NEW YORK (TheStreet) -- Russian President Vladimir Putin's relentless ambition has raised his nation to prominence. Russia has become an international player in the geopolitical game of chess. There's a problem for him, however.
Putin has attempted to impose Russian interests first in the Ukraine and now in the Middle East. As a result, he is gradually pushing Russia closer and closer to default, just as the arms race with the U.S. during the Reagan years helped bring about the collapse of the Soviet Union.
Russia Can't Compete With the U.S.
If you take in all the angles, Russia is playing a game it simply cannot win. Russia's gross domestic product in 2014 was $1.86 trillion, according to The World Bank. That's less than the state of California, which had gross state product of $2.312 trillion! Russia's population is only slightly larger than Japan's. And Russia's average GDP per capita is less than Turkey's. Does Putin really believe that Russia can compete in an arms race with the U.S.? The U.S. economy is still the world's largest, at roughly eight times the size of Russia's. And it has more than twice the population. Realistically, there is no competition.
Putin's Wars Cost
Of course, that rather evident fact hasn't deterred Putin from boosting military spending. Military spending is now at levels not seen since the days of the Soviet Union. (Yes, that Soviet Union, which was eventually dissolved and bankrupted.) It's one thing to interfere with Ukraine, a country close to home. But it's quite another to begin to engage in strikes in the Middle East.
If the latest tensions between the U.S. and Russia escalate, what can we expect? Certainly, more proactive interventions from Russia that will dearly cost Russia's battered economy. And which, of course, Russia can't afford to pay.
The real cost of Putin's war games and military buildup is approaching 20% of GDP, according to a recent Bloomberg article analyzing Putin's war machine. With annual GDP growth of -4.6%, dwindling income and 15% inflation, that's a recipe for bankruptcy.
Russia Can't Spend Its Way Out
Some might argue that the boost in military spending could eventually bring growth back into Russia's economy. But fiscal stimulus only works when there is low inflation. Then, the government could borrow cheaply at low interest rates. But when yields for Russian bonds are at 11.3% and inflation is skyrocketing at 15% annually, the cost of borrowing isn't cheap. When the government spends under those conditions, it can only lead to economic deterioration. And that is exactly the path for Russia at the moment.
Path to Default Will Be Gradual
At the moment, Russia could still fund military spending, though just barely. That means that default in Russia is not imminent. But military interventions seem to have become Putin's tool for survival. That suggests that military spending is likely to surge even as Russia's means dwindle.
Perhaps the best indicator of Russia's economic future is the price of credit default swaps. Although they're off their highs seen in February, the are trending higher again. (You can see map the probabilities of default for different countries using this tool at Deutsche Bank's research site.) This illustrates just how Russia is slowly but consistently, through military spending, advancing toward default. Default won't come today, and probably not tomorrow, but it will come eventually unless Putin changes his strategy.