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Russianomics: economic shelling on Russia’s supply chains!

The West’s economic strategy against Russia’s funding has been ineffective up to date; the ruble is getting strong, as seen in the previous post Russianomics: attacking the war machine funding!

Nevertheless, as you may already know, the West has set a number of sanctions on the Russian economy, locking the import of dual-use items (click here). Economics-Nobel Prize winner Paul Krugman pointed out several times -on Spotify and in the NYT– that the Russian problem is not the revenue it gets through exports but the capacity to import spare parts and components for its economy and, punctually, for its war machine to keep it running.  

According to Riddle‘s article, sanctions make difficult the implementation of production plans and the delivery of military hardware, and in the NYT it was stated that the creation of Russia’s own supply chain will take Russia years and trillions of dollars.

 

Warfare means a massive expenditure on weapons

It is noteworthy to mention that Russia requires a massive amount of war materiel to fuel its army in Ukraine.

According to analyst Vikram Mittal’s article in Forbes, «doctrine holds that an offensive operation should have a 3-to-1 advantage in manpower» (click here) and, as informed by Bonnie Berkowits and Artur Galocha -in the Washington Post -it also requires spending «an enormous amount of ammunition» (click here).

Proof of it can be found in Alex Vershinin’s calculations:

The Russians have fired between 1,100 and 2,100 missiles… meaning that in three months of combat, Russia has burned through four times the US annual missile production. (click here)

 

In short, Russia -as the attacker -delivers higher expenses than Ukraine and will have to cope with the US «Arsenal of Democracy» policy (click here), how the supply of weapons from the US to Ukraine is known.

Although according to the Observatory of Economic Complexity (OEC)  Russia has a surplus in weapon production like the US, there is a sizeable gap in their military-industrial base; 27.3% of global weapon exports come from the US, while only 1.38% come from Russia.

However, the depletion of the armaments delivered a high rate not only from Russian inventories but even from the stockpile of the Arsenal of Democracy -as Hal Brands informed in Bloomberg (click here), therefore, the factories must be flat-out.

Can Russia deal with the economic warfare to keep running its army? Answering this question is a titanic task, but the following can give us some insights.

 

Everything may change if China sits down on the board

Russia is a very small economy besides the US, but, what about China? They are a close ally of Russia. It is already the second economy in the world (PPP) and 4.06% of world armaments come from there (OEC); its share and surplus in weapon production are higher than Russia’s.  

 

Figure 1. GDP (PPP) of Russia, China, and the US, 1950-2019

Source: Feenstra, Robert C., Robert Inklaar and Marcel P. Timmer (2015).

 

While Russia’s trade with China has risen, it has dropped with the West’s leading economies, at least since 2019. Virtually one-fourth of 2020’s imports in Russia came from China, and if India -another of Russia’s allies – is added, it makes one-third.

Origin Imports
2019 growth 2018-2019 2020 growth 2019-2020
China 20.6% 3.01% 23.0% 3.9%
Germany 12.4% -3.84% 11.9% -10.7%
Belarus 56.6% -5.90% 58.2% -4.2%
India 13.6% -24.20% 13.0% -11.1%
United States 38.4% -4.35% 25.8% -37.4%
Source: The Observatory of Economic Complexity (OEC)

Some analysts think that it is hard to believe that China will abandon Russia, its «irreplaceable partner», as was argued by Hu Xijin in Global Times; a tabloid newspaper in the People’s Republic of China:

…the idea of reconciling ties with the US by abandoning Russia has no market in China at all. Most Chinese people believe that the US’ ultimate goal toward Russia is to make it no longer a «nuclear threat,» yet its goal toward China is to make China completely lose its development and competitiveness, splitting China into puzzle pieces, with each piece being controlled by the US, purchasing US weapons and producing cheap products. (click here).

 

Therefore the key imports for Russia’s manufacturing sector and war machine would be assured as long as China’s production capacity allows it -leaving aside the India-Russia relationship. 

Of course, the figures plotted up to this point are quantitative and not qualitative. Russia will need a partner with the capability to produce tons of goods, but also the sanctioned high-tech and dual-use items it used to import from the West to build up its economy and army (click here).

Some people, like Krugman, think that «China’s high-tech industries are not yet thought to be sufficient to replace American components» (click here).

While others, like Michael Roberts, ponder the possibility that «Chinese companies, especially those that have themselves been the target of US sanctions, might help Russia circumvent the export controls» (click here).

No doubt, Russia is the world’s most-sanctioned economy (click here) and will have serious supply-side economic problems (issues), however, it is not by far the hard challenge Russia has faced in its history. Indeed, other smaller sanction economies, such as Venezuela, have coped with economic aggressions, and its president -Nicolas Maduro -is still in office.

Basically, Russia has two options; to carry out a substitution process or boost a parallel-imports system where goods not intended to go to Russia end in that country. Vladislav Inozemtsev reckons that the latter is more straightforward and likely than the former, he made a very compelling argument in this respect in Riddle:

…import substitution­­ is unrealistic under the current circumstances because now it must be a full-cycle production (as was the case, for example, in the Soviet Union)… This problem cannot be solved because the technologies used in the world (and ­in Russia) have advanced considerably, and the Russian industry itself is significantly inferior ­to the former Soviet industry, in both scale and capacity. (click here)

 

So Russia has problems in its supply chain due to sanctions but also has solutions.

 

Last remark

You may see the value of a currency as a measure of a war-effort outcome, if you follow the logic of economics-Nobel Prize winner Paul Krugman when he wrote on 28 February 2022:

…This leaves Russia’s economy highly vulnerable to sanctions that might disrupt this trade, a reality reflected in Monday’s sharp plunge in the value of the ruble despite a huge increase in domestic interest rates and draconian attempts to limit capital flight. (click here).

 

Well, now on 06 July 2022, the ruble is stronger than before the war and the euro plunged sharply.

Source: the chart is taken from TradingView

Not misunderstand the matter, the global economic turmoil is the aftermath of numerous variables, and it is hard to give credit only to one as the main cause of an economy’s performance in particular, but for Europe -at least –economic warfare has turned out a negative factor for its currency’s unfolding, a fact that contrast with Russia’s ruble, as shown in the previous post (click here).

The third part of this article encompasses the supply of components and equipment. Russianomics: the economic bunker needs supplies to endure.

 

* I am indebted to my friend Mr. James Barry for assistance in editing.

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Medardo Alfonso Palomino Arias

Por Medardo Alfonso Palomino Arias

Economista y Magister en Gestión Pública graduado en la Universidad Santiago de Cali, Colombia. He sido Profesor desde el año 2014 en distintas universidades de Cali. En la actualidad me encuentro adelantando estudios y viajando en Australia. El proposito de mi blog es difundir conocimiento sobre economía y brindar un espacio para el debate.

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