The much heralded Ukrainian summer offensive hasn't achieved the breakthroughs that many in the Kyiv and the West were hoping for.

That has been disappointing and increased the pressure on everyone involved on Ukraine's side. US and European political support for the Ukrainian war isn't bottomless and high inflation and strained budgets are creating pressure on governments to focus their financial firepower at home.

This must make it more difficult to both prosecute the war and keep the crucial Western alliance united. The situation is tense and not just on the front lines.

However, the news hasn't been all bad. The summer has delivered one very pleasant surprise:

The Russian economy has cracked.

Slowly and then suddenly, the Russian economy has begun showing serious signs of wear and deterioration.

This has shown up most clearly in its currency, the ruble, which has fallen to over 100 vs the US Dollar:

That means the Russian ruble has now lost around a quarter of its value since the start of the war. There have been similar moves versus the Euro or Canadian Dollar etc.

Even better is the fact that the Russian currency is declining even as the price of oil is rising, as you can see here:

As regular readers will know, oil has risen 7 of the last 8 weeks and yet that hasn't supported the Russian currency whatsoever. This has been a surprise and a pleasant one and shows that the economy has deteriorated considerably and the driver for the currency has materially changed.

​We have been pretty critical of the sanctions imposed on Russia in the past but it has been great to see the regime slowly tighten and the pressure finally begin to produce results. We have to hope it will continue.

The most notable development might be that the economic decline is accelerating. That must be very difficult for Russian citizens. It is one thing to be poorer, it is quite another to watch your wealth fall every week and expect it only to continue. Regular Russians will be desperate to try and get their meager savings into some other currency. They will find that impossible to do legally and the exchange rates on the thriving and dangerous black market even worse.

The central bank held an emergency meeting and increased interest rates by 3.5% (!) from 8.5% to 12% to try and arrest the decline. This has worked, at least temporarily, but unless something drastic changes it will difficult for the Russian state to properly reverse a decline like this.

All of this raises some important questions:

What is bad about a weak currency?

At its heart, a weakening currency stokes inflation. It does so by driving up the prices for imports which filter through rapidly to the economy. If a mechanic has to pay more to import tools or parts then very quickly his customers will find they have to pay more for repair services etc.

All of this means that, on relative terms, Russia and especially Russians themselves is becoming poorer.

Why is this economic deterioration happening now?

Well, as the first chart makes very clear, it has been happening for quite some time but only gathered pace recently.

That isn't too surprising. As the old Hemingway quote reminds us: you go bankrupt gradually and then suddenly all at once.

But what is more notable is just how "stuck" Russia is today.

A lot of places - including this newsletter - have made the point that Ukraine's economy is being hammered by the conflict and is under massive strain as a result.

But this is also happening in Russia and slowly but surely over time, it is adding up. Specifically, Russia is spending a lot on the war, on propping up its domestic economy and in extra social welfare payments to the many of its citizens who have lost what is generally their only son.

This extra spending has quickly expanded the deficit which, in turn, weakened the currency. No one wants to hold a currency where the state is borrowing and spending recklessly and this becomes doubly true when that spending is on an unproductive and unsuccessful war.

Russia is trying to buy domestic peace to pay for their foreign wars. It was always a dumb idea but now it is proving dumb and very expensive.

What does this mean?

Sadly, we are not sure it means much for the war itself.

The conflict is bankrupting Russia and destroying the domestic economy but that is nothing new.

This process can get far, far worse without really impacting the Russian state or its leaders. We have seen this elsewhere with heavily sanctioned countries like Assad's Syria, Qaddafi's Libya or Saddam Hussein's Iraq. There is also the Kim regime in North Korea. Yes, the collapsing economy will gradually mean the complete impoverishment of Russia and its citizens but that won't trouble the leadership much.

The war hasn't gone very well for Ukraine on the battlefield but we will have to hope that the rout of the Russian economy could accomplish what the stalemate on the battlefield has not:

A reason to negotiate.

We aren't too optimistic but we have to hope for something as the carnage drags on.

Meanwhile, the Russian ruble isn't the only asset that had a bad week...

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