The big development in the Russia/Ukraine war is not the latest US aid package, or the Ukraine’s audacious incursion into the Kursk region of Russia. The most consequential development is the massive increase in Russian defence spending next year.

Vladimir Putin has managed to turn Russia into a war economy. This is the bit that almost western experts on Russia got wrong. I recall reading an article by Putin’s former economic adviser, Andrei Illarionov, who predicted that Putin would by now have run out of money. He said in a German interview in 2022 that Putin’s reserve would last only for one more year and the result would a currency crisis.

Illarionov’s comments were a monumental misjudgement that has become typical of western commentary about the Russia war. Since then, the exact opposite has happened. Russia’s economy is roaring. When you listen to the debate in Germany or the US, you might get the impression that it is the West that is running out of money. This is not true either. But we are running out of a willingness to spend it.

Since the start of the Russia/Ukraine war, Europe has been teetering at the brink of recession because it was dependent on Russian gas, and industrial supply routes that cut through Russia. Russia has outgrown all of the big G7 countries – thanks to the war economy effect.

If the West was really serious about helping Ukraine defeat Russia, it would have to do exactly the same – switch to a war economy: shift money from other parts of the budget towards higher defence spending and specifically for weapons for Ukraine. None of the large western countries are ready to do this. Germany is fast moving in the opposite direction by cutting all parts of the Ukraine aid budget for the next three years that are not yet allocated.

Last year, Russia spent 6.5 trillion roubles on defence, a little more than £50bn with today’s exchange rate. This year, it has gone to 10.8 trillion roubles, and next year it is foreseen to go up 13.2 trillion. This is over 6 percent of the economy’s output. Many western countries are struggling to reach 2 percent.

There is a lot of muddled thinking about what happens to economies during a war. Economies do not run out of money – unless they use someone else’s currency like the US dollar. A war economy is the biggest imaginable Keynesian-style fiscal boost.

The Russian war economy is running on steroids right now and generates huge revenues for the state. Non-oil and gas revenues are projected to rise by a whopping 73 percent next year. Russia is not funding its increased defence through debt – but through a booming economy.

To insist that the west needs to defeat Putin is cheap talk. I read it again this week from Norbert Röttgen, the foreign affairs spokesman of Germany’s Christian Democrats. He said “diplomacy has a chance only once Putin recognises that he cannot achieve anything through war.” Röttgen’s own CDU is opposed to a change to Germany’s tough fiscal rules to allow an increase in military spending. If we were serious about this, we too would double our defence spending, which is what Russia did since the beginning of the war. We would first need to agree how we finance this. Through higher taxes? Maybe cuts in pensions and welfare payments? Or even less investment into our crumbling public infrastructure? Maybe more debt?

Germany, not Russia, is struggling with its defence budgets. And if anyone is in danger of recognising that continued war is futile, it is less like to be Putin, than Ukraine’s tired western supporters.

Our Ukraine war narratives are mainly informed by wishful thinking – about Russia running out of money, about the impact of sanctions on the Russian economy, about our own political appetite to support Ukraine after the initial period of Ukraine euphoria ended. The western alliance is clear only about its red lines – they it does not want to engage in a war with Russia directly. I agree with that position. But it does not constitute a strategy. I see no scenario in which Ukraine could liberate the territories occupied since February 2022, given the red lines. I do, however, see a scenario in which Putin could achieves his main war goal – the annexation of four Ukrainian oblasts - Donetsk, Luhansk, Zaporizhzhia and Kherson.

This is not a prediction, but a warning that the West urgently needs to adapt a more realistic war strategy, rather than funding an open-ended war that Ukraine has no chance of winning.

US support for Ukraine is still holding up but at a lower level. The US foreign policy priority right now is the Middle East. If Donald Trump wins next months, all bets are off anyway.

Whatever happens, the Europeans are not going to fill any gaps left by the US. Michel Barnier, the new French prime minister, has just announced a €40 billion austerity budget for next year. Austerity also returned to Italy. But it is Germany where I see the support for Ukraine dwindling the most.

Last week, Dietmer Woidke and Michael Kretschmer, the state premiers from Brandenburg and Saxony, together with Mario Voigt, the CDU leader of Thuringia, wrote an article in Frankfurter Allgemeine to press the case for a peace conference. The political establishment in Berlin rightly interpreted this as an attack on the government’s policies to send weapons to Ukraine.

The three are at the heart of the centrist policy establishment. They all depend on the support of Sahra Wagenknecht, who emerged as a power broker in east German politics after recent state elections. She has emerged the most outspoken opponent to Germany’s support for Ukraine. Her position is shared by the left of Olaf Scholz’s SPD. She is pushing the SPD in a direction that many of its members want it to be pushed.

Scholz now says he wants to resume the dialogue with Putin. He has not talked to him for two years. Scholz desperately needs this war to end before next year’s elections. He does not want to put himself in a position where he, too, relies on Wagenknecht for support.

Scholz, too, believed at one point that a war of attrition would favour Ukraine. It was a consensus view in the west that we would win a blinking contest with Putin. Now that Russia has transitioned to a war economy, while we have not, I see the balance of power shifting in favour of Russia. Germany will have to find some €30 billion a year just to meet the Nato defence spending target of 2 percent of GDP. They would need a lot more if they wanted to provide Ukraine with its share of the funds needed to defeat Russia. Germany is already one of the world’s high-tax countries. There are no political majorities for even higher taxes. Or for spending cuts. Or for higher debt. The current coalition is not ready to do whatever it takes to support Ukraine.

Scholz is now talking about diplomatic solutions to the war. His diplomacy falls into the hopeless, but not serious category. Peace talk is cheap. Scholz recently called for Russia to participate in what has been hailed as a peace conference, an international gathering that met in Switzerland in June. Russia already said it is not interested in a meeting heavily biased towards Ukraine’s supporters.

Scholz’ futile diplomacy is a reminder that the west has reached a dead end in its Ukraine strategy. The original idea was to isolate Russia. But it ended with Russia deepening its alliances with China, Iran and North Korea. Russia and China, for example, are strengthening their commercial and military ties. A notable area for bilateral Russian-Chinese cooperation is the Arctic. The Arctic is a weak spot of western security, while Russia has built up its military capacities in the Kola Peninsula, the region that borders on the north of Finland. Russia’s state-owned nuclear energy firm Rosatom and China’s Hainan Yangpu NewNew Shipping company have recently created a joint venture to cooperate on building infrastructure and ice-class container vessels to operate a year-round Arctic route. [note the name is NewNew. This is not a typo]

The West underestimated China and Russia at every turn. And it overestimated its ability to draw third countries into the western alliance. India, Brazil and South Africa all said no. The Europeans, meanwhile, are becoming hopelessly divided.

Austria is one of the countries that still gets most of its gas from Russia. Russian gas accounts for 83 percent of Austrian gas imports. The gas comes through the Ukrainian gas pipelines, one of the few Russian supply routes to Europe still running. The transit contract between Ukraine and Russia is due to expire at the end of this year. Ukraine said it does not want to renew it.

To say that this will upset the Austrian would be an understatement. When Germany found itself in that situation two years ago when the Russian gas pipelines were blown up in the Baltic Sea, it took a big effort to redirect gas supplies. Austria is in a weaker position because it has no direct access to the sea and cannot built port terminals for liquid natural gas as Germany did. Austria would have to procure its gas on global markets through third parties, at a higher cost.

This issue could easily get tangled with the formation of Austria’s new government after the victory of the far-right FPÖ in the recent elections. The FPÖ, too, wants to stop weapons deliveries for Ukraine. Slovakia and Hungary, Austria’s neighbours to the east, are both run by politicians friendly towards Putin. I even noted in change in tone by the Polish government. Their willing to supply Ukraine with weapons is also now hitting a ceiling.

My advice to anybody who wants to help Ukraine is to start thinking about end games, not restating mantras and maximalist positions. If you frame the war in terms of victory and defeat, you are more likely to end with defeat than if you adopted a more nuanced and flexible strategy.

I think the best way forward would be to switch to a defensive war, to stop Russia’s advances, but not to push back. And to step up western military aid in support of this restated war goal. It takes fewer troops to defend territory than to occupy it. It is also easier to organise political majorities behind a strategy that stands a chance of succeeding. Even this more modest goal would require an increase in defence spending. It would not be a cheap option. Nor would it be a surrender.

If we continue on the current path, there is a serious possibility that it is the west that will lose the blinking contest.