daily allowance of fuel. If you just stayed inside and watched TV, you'd believe that all is well. The managing of appearances runs to the top. In May, Russia held its annual Victory Day parade, the big red square affair that Putin uses to project military strength. This year, for the first time in nearly two decades, there was no military hardware in it. No tanks, no missile launchers, just soldiers and a flyover. Because rolling your strategic hardware slowly through an open square is unwise when the other side has drones that reach Moscow. Ukraine had drones over the capital that same week. So, Putin got himself a guarantee. Zelensky issued a formal decree declaring Red Square off-limits to Ukrainian strikes for the duration of the parade, publishing, helpfully, the exact coordinates in exchange for a prisoner swap a thousand from each side. The man who invaded to restore Russian greatness held his greatness parade with his enemy's written permission. The Kremlin called the decree a silly joke, which it was, though possibly not in the way that they meant. The cause of these shortages is no mystery. Ukraine has moved the center of gravity of the war away from the trenches of the Donbass and into Russia's refineries. Using drones that can fly 1,400 kilometers into Russian territory, Ukraine has taken out somewhere around a third of the country's oil refining capacity. Kiev's own general staff claims the number is closer to 43%. Independent energy analysts land nearer to a third, but either way, it's enough to get you rationed at your own gas stations in a country that exports oil for a living. And it isn't only refineries. Over the summer, Ukraine widened the campaign to the thing Putin prizes most – Crimea, annexed in 2014 and, until recently, the one piece of occupied territory where Russians could sunbathe and pretend the war was somewhere else. That pretense is now over. After weeks of drone strikes on power substations, oil terminals, and the ferries that supply the peninsula, Russian-installed authorities declared a state of emergency indefinitely. Civilian petrol sales were halted outright and cities went dark. The air raid sirens, meanwhile, have been switched off. Not because Crimea is safe. A senior local official explained that if they left the sirens on, they'd be sounding 22 hours a day and nobody would get any sleep. Residents suspect that the real reason is simpler. A wailing siren is bad for the tourist season, so the beaches at Yalta stay full while a short drive away, mobile air defence teams fire machine guns at drones over the rooftops. Tourists elsewhere on the peninsula spent their holidays stuck in traffic jams trying to flee over bridges that Ukraine has damaged, but pointedly not destroyed. One analysis suggests that Kiev is leaving the last one standing on purpose as an exit. The knock-on effects reach well past Crimea. To blunt the drones, Russian regions now routinely shut off mobile networks and mobile internet, which also, as it happens, switches off the card readers and the cash machines. So a drone alert three regions away can leave you unable to buy a coffee. And because there aren't enough air defence systems to cover everything at once, Moscow has to choose what to protect. It's been photographed lowering panzer missile systems by helicopter onto the roofs of Moscow apartment blocks, pulling cover off other sites to do it. This is what the parades are built to hide. A country that invaded its neighbour to project strength now can't reliably keep the lights on in the territory it invaded for and is rationing its air defences between its own capital and its own oil refineries. A war that the Kremlin assumed would wrap up over a long weekend has now run longer than the First World War with no end in sight. The numbers behind it are the kind that don't really compute. CSIS puts Russian battlefield casualties dead, wounded and missing at approximately 1.4 million people between February 2022 and June 2026, including up to 450,000 deaths. Russia has lost more soldiers in Ukraine than the United States has lost in every war combined since 1945, four times over. I came across a recent story about Russia rejecting the US claim that Ukrainian strikes inside Russia could help bring the war to an end. What's interesting is that different outlets framed the same remarks in very different ways. One high-factuality source emphasised the Kremlin's claim that Ukrainian attacks would only extend the conflict. Another high-factuality source focused instead on Peshkov's criticism of the White House, saying there was a fundamental misunderstanding in Washington. Same story, but two quite different ways of guiding the reader towards what matters. That's exactly the kind of thing I check with Ground News before relying on any single headline. Ground News is a website and app that pulls together reporting on the same story from outlets around the world and lets you compare how it's being covered. You can see the headlines side by side, check the bias distribution of the coverage, look at the factuality ratings of the sources and even see who owns the outlets behind the reporting. That context matters, especially in a war where the same development can be presented as escalation, strategy or diplomacy, depending on the outlet covering it. Ground News also has a blind spot feed which highlights stories that one side of the political spectrum is covering much more heavily than the other, so you can spot what may be missing from your usual news diet. Go to ground.news.pb or scan the QR code to get 40% off the Ground News Vantage plan, the same plan that I use. If you'd listened to the Kremlin's cheerleaders last year, you'd have believed that Russia had found a loophole in the laws of financial gravity. They were claiming that the economy was booming. This year, even the official government spreadsheets disagree. According to a June 2026 report from the Kiel Institute, the Russian economy contracted 0.3% in the first quarter, despite the government sharply ramping up spending. Moscow has cut its own 2026 growth forecast to 0.4%. That is not a typo, four-tenths of one percent, from a government that spent the last four years describing sanctions as basically decorative. The economist Torbjorn Becker describes it as a two-track economy. To keep inflation under control, Russia's central bank has held rates above 14%, while the government keeps pouring rubles into defense with the other hand. It's the macroeconomic equivalent of flooring the accelerator with the brakes locked on. The engine screams, the civilian economy chokes on the borrowing costs, and the car doesn't go any faster. Russia is not collapsing, not dramatically, and not on a schedule anyone could put a date on. The Kiel Institute's term for what's going on is structural exhaustion, which is a nice way of saying that the economy is running on fumes. They report that Russia's pre-war fiscal buffers are almost entirely spent, and the state is now engaged in a dangerous game of under-the-table financial engineering to keep its war machine from seizing up. It's not just Russian citizens who are expected to buy into the televised alternate reality. For the last few years, a strange pattern has emerged where certain Western commentators look at modern Russia and see a highly cohesive traditionalist paradise. They manage to look past the military draft, the collapsing infrastructure, and the rampant corruption, and see instead a spiritually unified nation bravely standing up to Western decadence. The highest profile example is when the YouTuber Tucker Carlson took a pilgrimage to Moscow in 2024 to interview Vladimir Putin. In the video, Carlson rode the subway, admired the decor of the train station, and visited an upscale grocery store where he priced out a week's shopping at $104 against the roughly $400 he and his crew guessed it would cost back home. He came away, in his own words, radicalized against American leadership. That's how I feel anyway. Radicalized. This grocery store diplomacy is not historically a new thing. In 1989, Boris Yeltsin visited a supermarket in Houston and was so stunned by the shelves of pudding cups and the total absence of a bread line that he went home and helped dismantle the Soviet Union. Thirty-five years later, an American walked into a Russian supermarket and had the exact opposite reaction. Progress, it turns out, runs in both directions, provided that you only ever visit the flagship store. Now, it's not that unusual for Americans abroad to notice that the bread is better, and this is mostly because American bread is horrible. Had Carlson gone to Paris instead, he'd still be wearing a beret and a string of onions around his neck to this day. At the time, plenty of people pointed out that judging a country's macroeconomic health from a supermarket next to the foreign ministry is a bit silly. The conservative writer Jonah Goldberg called the whole segment amazingly stupid and noted that Russia on a per capita basis is about a fifth as wealthy as the United States and that America's poorest regions are significantly wealthier than Russia. Russian GDP per capita sits somewhere around $13,000 to $15,000, while the US number is north of $80,000. So, of course, the bread is a bit cheaper in Russia. The traditional Christian values argument holds up about as well. Surveys show that religion plays an important role in the lives of about 15% of the Russian population, significantly lower than the equivalent US number, not higher. In fairness to Carlson, by the time he got to that Moscow supermarket, he'd already been through quite a lot. Sometime in 2023, by his own account, he was physically attacked in his bed by a demon. Something that he didn't make public until a documentary interview released in late 2024, in which he said that he woke with four bleeding claw marks across his ribs and shoulders left, in his words, by something unseen. Now, this isn't a theology channel, whatever the comments keep insisting, so we should probably consider the alternative explanations. And here we can turn, as we so often can, to Vladimir Putin. In his own autobiography, Putin tells a story about growing up in a St. Petersburg apartment block, where as a boy he once chased a large rat down a hallway with a stick. Now, to my younger viewers, this is what children did before they had mobile phones in Russia, anyhow. He cornered the rat and then, the rat having nowhere left to go, turned around, lunged at his face and chased him back into his parents' home. Hold on to that story, because we'll need it for later. But for now, it's enough to note that between Russian municipal plumbing, the general absence of pest control, and a head of state with first-hand experience of large aggressive rats indoors, there's a non-zero chance that the terrifying entity that Claude Tucker Carlson was, in fact, a rat, an Occam's razor. The people falling for the Potemkin supermarket tour are making the same mistake as the people reading Russia's official GDP figures. They're looking at the display case and ignoring the foundations underneath it. If we actually want to understand how Russia is paying for the war, we need to stop admiring the bread and go back to the depleted sovereign wealth fund and the bankruptcy statistics instead. Once you do that, the numbers get bleak rather fast. Russia went into this war with a serious rainy day account. For years, the Kremlin had funneled excess oil and gas revenue into its national wealth fund, a buffer built for exactly this kind of shock. At the start of the invasion, that fund's liquid assets sat at 6.5% of GDP. As of this April, they're down to 1.8%. The cushion is mostly gone. Without those savings, the government is burning cash at a rate that doesn't leave much room for manoeuvre. In the first three months of 2026 alone, Russia's budget deficit hit 4.6 trillion rubles. The official target for the entire year was 3.8 trillion, so they blew through their 12 month credit limit in 90 days. So, piggy bank empty, official budget already blown, how are they keeping the lights on in the tank factories? Well, by moving the cost off the books. The economist Matthew Klein, drawing on research by Craig Kennedy, lays out the basic arithmetic. Military spending is up and oil and gas revenue is down, and the shortfall has to come from somewhere. So, it's coming from everywhere. Higher taxes, spending cuts, more borrowing, and the steady sale of reserve assets, including the national gold. An energy superpower is selling its gold to cover the fuel bill. On top of that, corporate debt has ballooned since the war began, driven largely by state-controlled banks being ordered to flood military-related companies with cheap credit. The Kremlin has effectively commandeered the banking system to do through the back door what the budget can't do openly. And the state keeps these firms afloat by letting them simply not pay their bills. The government is sitting on a mountain of uncollected taxes and fees from the corporate sector, debt by any other name, just filed under a friendlier heading. It's a bit like a landlord letting a failing shop skip rent indefinitely and the shop owner using the money he didn't pay in rent to declare a record year. It works on a spreadsheet for a while, but eventually somebody needs to come up with actual cash to stop the building falling down. The bill is arriving. Overdue enterprise debt has climbed sharply and a meaningful share of all corporate debt is now flagged as problem loans. For a growing number of large Russian firms, the annual interest bill is bigger than their entire annual EBITDA, which means that the businesses are losing money at the raw operating level before you even get to the taxman or asset depreciation. At that point, company is a generous word for what you're looking at. It's an org chart standing on top of an invoice someone else is going to have to pay. Unfortunately for Moscow, the shock that finally tips this over isn't coming from the West. It's coming from their most important ally. Days before the full-scale invasion, Vladimir Putin and Xi Jinping signed a joint statement declaring a no-limits partnership. To a casual observer, that reads like two geopolitical heavyweights teaming up to rewrite the global financial system. But according to economist Alicia Garcia-Herrero, once you look at the actual trade data, this is by no means an alliance of equals. It's an increasingly lopsided arrangement and Russia is on the wrong end of it. China now accounts for roughly 35% of Russia's total foreign trade, up from 16% before the war. With European markets closed, Russia has become a captive supplier. Vast quantities of raw materials and one buyer able to take them at scale. Beijing knows exactly how much leverage this gives them. You can watch that leverage play out in real time with the power of Siberia 2 pipeline, the project meant to redirect gas that used to flow to Europe straight into China. Putin flew to Beijing in May specifically hoping to close the deal. He came home with more than 40 signed documents on everything from trade to nuclear security and nothing at all on the pipeline. China is perfectly happy to let Russia sit there while it keeps squeezing the terms. While Russia takes a haircut on what it sells, it's becoming completely dependent on China for what it buys, particularly for the military. The Kremlin likes to talk about import substitution, replacing western goods with domestic production. The customs data tells a very different story. Russia has mostly just swapped its European dependency for a Chinese one. Its military industrial complex now relies on China for the majority of its critical dual-use technology. Electronic components, CNC machine tools, the boring sounding stuff that actually keeps a war economy running. The economist Konstantin Urgorov went digging through the Russian's custom records to see exactly how that works. Take microprocessors. In 2021, most of the chips entering Russia were made by American companies like Intel and AMD. Today, those same western brands still make up the overwhelming majority of Russia's chip imports. The only thing that's changed is the paperwork which now routes the vast majority of them through China first. Beijing isn't replacing western technology, it's charging a toll on it. With ordinary consumer goods, China isn't bothering with the middleman act, it's just taking the market. Western appliance brands like Electrolux and Indesit have all but disappeared from Russian shelves, replaced almost entirely by Chinese made equivalents. China hasn't offered Russia a no-limits friendship, it's giving them a very patient landlord. Moscow is burning through men and money to fight a war of attrition and in the process it's mortgaged its economy to Beijing. The realization that sanctions are leakier than advertised and that China is content to keep the Russian war machine running in exchange for discount oil has started to worry European capitals. They are waking up to the possibility of having to fight a land war without American backup. If you assumed that Europe waking up to the prospect of fighting wars without American backup was setting off champagne corks in the boardrooms of US defense contractors, you'd be wrong. Through early 2026, with the conflict in the Middle East grinding on and Washington increasingly distracted, European capitals started doing the previously unthinkable, they opened their wallets. Germany's Chancellor Friedrich Merz took a match to decades of fiscal discipline and committed to borrowing more than 800 billion euros by 2030 to rebuild the military and the country's infrastructure. The target is defense spending of 3.5% of GDP by 2029 from a country that was spending about 1.5% as recently as 2023. Logically, the wealthiest nations on earth, all rearming at once, should send defense stocks through the roof. Instead, in March 2026, the NYSE ARCA defense index fell nearly 8% while the S&P 500 fell about 5%. The defense sector underperformed the broad market in the same month Europe announced the biggest rearmament since the Cold War. Analysts offered a few explanations. A lot of conflict premium was already baked into the valuations. The index had climbed more than 150% between 2020 and 2025, so the stocks were priced for a war before anyone announced one. Modern defense manufacturing runs on very long production cycles. You can't just flip a switch and double your output of Patriot missiles by next quarter. But there's a further reason the European checks aren't all being mailed to the United States. Europe has started to worry about what happens if it becomes dependent on American technology. If Washington now treats its alliances as transactional, then building your entire national defense around high-tech American jets and weapons systems starts to look less like a partnership and more like a subscription that can be cancelled with no notice. European officials have begun talking openly about American kill switches. The possibility that a US administration, perhaps one currently threatening to annex Greenland from a NATO ally, could restrict software updates or spare parts over a foreign policy disagreement and turn your air force into a very expensive collection of parked aircraft. There's also a growing suspicion that the doctrine itself is out of date. NATO planning was built around the 1990s Gulf War model, overwhelming expensive conventional force. In Ukraine, Russia's $100 million weapons systems are being turned into scrap by disposable drones flown by people holding a tablet in a tree line. Because European militaries lack the capacity to apply overwhelming raw force the way the Pentagon does, their baseline strategy has to look a bit different. As a senior British official put it to the Financial Times, instead of trying to match Russia tank for tank, Europe will have to thwart, create dilemmas and put up a kind of porcupine defense. The idea isn't to mead Russia head-on, it's to make territory so decentralized, prickly and expensive to invade that nobody bothers trying to swallow it. To get there, Europe wants to copy Ukraine's agile low-cost manufacturing. Ukraine went from a napkin sketch to combat-tested Flamingo cruise missiles in under 9 months and now builds them for roughly half a million dollars a piece, which is about a fifth the price of an American Tomahawk with double the range. German defense firm Diehl is now in talks to build the thing on German soil rather than wage years for a more expensive American equivalent that Washington hasn't yet agreed to sell. This raises a slightly awkward question that European treasuries are beginning to ask out loud. Ukraine and in its own way Iran have both shown that large numbers of cheap expendable systems can blunt, bankrupt or humiliate a far richer and more sophisticated military. A $100,000 drone that destroys a $50 million jet on the ground is not a fair fight and it isn't meant to be. So does Europe actually need fleets of expensive American fighter jets or is a good part of that spending less about deterrence than about sending a tribute to Washington to keep the security relationship sweet? Nobody phrases it quite that way at a summit but the arithmetic is doing the talking. Russia's nuclear arsenal, for its part, has been useless against every single thing that's actually going wrong for it. You can't nuke a drone shortage. There's a second, quieter point buried underneath all the alarm about the Russian threat. Russia spends enormous sums on its military and it still couldn't take Ukraine. Europe collectively already outspends Russia on defense and it's wealthier, more populous and further up the technology ladder. The country that was supposed to be capable of reaching the English Channel in a matter of weeks has spent four years failing to capture towns a two-hour drive from its own border, advancing by one CSIS measure at about 70 meters a day, which is slower than the Somme. The case for European rearmament is real but the case for outright panic assumes a 10-foot tall Russia that the last four years have not exactly delivered. The irony here is hard to miss. The US defense establishment spent decades lecturing Europe about spending more on its own military. Europe has finally started and is deliberately designing a force that runs without American weapons, built in factories that aren't in America. There's a persistent optimism among certain foreign policy commentators that this whole thing can be wrapped up with one neat executive deal. The logic usually rests on a psychological framework known as the cornered Putin theory. Diplomats who like this theory lean on that rat, the one from Putin's hallway, the one we filed away earlier. The lesson we're told is that you must never corner Russia or the cornered rat, a nuclear superpower, might do something drastic. There's just one problem with using the story as a diplomatic roadmap. The people citing it seem to have forgotten how it ends. In the story, the rat didn't negotiate and Putin didn't win. The rat attacked and Putin ran away and Putin, of all people, should have remembered that. By launching a full-scale invasion, he did the cornering. He backed Ukraine into a corner and waited for it to fold. Instead, it turned around and lunged. And four years later, it's Putin backed against the wall, running a war of attrition that's steadily dismantling his own economy, with no way out he'd care to explain on television. Once you work out who's actually cornered, Ukraine's reluctance to sign a peace deal makes more sense. It's not that Ukrainians are uninterested in peace, it's that they've learned deals with Moscow tend not to survive contact with the next Russian offensive. In 1994, Ukraine signed the Budapest Memorandum, handing over the third-largest nuclear arsenal in the world in exchange for explicit security guarantees from the United States, the UK and Russia. In 2014, Russia annexed Crimea and started a war in the Donbas. There was a ceasefire, an eight-year pause to rearm and then the rest of the invasion came in 2022. From Kiev's perspective, a settlement with Moscow isn't a peace treaty, it's a half-time. This has left Europe in an unusual position. As The Economist recently put it, NATO is simultaneously in the best and worst shape of its life, expanding, rearming and better funded than ever and, at the same time, hollowed out by the prospect of America walking away. In that environment, European planners are working out that they may need Ukraine roughly as much as If the plan is a decentralized porcupine defense to deter Russia, letting Ukraine fall would mean surrendering the most combat-tested part of the whole perimeter, which leaves the much-anticipated peace summit fairly dead in the water. Even if Putin wanted a diplomatic exit tomorrow, Europe has almost nothing to put on the table. It can't hand over Ukrainian territory and The Economist notes that the strongest inducement it can realistically offer is the promise of somewhat lighter sanctions later on. That is not a triumph you bring home to a domestic audience after four years, several hundred thousand casualties and an emptied national wealth fund. The Russian billionaire Andrei Melenchenko, currently eighth on Russia's Forbes list, recently laid out the actual options in An Essay for The Economist and a triumphant return to superpower status wasn't among them. He sketched five scenarios, most of them bleak. State collapse, a besieged North Korea-style fortress economy, a slide back to the periphery of the West as a poor relation or absorption into China's orbit as a supplier of raw materials and a strategic buffer. The man is not a dissident. The ammonia from his plants goes into munitions, which makes it all the more striking that the best case he can master is predictable. And the striking thing is how far up and down the country that verdict travels. It's exactly what The Economist at the Kiel Institute meant by structural exhaustion. A tour guide in Fedosa asked by The Economist what she wanted, put it slightly differently. No grand ambitions, no one trying to make things better, just the sun coming up in the morning and the tourists coming back in summer. The spreadsheet and the beach have reached the same conclusion. Vladimir Putin launched this war ostensibly to push back NATO and secure Russia's place as a fiercely independent great power. Four years on, Europe is running its largest military build-up since the Cold War and the Russian economy has been reduced to a discount fuel supplier to Beijing. You can keep a wartime economy looking healthy for a surprisingly long time by cannibalizing the civilian sector to make tanks and shells, but when the rainy day funds hit zero and your last remaining major customer is bleeding your margins, you're not an independent empire, you're a subsidiary. If you found this interesting, you should watch my video on whether OpenAI expects a government bailout next. Don't forget to check out our sponsor, Ground News, using the link in the video description. See you in the next video.