In our latest Inside Out: Midweek Briefing on Russia, John Lough, Head of Foreign Policy at NEST Centre,speaks with Mikhail Kasyanov, former Russian Prime Minister, about his experiences negotiating with Ukraine in the early 2000s, Putin’s evolving attitudes toward Kyiv, the Kremlin’s current war strategy, and the financial and geopolitical pressures shaping Russia’s options today.

I can’t resist asking you about your experience of dealing with Ukraine as Russian Prime Minister. Your counterpart in the year 2000 was Viktor Yushchenko. What were the issues you were dealing with at the time?

Yes, that was a long time ago – and it was a very different time. I would say we were helping Ukraine work through the serious difficulties it was facing. Back then, Russia was seen – and saw itself – as a leading country building democracy and a market economy. Ukraine, meanwhile, was struggling with major economic issues – first and foremost, economic survival. One of the biggest problems was its gas debt to Russia, including unapproved and unpaid consumption of natural gas. That was a key issue in our bilateral relations. Trade was another.

I was fortunate that Viktor Yushchenko, a liberal and pro-reform politician, headed the Ukrainian government. Within a short time, we resolved a number of problems starting with the gas debt. I offered a ten-year restructuring plan, and the Ukrainian side formally recognised all debts, including those for unauthorised gas use. I also opened the Russian market to Ukrainian companies – we lowered tariffs on many goods. This allowed Ukraine to earn substantial revenues by exporting to Russian consumers and industries. The relationship was mutually beneficial, with good prospects for joint progress. We were also moving together toward European integration. That was a major goal for my government. 

Looking back at those days, how did you, as Prime Minister, perceive Ukraine at the time? Given the economic, cultural, and personal ties between the two сountries, was Ukraine still considered somehow attached to Russia? 

As head of government, I had a very clear view: Ukraine was an equal partner, a fully independent country. Russians and Ukrainians are very close – not one people, as Putin now claims, but two closely connected nations. But I see where your question is going – you’re pointing to a tension, and yes, there was one. President Putin didn’t share my view. In our conversations, he expressed frustration that I treated Ukraine on equal terms, especially when I negotiated mutually beneficial agreements with them. Still, that period was different. My government had significant independence in shaping economic policy and pursuing integration with neighbouring countries. 

How did Putin relate to Ukraine back then? I was told by a senior Ukrainian official at the time that he showed respect towards President Kuchma because of Kuchma’s past as the General Director of Yuzhmash.

Yes, President Kuchma had been the head of Yuzhmash, and Putin did respect people like that – senior officials, military leaders, experienced figures. He had just entered federal politics and didn’t yet understand the full weight and influence of those individuals.

Fast forwarding to last week, how did you interpret Putin’s comments about Ukraine? It seems that he’s sometimes honest and says what he thinks. The message to Ukraine was clear: you can carry on fighting, but you will lose more and more territory, and you won’t have a proper country left.

Regarding Putin’s recent statements on Ukraine, I think he’s losing his usual restraint and filters. Back then, he knew that President Trump still believed that a negotiated deal with Putin was strategically important. So Putin exercised patience, using that belief to his advantage.

Now Putin’s turning up the pressure. When he says Ukraine and Russia are ‘one people’ or asserts that any land where Russian soldiers set foot becomes Russian territory – that’s not just rhetoric. That’s psychological pressure on the Ukrainian government and society.

However, I think the situation has shifted since the St Petersburg Forum. He may already regret having said that. Events since then – particularly the US operation in Iran – have reshaped the landscape. The recent NATO Summit in The Hague is especially important. If you read the summit’s declaration carefully, you’ll see how it changes the context – and I believe it has already changed Putin’s thinking.

So you think he’s now in a rush and more aggressive because he has to act before the window closes?

Yes, but this was two weeks ago. Now Putin is in a different position. After the US air strikes in Iran he realised the Americans have the capacity to act decisively.

Then came the NATO declaration. First, it reaffirmed Article 5 – collective defence. Second, for the first time, it named Russia and terrorism the primary threats to NATO. That kind of language had never been used so directly in official NATO documents before. Third, the summit confirmed that long-term support for Ukraine would be institutionalised, built into the annual budgets of NATO member states. 

This is no longer mere political talk. It means ministries of defence across NATO will coordinate directly with Ukraine’s military as part of their budget planning. The United States signed that declaration too.

That’s a major shift – especially after Trump had previously downplayed NATO’s role. Putin is watching this closely. His perception of the global landscape is changing.

Let’s shift to the question of sustainability.  Some economists I’ve spoken to believe the Russian economy is in serious trouble and Putin should be looking for a way out. Others say he can continue fighting like this for a decade. How long can Russia keep fighting this war? What’s your view?

I don’t believe he can sustain this for a decade. Right now, over the last few months, Putin still feels confident. State finances are in relatively good shape, although revenues are already dropping due to falling oil prices and rising military spending. Military spending now accounts for 7–8 per cent of GDP and is still rising.  But this isn’t yet a crisis, not this month. At the moment, state finances are stable. But by the end of the year, the picture could change, especially if oil prices keep falling. Around 30 per cent of the Russian federal budget depends on oil revenues – from taxes and export duties. The budget was calculated with an expected Urals price of $70 per barrel, implying Brent at $80. But right now, prices are moving toward $60 per barrel for Brent, which would mean $50 for Urals. That would create a $35 billion shortfall in the Russian budget this year.

Putin spends about $150 billion a year on the war. A $35 billion loss wouldn’t be fatal, but it would be painful. Initial projection for the deficit was about 2 per cent of GDP. Now having this loss in revenue and increasing military expenditure the deficit is going to reach 5 per cent. It is not huge and Russia can cover that from the stabilisation fund – for now. But after that, they’ll have nothing left. And if Ukraine receives more support from the US, EU, UK, and Canada – which now seems likely – Putin will have to increase military spending even further.

There’s no other source to finance the deficit, except by printing money, which will lead to more inflation. That’s why I think Putin’s financial position will weaken significantly by the end of the year. That means pressure from both sides: declining revenues and rising expenses. By the end of the year, this could put real strain on state finances. 

Now Putin isn’t interested in real negotiations. He believes that he can win the war of attrition in a few months. He wants to simulate talks so as to please Tramp. That’s why he recently asked President Trump to pressure Ukraine into holding another meeting in Istanbul – to create an illusion of negotiations, but with no real substance.

We need to understand one thing: this war is about money, it’s only going on because there is money for it. Every soldier on the battlefield is there for money – it’s a paid army. It’s not just about tanks and ammunition, it’s about sustaining 600,000 soldiers. That costs a fortune.

That’s Putin’s vulnerability. That can pressure him into real negotiations. Right now, he’s not ready for compromise. On the contrary, his tone is becoming more aggressive; he’s issuing new threats to occupy more territory. But that may change – and change soon.