Commentary on Political Economy

Friday 17 February 2023



Mission impossible: Putin can’t continue his disastrous war

ByAmbrose Evans-Pritchard

You have 1 free article remaining

Subscribers power our newsroom.

The vast Uralvagonzavod tank factory in Western Siberia is running out of workers. Plans to add a second production line for T-90 battle tanks have stalled.

“It’s now impossible: there is an acute shortage of personnel at the plant. A master used to need special training, but now they take anyone with any experience in production,” said one employee, speaking to the regional Sverdlovsk newspaper.

Russian President Vladimir Putin is running out of options.

Russian President Vladimir Putin is running out of options.CREDIT:AP

The sprawling complex served as Stalin’s rear fortress in the Second World War. It built the Soviet Union’s T-34 tanks, safely beyond the reach of the Nazis.

Now under the state conglomerate Rostec - run by ex-KGB general Sergey Chemezov - it may struggle to save the Russian army a second time.

Rostec is scouring the country, offering bumper wages and housing vouchers, especially for design engineers. But the pool of skills and manpower has dried up.

Some 700,000 Russians have left the country since the war began a year ago, mostly young men and mostly the best-educated. The military meat grinder is chewing up 800 soldiers a day, according to British intelligence. The more that Vladimir Putin mobilises those who remain, the less he has for his war industries.

The International Institute for Strategic Studies thinks Russia has already lost 2,000-2,300 tanks in Ukraine, wasting half of its pre-war stock of T-72s and T-80s. “They’re producing and reactivating nowhere near enough to compensate for those loss rates,” it said.

Clearly, Uralvagonzavod cannot change this equation. Russia is for now drawing down its final reserve of Soviet relics, but these lack parts and are sitting ducks for Ukrainian drones.

The US Treasury said in October that the Western blockade of semiconductors had led to a 70 per cent drop in chip imports from all global sources, curtailing production of hypersonic missiles, surface-to-air missiles, and airborne early-warning systems.

It said Russia is cannibalising dishwashers and fridges to find chips for the military, but this is desperate bootstrap stuff. These circuit boards are not instantly interchangeable.

Some 700,000 Russians have left the country since the war began a year ago, mostly young men and mostly the best-educated.

Some 700,000 Russians have left the country since the war began a year ago, mostly young men and mostly the best-educated.CREDIT:BLOOMBERG PHOTO BY ANDREY RUDAKOV

Russia has two major semiconductors producers, Mikron and Baikal. They are in the 90nm (nanometer) range, workhorse technology from 20 years ago, unfit for modern precision weapons. Intel, Samsung, and Taiwan’s TSMC are already working on 2nm chips.

The Kremlin has unveiled a $US40 billion ($58.2 billion) project to produce 90nm chips en masse by 2030, but that only goes to show how hopeless the task is.

“Despite this Russian effort to build a home-grown semiconductor industry, despite the propaganda, they haven’t succeeded, and I don’t think they’ll ever succeed,” said James Byrne, head of open-source intelligence at the Royal United Services Institute (Rusi).

Russian customs data purports to show that chip imports have surged despite the blockade, which is of course what the Kremlin wants us to believe. To the extent that volumes have risen, the imports are mostly routine low-tech chips from China. These reportedly have a “defect rate” 20 times higher.

James Lewis, technology chief at Washington’s Centre for Strategic and International Studies, says it would take two to three years to reconfigure platforms to accept many of these Chinese imports.

Byrne says the weapons captured or shot down in Ukraine overwhelmingly contain US chips, mostly from Texas Instruments and Analogue Devices. This was to be expected in the early phase of the war: these were legacy weapons built earlier.

“Can Chinese manufacturers replace all those components? I am sceptical. We’ve hardly seen any of these Chinese chips in Russian weapons platforms,” he said.

When it comes to weapons, the Kremlin still depends on an opaque supply chain of Western chips through Hong Kong, Turkey, or the Middle East. Many get through, but many do not, and the Biden administration is tightening the global noose.

Russia has now lost half its global oil export revenues.

Russia has now lost half its global oil export revenues.CREDIT:ISTOCK

Smuggling on this scale is a very expensive headache. Putin could afford to pay whatever it took in 2022. Russia had a current account surplus of 20 per cent of GDP in the early months of the war, before the G7’s oil and gas sanctions began to bite.

Hence the apparent resilience of the Russian economy. It did not shrink by 10 per cent to 12 per cent as expected. The central bank says GDP contracted by just 2.5 per cent last year. But the picture deteriorated rapidly in the fourth quarter, and shock figures in January have since raised alarm bells at the Kremlin. State energy revenues collapsed by 46 per cent and the budget swung to a $US25 billion deficit in one month.

Russia has no internal bond market to fund deficits on this scale. The Kremlin is having to raid the national wealth fund. That dropped by $US38 billion to $US148 billion in January.

Putin can still sell his oil under the G7 oil price cap, activated in December. But the West controls 90 per cent of the trade through insurance, financing, and ship ownership.

China, India, or Turkey are all driving hard bargains, knowing that Russia is a distressed seller. Urals crude has been trading at a $US40 discount to Brent.

Russia is not going to run out of fuel or food but it lacks much else needed to sustain its war machine, and it is massively outpowered by the West.

Russia has lost its primary gas market in Europe forever. The price for liquefied natural gas that it can still sell has fallen 70 per cent since last August. Russia has now lost half its global oil export revenues as well, and that is much more painful.

Putin still has the means to torment the West. He could slash oil output by three million barrels a day, timed to coincide with recovering Chinese demand, and force the price to $US200 in hopes of provoking Europe’s frazzled democracies to turn against their leaders over Ukraine.

He might think he can recoup on price what he loses on volume. But such an oil shock would hurt China, India, and the global South even more than the West, and it would probably fail to shift democratic opinion.

The lesson of economic warfare, from the Continental Blockade through to the strangulation of Germany in two world wars, is that it takes a long time, but often ends with startling speed.

Why did the German spring offensive in 1918 crumble and set in motion the cascading collapse of the Wilhelmine system? Why did the nation snap after four years of stoic forbearance?

Because the country no longer had the economic means to wage offensive warfare. It had run out of workers for iron and steel plants. It had run out farm hands. It had run out of fuel, rubber, fertilisers, and food. It had run out of money.

Russia is not going to run out of fuel or food but it lacks much else needed to sustain its war machine, and it is massively outpowered by the West.

How does one go bust, to borrow the immortal line from Hemingway? “Two ways: gradually, then suddenly.” 

No comments:

Post a Comment