ECONOMY
‘Russia’s Military Capabilities Can Stretch Until 2027’
May 9, 2024
Vladislav Inozemtsev
Economist- Yevgeny SenshinJournalist
Now, running a deficit is seen not only as acceptable, but beneficial for the country. Economist Vladislav Inozemtsev discusses the robustness of Putin’s economy, the contradiction between the generous remuneration for soldiers and the regime’s complete disregard for their lives, and the outlook for the war in Ukraine.
The original text in Russian was published in Republic. A shortened version is being republished here with their permission.
Russian tank T-80BVM. Source: Wiki Commons
How much longer can Putin’s economy rivet tanks and shells and generally wage war?
The Russian economy can continue to rivet tanks and so on for a very long time. But I think there are at least two layers to this issue.
The first is various “simple” weapons. Non-precision artillery, shells, missiles, primitive drones, armored vehicles, small arms — all this can be produced for as long as they want. Production volumes are rising, and even faster than many observers see. In addition, there are Soviet stocks of various types of equipment — for example, tanks — that are being modernized. This is, of course, shabby, but when used in combat against ordinary rifle formations, it can make a difference.
So, in this regard I would not say there are any time limits at all.
What we saw in 2023 was a transition from trying to buy shells and other stuff elsewhere to producing it all ourselves in sufficient quantities.
The second layer is precision weapons: sophisticated drones, aircraft, ballistic missiles and everything else. Russia needs imports of high-tech components — throughout 2022 they came from the West through a bunch of dummy companies, which in 2023 were mostly replaced by Chinese firms. Here, the Russian army could face big problems if the West closes all the loopholes for the supply [of these components], for example, by pressuring the Chinese, which is why Antony Blinken recently visited Beijing.
But even these problems would be temporary. Perhaps current production would slow, but in a year or two the shortages would be addressed. By refocusing on a few certain items and reducing quality and reliability, Russian can make even complex weapon systems itself.
So, I think that we should not expect a shortage of shells. The ramping-up of the military-industrial complex is not causing many financial problems either. Judging by the last two years, we see that money spent on [defense] has a very positive effect on the economy. This money then flows to different industries. In addition, the military-industrial complex is increasing wages, driving competition for workers, which means that business must boost efficiency.
Nowadays, all businesspeople are howling from the labor shortage, but without it there can be no modernization. Overall, the high expenditures on the military-industrial complex do not create any special economic problems, but only generate benefits in “Putinonomics.”
Yet there is still one problem. And it is not economic. This problem is related to people.
Before everything else Russia will run out of soldiers, because today, for the first time since the time of Tsar Alexei Mikhailovich, essentially a mercenary army has been created, in which even the rank and file receive high salaries.
This had not been seen from the beginning of the reign of Peter I, when conscription was introduced, until the end of the Soviet period, when an ordinary soldier received three rubles a month. Putin wants to recruit soldiers for the army with money.
The Russian economy can continue to rivet tanks and so on for a very long time. But I think there are at least two layers to this issue.
The first is various “simple” weapons. Non-precision artillery, shells, missiles, primitive drones, armored vehicles, small arms — all this can be produced for as long as they want. Production volumes are rising, and even faster than many observers see. In addition, there are Soviet stocks of various types of equipment — for example, tanks — that are being modernized. This is, of course, shabby, but when used in combat against ordinary rifle formations, it can make a difference.
So, in this regard I would not say there are any time limits at all.
What we saw in 2023 was a transition from trying to buy shells and other stuff elsewhere to producing it all ourselves in sufficient quantities.
The second layer is precision weapons: sophisticated drones, aircraft, ballistic missiles and everything else. Russia needs imports of high-tech components — throughout 2022 they came from the West through a bunch of dummy companies, which in 2023 were mostly replaced by Chinese firms. Here, the Russian army could face big problems if the West closes all the loopholes for the supply [of these components], for example, by pressuring the Chinese, which is why Antony Blinken recently visited Beijing.
But even these problems would be temporary. Perhaps current production would slow, but in a year or two the shortages would be addressed. By refocusing on a few certain items and reducing quality and reliability, Russian can make even complex weapon systems itself.
So, I think that we should not expect a shortage of shells. The ramping-up of the military-industrial complex is not causing many financial problems either. Judging by the last two years, we see that money spent on [defense] has a very positive effect on the economy. This money then flows to different industries. In addition, the military-industrial complex is increasing wages, driving competition for workers, which means that business must boost efficiency.
Nowadays, all businesspeople are howling from the labor shortage, but without it there can be no modernization. Overall, the high expenditures on the military-industrial complex do not create any special economic problems, but only generate benefits in “Putinonomics.”
Yet there is still one problem. And it is not economic. This problem is related to people.
Before everything else Russia will run out of soldiers, because today, for the first time since the time of Tsar Alexei Mikhailovich, essentially a mercenary army has been created, in which even the rank and file receive high salaries.
This had not been seen from the beginning of the reign of Peter I, when conscription was introduced, until the end of the Soviet period, when an ordinary soldier received three rubles a month. Putin wants to recruit soldiers for the army with money.
“The main problem is that even when recruited for a lot of money, soldiers are still not treated as valuable assets, but as an endless mass that women will keep replenishing.”
Damaged building in Avdiivka, December 2023. Source: Wiki Commons
All these “meat grinders” were good when there was conscription for 25 years; there were a lot of children in serf families, and you could draw any number of conscripts. But today the situation is completely different, and the main problem will be that no one will go to fight even if they pay more and more. Meanwhile, if the regime suddenly decides on a new round of mobilization, the consequences will be catastrophic.
So, you think that big salaries will not motivate [people]? There will be fewer and fewer people in Russia ready to die for the “Russian world?”
That’s not exactly what I meant. We see that the authorities are now raising the bonus for signing a contract: previously it was, depending on the region, RUB 50,000-250,000, but now for the “record holders” — Krasnodar Region and St Petersburg — it has exceeded RUB 1,000,000. Since mobilization began in 2022, the salary of an ordinary soldier has been raised to RUB 200,000 per month, whereas before that contract soldiers received a little over RUB 40,000. Now, the dollar exchange rate is rising, and civilian wages are rising, so I think this will further spur the growth of wages at the front — by the end of the year, they will urgently have to be bumped up to at least RUB 300,000 per month. The raises will continue, and people will sign up, and though perhaps not in the numbers that the Kremlin expects, they will come.
The economics of the military-industrial complex are clear to me: the government gives more money, a little is stolen, orders are distributed among contractors, wages are paid to workers along the entire production chain, workers are provided with an exemption from service, people line up to work at the plant, production begins. These are market relations functioning in thesame market environment. But in the case of soldiers, it is not clear to me what the Kremlin is hoping for. “Bodies” are being purchased at market rates but are being utilized in a non-market way.
Today, the salaries of Russian military personnel at the front — do not laugh — are equal to those of ordinary soldiers in the US army, albeit in peacetime. Yet look at how the American army cares about the life of each soldier: what equipment they provide, how much they are willing to spend and what risks they take to save each soldier in an emergency.
So, you think that big salaries will not motivate [people]? There will be fewer and fewer people in Russia ready to die for the “Russian world?”
That’s not exactly what I meant. We see that the authorities are now raising the bonus for signing a contract: previously it was, depending on the region, RUB 50,000-250,000, but now for the “record holders” — Krasnodar Region and St Petersburg — it has exceeded RUB 1,000,000. Since mobilization began in 2022, the salary of an ordinary soldier has been raised to RUB 200,000 per month, whereas before that contract soldiers received a little over RUB 40,000. Now, the dollar exchange rate is rising, and civilian wages are rising, so I think this will further spur the growth of wages at the front — by the end of the year, they will urgently have to be bumped up to at least RUB 300,000 per month. The raises will continue, and people will sign up, and though perhaps not in the numbers that the Kremlin expects, they will come.
The economics of the military-industrial complex are clear to me: the government gives more money, a little is stolen, orders are distributed among contractors, wages are paid to workers along the entire production chain, workers are provided with an exemption from service, people line up to work at the plant, production begins. These are market relations functioning in thesame market environment. But in the case of soldiers, it is not clear to me what the Kremlin is hoping for. “Bodies” are being purchased at market rates but are being utilized in a non-market way.
Today, the salaries of Russian military personnel at the front — do not laugh — are equal to those of ordinary soldiers in the US army, albeit in peacetime. Yet look at how the American army cares about the life of each soldier: what equipment they provide, how much they are willing to spend and what risks they take to save each soldier in an emergency.
“Meanwhile, in Russia mobilized soldiers are expended every day in senseless attacks on fortified Ukrainian positions, without accountability.”
Monument to the T-34/85 tank near the Uralvagonzavod complex. Source: Wiki Commons
Therefore, I believe that at some stage the male population will simply be exhausted. And people will doubt whether they need to go to war even for a lot of money.
The labor shortage continues to intensify. How is it affecting Russia’s ability to wage war and resist Western economic pressure?
Labor shortages are always commensurate with technical demands. If you want to create a modern military-industrial complex to produce semiconductors, chips, guidance systems and next-generation fighters, then you will, of course, have a huge shortage of labor. But if the task is to pump out shells, there is no labor shortage and there cannot be one.
Now, the only question is pay. The Russian economy has developed in such a way that in recent years people were paid insanely little. Since 2013, belt-tightening started, and people began to be paid less and less, as measured by the share of wages in GDP, which fell from approximately 46% to 39%.
In Western countries, the average share of wages in GDP is approximately 55-65%, with 10% the share of profit. In Russia, wages were 39% of GDP in 2021, whereas now the figure has probably risen to 40-41%, though still the share of profit last year amounted to 19.6% of GDP (in the US it is only 10.4%). Probably only in parts of Africa are people exploited in the modern world like they are in Russia.
And in this regard, the labor shortage is simply due to the fact that people are not paid. Pay them more and there will be no shortage.
You want to hire people for low wages whose skills are actually worth more? Sure, you can modernize and optimize production so that there is less need for workers. You would not do this, however, because you do not have any such objective. You think there are a lot of people, they have nowhere to go, they will come to work for cheap. But that’s in the past.
The labor shortage continues to intensify. How is it affecting Russia’s ability to wage war and resist Western economic pressure?
Labor shortages are always commensurate with technical demands. If you want to create a modern military-industrial complex to produce semiconductors, chips, guidance systems and next-generation fighters, then you will, of course, have a huge shortage of labor. But if the task is to pump out shells, there is no labor shortage and there cannot be one.
Now, the only question is pay. The Russian economy has developed in such a way that in recent years people were paid insanely little. Since 2013, belt-tightening started, and people began to be paid less and less, as measured by the share of wages in GDP, which fell from approximately 46% to 39%.
In Western countries, the average share of wages in GDP is approximately 55-65%, with 10% the share of profit. In Russia, wages were 39% of GDP in 2021, whereas now the figure has probably risen to 40-41%, though still the share of profit last year amounted to 19.6% of GDP (in the US it is only 10.4%). Probably only in parts of Africa are people exploited in the modern world like they are in Russia.
And in this regard, the labor shortage is simply due to the fact that people are not paid. Pay them more and there will be no shortage.
You want to hire people for low wages whose skills are actually worth more? Sure, you can modernize and optimize production so that there is less need for workers. You would not do this, however, because you do not have any such objective. You think there are a lot of people, they have nowhere to go, they will come to work for cheap. But that’s in the past.
“As a result, there are not enough Russian workers, there are not enough migrants, and modernization is long and expensive. What else can you do? Raise salaries and there will be no labor shortage.”
Administrative building of Gazprom Transgaz Nizhny Novgorod. Source: Wiki Commons
What about the labor shortage in terms of skills, experience, knowledge, education?
There are engineering-level workers who must come up with some kind of process, launch new technologies, design tanks, develop a system of orders with other firms. And there are operators — people who stand at a conveyor belt. I think the latter category can be trained in a few months. So, I have no doubt that the general workforce can be trained quickly. Recall the USSR during World War II, when factories were evacuated to the Urals and 13- and 14-year-old children were taught in a short time to make incredible quantities of shells.
Sure, technology has come a long way. But all that technology remains in the West. In the future, [Russia] will operate on more primitive technology. “Import substitution” is nothing more than a systematic and authorized decline in the technological level. And at that technological level the demands of production and the abilities of workers will quickly intersect.
In the next three years, according to IMF forecasts, the lag in Russia’s per capita GDP will increase: by 2029, Russian GDP per capita will be $15,683, while it is expected to be $18,396 in Kazakhstan and $18,202 in Turkmenistan. Could a drop in living standards put serious pressure on the Kremlin’s policy?
My first article for Republic back in 2015 was on when Putinism would end economically. And the answer was simple: Putinism will end economically when it becomes unprofitable for the beneficiaries of the regime, the owners of the property that has been plundered, to use that property. The article received more than a million views.
Take Sechin. He seated himself at Rosneft and is getting fat there. Miller made a fortune at Gazprom. But they are bureaucrats, while many regime loyalists own huge assets in the oil industry, metallurgy, construction, trade and so on.
If Gazprom and oil companies become unprofitable — and not for one year, as now, but over the long term — if the budget does not have the money to order tanks from Rostec, if the population becomes impoverished and cannot buy goods produced by other private companies, and it becomes obvious to those who now pray to Putin that all their companies are just making losses, this will be the end.
There are engineering-level workers who must come up with some kind of process, launch new technologies, design tanks, develop a system of orders with other firms. And there are operators — people who stand at a conveyor belt. I think the latter category can be trained in a few months. So, I have no doubt that the general workforce can be trained quickly. Recall the USSR during World War II, when factories were evacuated to the Urals and 13- and 14-year-old children were taught in a short time to make incredible quantities of shells.
Sure, technology has come a long way. But all that technology remains in the West. In the future, [Russia] will operate on more primitive technology. “Import substitution” is nothing more than a systematic and authorized decline in the technological level. And at that technological level the demands of production and the abilities of workers will quickly intersect.
In the next three years, according to IMF forecasts, the lag in Russia’s per capita GDP will increase: by 2029, Russian GDP per capita will be $15,683, while it is expected to be $18,396 in Kazakhstan and $18,202 in Turkmenistan. Could a drop in living standards put serious pressure on the Kremlin’s policy?
My first article for Republic back in 2015 was on when Putinism would end economically. And the answer was simple: Putinism will end economically when it becomes unprofitable for the beneficiaries of the regime, the owners of the property that has been plundered, to use that property. The article received more than a million views.
Take Sechin. He seated himself at Rosneft and is getting fat there. Miller made a fortune at Gazprom. But they are bureaucrats, while many regime loyalists own huge assets in the oil industry, metallurgy, construction, trade and so on.
If Gazprom and oil companies become unprofitable — and not for one year, as now, but over the long term — if the budget does not have the money to order tanks from Rostec, if the population becomes impoverished and cannot buy goods produced by other private companies, and it becomes obvious to those who now pray to Putin that all their companies are just making losses, this will be the end.
“The viability of the regime depends on large and medium-sized businesses — primarily because the bureaucracy has long since invaded those spheres; it has become the owner of hundreds of thousands of companies.”
Now, they are doing very well, but if they feel a catastrophe coming, the regime will not survive.
All these people are not the masses, which never go out to protest. Relatively average-sized shocks are enough for a coup at the top to occur, while for revolutionary sentiment to take hold, the standard of living must decline by approximately 30%, and within 1.0-1.5 years. If it slowly declines, as it did from 2014 to 2021, by 10%, then this will not change anything at all. In other words, there must be a major negative shock that the population would associate with the actions of the authorities, and so I do not expect anything from the masses at all.
But even in a very difficult situation, the regime can survive. Why? Because per capita GDP is not a number that worries anyone. What’s important is how it is distributed. Today, almost 20% of GDP is the profit of oligarchs and businesses, while about 36% of GDP is redistributed through the budget, with half of that going to fund the war. What does this mean? If you halve defense spending and trim at least half the profits, that’s 15-20% of GDP that can be used for social support.
I am certain: even in the current conditions, if you stop the war or at least reduce its intensity, even with a 10-15% drop in GDP, you can maintain the standard of living of the masses. An example of this was 2009, when Putin, who had moved to the White House [as prime minister], grabbed his head and began to empty the reserve fund.
At that time, Russia, while recording the largest drop in GDP among the G20 countries, was the only country that saw real disposable income grow in the G20. This can be repeated any day, if and when the war ends and a little bite is taken out of the oligarchs’ margins. There are plenty of ways to hold onto power.
Regardless of the outcome of this war, Russia will still spend a lot of resources, will be an outcast, society from top to bottom will be fatigued of everything, like the Soviet people were in the late 80s. How can the country develop further after everything that happened?
I think that this kind of war at its current intensity can continue for another three to five years at most. Currently, Russia is holding the front and even advancing, but only because assistance to Ukraine is not very great. If it is increased two- or threefold — and this will happen one way or another — then, of course, the Russian army will begin to crumble. And Putin now has no other options. He mobilized once and repelled the Ukrainian offensive, but at a very high cost. Therefore, a new round of mobilization is not on the table.
All these people are not the masses, which never go out to protest. Relatively average-sized shocks are enough for a coup at the top to occur, while for revolutionary sentiment to take hold, the standard of living must decline by approximately 30%, and within 1.0-1.5 years. If it slowly declines, as it did from 2014 to 2021, by 10%, then this will not change anything at all. In other words, there must be a major negative shock that the population would associate with the actions of the authorities, and so I do not expect anything from the masses at all.
But even in a very difficult situation, the regime can survive. Why? Because per capita GDP is not a number that worries anyone. What’s important is how it is distributed. Today, almost 20% of GDP is the profit of oligarchs and businesses, while about 36% of GDP is redistributed through the budget, with half of that going to fund the war. What does this mean? If you halve defense spending and trim at least half the profits, that’s 15-20% of GDP that can be used for social support.
I am certain: even in the current conditions, if you stop the war or at least reduce its intensity, even with a 10-15% drop in GDP, you can maintain the standard of living of the masses. An example of this was 2009, when Putin, who had moved to the White House [as prime minister], grabbed his head and began to empty the reserve fund.
At that time, Russia, while recording the largest drop in GDP among the G20 countries, was the only country that saw real disposable income grow in the G20. This can be repeated any day, if and when the war ends and a little bite is taken out of the oligarchs’ margins. There are plenty of ways to hold onto power.
Regardless of the outcome of this war, Russia will still spend a lot of resources, will be an outcast, society from top to bottom will be fatigued of everything, like the Soviet people were in the late 80s. How can the country develop further after everything that happened?
I think that this kind of war at its current intensity can continue for another three to five years at most. Currently, Russia is holding the front and even advancing, but only because assistance to Ukraine is not very great. If it is increased two- or threefold — and this will happen one way or another — then, of course, the Russian army will begin to crumble. And Putin now has no other options. He mobilized once and repelled the Ukrainian offensive, but at a very high cost. Therefore, a new round of mobilization is not on the table.
“I think it will take another two years for all Putin’s hopes of victory to be exhausted. Some negotiations and agreements will start around that time. So, I would say Russia’s military capabilities can stretch until 2027.”
As for the outlook for Russia as a whole, I have no reason to believe that the regime will collapse even if Putin is defeated in Ukraine.
But let’s say the Putin regime collapses. What’s next? A redistribution [of property] will begin, along with long fights over who was where, who did what, who stole what and where, who were whose accomplices. A war of all against all will begin. And many people will lose out. The end of Putinism will be comparable to that of the communist past in terms of total losses for the population.
Hence why the Russian population clings to Putin. Not because he is a great leader. [Rather] I think many people are sure that any changes will worsen the situation for tens of millions of people. Therefore, I think that if there is a transition, it will be extremely slow and come from within.
But let’s say the Putin regime collapses. What’s next? A redistribution [of property] will begin, along with long fights over who was where, who did what, who stole what and where, who were whose accomplices. A war of all against all will begin. And many people will lose out. The end of Putinism will be comparable to that of the communist past in terms of total losses for the population.
Hence why the Russian population clings to Putin. Not because he is a great leader. [Rather] I think many people are sure that any changes will worsen the situation for tens of millions of people. Therefore, I think that if there is a transition, it will be extremely slow and come from within.
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