The writer is professor of economics at Sciences Po, Paris

It was Russia’s Interior Minister, Vyacheslav von Plehve, who infamously declared a century ago: “What this country needs is a short and victorious war to stem the wave of revolution.” In 1904, amid growing public discontent with the Tsarist government, he viewed the coming Russo-Japanese conflict as a welcome distraction from domestic turmoil.

However, his doctrine backfired dramatically. The Russian Empire went to war with Japan, but suffered a catastrophic defeat; the resulting revolution of 1905 forced the Tsar to establish Russia’s first constitution and parliament, the Duma. Von Plehve himself did not live to see this – he was killed in 1904 by the same revolutionaries his war was meant to suppress.

Given Vladimir Putin’s historically low electoral ratings and Russians’ pessimistic views of their country’s economic prospects, it’s hard not to remember von Plehve’s saying. Whether or not Moscow invades Ukraine, it is already distracting the world – and ordinary Russians – from growing problems such as stagnating incomes, corruption and the disastrous handling of the Covid-19 pandemic. Russian opposition leader Alexei Navalny strongly believes this is the motivation for Putin’s current foreign policy “show”.

But the tightrope approach requires credible threats. If Putin’s belligerent rhetoric was not backed by the necessary troop movements, it would not be taken seriously. And while we don’t know if war will actually happen, the prospect of conflict has already hurt Russia’s economy. On January 24 alone, the stock market fell 7% in rubles; this decline was accompanied by the weakening of the ruble and sovereign bonds. Year-to-date, the dollar-denominated RTSI index has lost almost 20%. It has returned to pre-pandemic levels – even though oil, Russia’s main export, is worth a third more than then. The Russian market’s performance is particularly striking given that global stock prices are now trading 20-40% above their pre-pandemic highs.

January 24 was also unprecedented for the Central Bank of Russia’s decision to support the rouble. Russia’s budget breaks even when the price of oil is at $44 a barrel. When it is higher, the Russian Ministry of Finance uses excess export revenues to fill the sovereign wealth fund by taxing oil companies and handing over these revenues to the Central Bank to buy dollars. Since today’s oil price is almost double the break-even point, the Central Bank should invest heavily in dollars. On January 24, he stopped buying them.

Why are the markets so nervous? Russia’s macroeconomic fundamentals are actually very good: its gross domestic product is already above pre-pandemic levels, and according to the IMF’s Fiscal Monitor, it is the only major economy to have balanced its 2022 budget, with a budget surplus expected in 2023 and 2024 Russia’s sovereign wealth fund represents 12% of GDP. Its sovereign debt is very low, so the central bank can extinguish inflation by raising rates without substantial fiscal pain.

Yet investors are still scared. Despite high oil prices, capital outflows are high and the ruble is weak. Projected GDP growth rates are well below the global average. Indeed, the markets believe that the worst is yet to come. Invasion hasn’t happened yet, but it hasn’t been ruled out either – and a war would mean tough new penalties. The West is unlikely to impose an oil and gas embargo on Russia, as it did on Iran. Russia is one of the main oil exporters (just behind Saudi Arabia) and a key supplier of gas for Europe. However, NATO allies have the power to do great damage to the Russian financial system.

This is why the markets are pricing in a substantial depreciation of the ruble and a fall in the price of Russian debt. In the event of an invasion, it is likely that Russia will be suspended from the Swift payment system, its biggest banks will be subject to full sanctions and the assets of its wealthiest citizens will be frozen. While Russia has substantial reserves and its own domestic (albeit imperfect) Swift surrogate, it will experience further financial problems and bank failures, impacting the purchasing power of ordinary citizens.

Will this deter Putin? In 2015 he said, “Our sovereignty is not for sale,” implying that the financial costs will not prevent him from claiming territory he considers his own. Since then, he has indeed intensified the repression, ensuring that popular discontent does not translate into tangible political protest. On the other hand, it may be wrong – just as von Plehve’s doctrine turned out to be. Market reaction to Putin’s strategy already suggests that a real war could cost him far more than he can bear.