Last Sunday, the World Bank updated its economic forecasts for the countries of central and eastern Europe. Ukraine, which has lost almost five million of its 44m population in the last seven weeks, has been devastated and the economic figures are meaningless.

For what it is worth, economic output will be little more than half of last year’s figure and there has been such widespread destruction of infrastructure that recovery will take up to a decade even if the war ends soon.

How long the conflict lasts will depend on the resolve of the Russian Federation and the World Bank expects that its economic activity will collapse.

Sanctions

The sanctions imposed by the west are unprecedented and will cause a contraction of Russian GDP by 11% this year, foreign trade will decline by one-third and private investment by one-sixth, ensuring further GDP declines in future years.

There is a high risk of default on Russia’s sovereign debt, the rouble has collapsed, inflation is already over 20% and bank lending rates have doubled.

These impacts are considerably greater than the shock from the 2008 financial crash and the level of support for the war from the Russian population will come under strain. This is the purpose of sanctions and the undeclared objective is regime change.

From around $16,000 (€14,756) per head less than a decade ago, per-capita income in Russia had fallen to $12,000 (€11,067) before the war and will fall again to around $10,000 (€9,222) this year.

The more prosperous countries in western Europe have per-capita incomes four and five times the Russian figure.

The natural resource wealth of Russia has been stolen and misappropriated since the demise of the Soviet Union, while some other ex-communist countries with no natural resource wealth have done better.

The Putin regime has ruled Russia for over 20 years – he formally succeeded Boris Yeltsin in May 2000 and has reconfigured the state as an autocracy.

The hope is that Ukraine will resist long enough for the regime to crumble, and that Russia can become a normal country after Putin

Since the west has decided that direct military intervention in support of Ukraine is too risky against a nuclear-armed dictatorship, the hope is that Ukraine will resist long enough for the regime to crumble, and that Russia can become a normal country after Putin.

The World Bank forecast of an 11% decline in the Russian economy is based on the current sanctions regime. The International Institute of Finance has estimated that a total embargo on western imports of fossil fuels would cause a 30% decline in Russian economic activity.

Should the EU countries agree on this course and implement it for a sustained period, it is hard to see how Putinism will survive.

The current sanctions, and the dislocation in energy markets, will persist until the outcome is clear and European countries like Ireland must accommodate as best they can to high and unstable energy costs.

There have been incessant demands, most recently from the demonstration by truckers in Dublin on Monday, that the Government should insulate the public from higher energy costs.

The self-appointed group organising the demo called themselves The People of Ireland Against Fuel Prices, suggesting that the Government abolishes fuel prices altogether and not merely reduces VAT and excise duties.

At an aggregate level, no such flight from reality is possible: if imports have become expensive, no small importing country can insulate itself. Through no fault of anyone’s, domestic purchasing power has contracted. Opposition politicians can pretend that universal compensation for more expensive energy is feasible but they must know that more modest measures are all that is possible. The Government can no more control the import price of oil or gas than it can deliver cheap coffee or bargain bananas.

It may be feasible to smooth out the gyrations, at the cost of frequent mini-budgets, but there has been a major upward shift in energy costs and it would be foolish to pretend that it can be assumed away.

Temporary measures

Temporary measures that sacrifice tax revenue always appease lobby groups but there will be a reckoning when the budget has to be brought back into balance.

The European Central Bank is withdrawing support from Government bond markets, interest costs are already rising and there will be heavy costs in supporting Ukrainian refugees.

Ministers are reluctant to announce too many energy tax reductions, knowing that there will be no calls from the media for their restoration if world prices stabilise.

The next policy headache will be retail interest rates. The ECB meets in the first week of May to consider monetary policy. There will be no increase in official interest rates for now but it will come later in the year.

Government bond yields are already rising and mortgage rates will be next. The Government would be wise to resist calls for more fuel subsidies, and keep its powder dry for later challenges.