The devastation continues in Ukraine as the civil war shows no signs of ending. As many as 3,700 people have been killed as human rights abuses have been alleged on both sides of the conflict. Eastern Ukraine is in ruins.

But the real loser in this conflict may yet be Russia. Wars these days are fought not just with gunpowder but with money, and while Putin has generously given weapons to his allies in Ukraine he is sitting on a very weak nation that has been sealed off from the West. We can expect him to keep fighting, as would be his style, in both ways – but this could be an extremely long Winter for both nations.

Prokofiev Airport in Donetsk. It’s a ruin.

The difficulty for Russia begins with the sanctions imposed by the West, which have limited their access to capital markets. This is a terrible problem for Russia because they are a developing nation and have limited ability to raise their own capital. Cutting them off has caused the Ruble to fall 22% over the last year, limiting their ability to obtain foreign finance even without sanctions.

But because of a strange quirk, December 2014 is an especially bad month. Their normal appetite for capital is around $10B per month, but a lot comes due at the end of the year – a total of $34.2B. They have to come up with Euros and Dollars very quickly in order to finance their existing debt, and foreign exchange traders have already started betting heavily against the Ruble. It is sliding further and expected to take an even bigger hit.

Rubles in US Dollars over the last year, courtesy oanda.com

Russia has been defending its currency the best it can through all this, but according to reports it has exhausted its reserves of foreign currency. They still have prodigious reserves of gold, however, and that’s where the story becomes strange. They have over 1,112 tonnes of gold ($45B) and are apparently still buying more. It’s their ultimate hedge against being cut off by the West.

When will they start selling off their gold reserves? It seems as though Putin wants to use this to back the Ruble as they move away from foreign currencies, but even this massive reserve isn’t anywhere near enough to to that. They will only probably be a net seller if they get into real trouble.

It’s always been about the black stuff.

But there is even more trouble ahead than their debt repayment schedule. The government relies heavily on oil sales through state owned oil companies to keep the entire nation moving. This funds about half of their budget. According to estimates, they need an oil price of $100 per barrel to break even (WTI). Oil is currently at $82 per barrel, meaning they will have a shortfall of about 9%. That will require a large deficit that will put more pressure on the Ruble.

This is the battleground for the real fight, and it’s been engaged on both sides. Traders borrowing Rubles to sell them now, expecting to pay the debt back with cheaper Rubles later, have already pushed interest rates to 8% in Russia. This will almost certainly accelerate as time goes on, essentially wiping out credit in Russia.

A rapid devaluation of the Ruble would result in hyperinflation, at least as a spike, which could reasonably hit in January. Their only defense appears to be their gold reserve – but it can’t last long. If they do start selling all or part of it we can reasonably expect the price of gold to fall, limiting the value of this bulwark. And if they try to raise more cash by selling more oil they’ll only make that situation worse.

A crisis like this hitting in the middle of Winter would be absolutely devastating for Russia and likely be the end of Putin’s incredible string of popularity. This might well explain why he has been more than a little paranoid recently, avoiding public contact and keeping his bodyguards close at hand.

Ukraine has always been ready for this fight, at least in the old fashioned way.

But the fight is only starting now and will continue. The problem for Russia is that it simply has few financial weapons and a very limited ability to fight this war.

What does this mean for Ukraine? The shooting war is continuing with no signs of changing. There is an election to the Rada (Parliament) in November, but that will probably not change anything. Their misery appears as though it will continue through the Winter as well.

But when Spring comes, there may be a devastated landscape on both sides of the border that will take the fight out of everyone. It isn’t a lot to hope for unless you have a fatalistic sense of hope that hardens from an ability to endure. Fortunately, both sides have that. It’s really all this sorry conflict has to offer at this point.