Russia: Counting The Losses


April 2, 2015: Russian economists see GDP shrinking another four percent this year and less than one percent in 2016 followed by growth. What the Russian economists will not openly discuss is that this forecast implies that something will be done about the corruption and lawlessness that makes it difficult for businesses to be created and grow. The government has some very good economic advisors but so far there has been little action on dealing with the corruption, which the economists (and most Russians) agree is the major obstacle to growth and prosperity.

The growing Russian use of armed (and diplomatic) aggression against its neighbors is hurting the Russian economy in unexpected ways. For example long time customers for Russian military equipment (weapons, spare parts and services) are becoming more reluctant to buy Russian. The reason is simple, Russia is now seen as unpredictable and unreliable when it comes to supplying support and spare parts for their weapons and equipment. This became obvious when Russia was hit with economic sanctions in 2014 for its aggression against Ukraine. Russia then threatened to halt shipments and support for weapons to any country that supported the sanctions. Soon Russia got the message and tried to back down, but it was too late. The message was sent and the damage was done.

Meanwhile the government continues to succeed at shifting the blame for the poor economy to the West and especially NATO. Most Russians believe that this is all part of a NATO plot against Russia and that their own government is merely responding to this aggression. President Putin still has approval ratings of over 80 percent. The sanctions are directed at the key people supporting Putin and the aggression in Ukraine but most of these targets are very rich and the only discomfort they endure is a fall in the value of their assets. For most Russians the deprivations are more tangible with rising prices, shortages and unemployment. For thousands of parents there is the son getting killed or wounded in the Ukraine where, officially, there are no Russian soldiers.

Ukraine has asked NATO for electronic warfare support and there has been no publicity about the response. That could mean that some NATO nations came through, quietly, mainly for the opportunity to get a better understanding of the latest Russian electronic warfare gear when used under combat conditions. That is important because Russia exports a lot of this equipment. The Russians don’t mind making their electronic warfare tech more vulnerable to theft because Russian manufacturers need the money to stay in business. NATO would simply like to know more about the latest Russian gear, just in case.

A Russian motorized infantry brigade in Western Siberia recently received fifteen modernized T-72B3 tanks. This is a modernized version of T-72 with an improved fire control system and next-generation communications equipment. The delivery was of the Russian effort to modernize its armed forces. Russia has over 5,000 T-72 tanks in use (2,000 in active service and 3,000 in reserve) and most of them are Cold War (pre-1991) vintage and seriously out-of-date compared to American, European and Chinese tanks. Modernizing these Cold War era tanks has been underway for a decade but is proceeding very slowly because of money shortages.

As much as Russia tries to hide the presence of Russian troops in the eastern Ukraine (Donbas) those troops have become more and more visible to the general public. The rebel controlled areas of Donbas are not heavily policed and many of the civilians there don’t want to be ruled by Russia but keep their mouths shut and their cell phone cameras active. With the addition of commercial satellite photos and military grade satellite photos released by the United States it has been possible to identify the extent of the Russian effort. Increasingly Russian soldiers are going public on the Internet and even in some Russian media about the presence and importance (for rebel success in Donbas) of Russian troops in Ukraine. From all this it appears that Russia has brought in over 40,000 combat and support troops from over a hundred different units. These troops are usually brought in for a few months, or as many as six months, then sent back to their home base and replaced by another unit. This is causing problems in Russia because many of the troops involved are conscripts and when these are killed the official story is that they died from something other than combat. The bodies are shipped home in sealed caskets which are often, in violation of government instructions, unsealed. When that happens the parents discover that their son died in combat and that gets around via the Internet and some of the more daring mass media. Most Russian mass media is government controlled, but the Internet dilutes the news monopoly that control of mass media used to confer. The situation has gotten worse as Russia has begun using special units of Interior Ministry Police to work behind units in combat and arrest any troops, usually conscripts, who try to run away. This harkens back to the World War II practice of having groups of KGB men behind the front line with orders to shoot on sight any troops they saw moving away from the fighting.

Since Russia began invading and trying to annex parts of Ukraine in 2014 there has been a substantial shift in population. Since early 2014 nearly two million people have left Russia. More than half these were Westerners (including many from East European countries) working in Russia, providing skills that Russia did not have. The rest were Russians, most of them highly educated and with similar skills to the departing Westerners. What all these migrants had in common was a desire to get away from an increasingly authoritarian, intolerant and economically disastrous Russian government. About half the departing Westerners and skilled Russians were replaced by more (less educated and skilled) migrants from the east (Central Asia, North Korea, China and the Caucasus). There would be more migrants from the east but the lower oil prices has caused an economic crises and fewer jobs, especially fewer jobs for the less educated. Since the current Russian government seems determined to continue its aggressive and anti-Western policies, the exodus of skilled Russians will continue. During the Soviet period such migration was forbidden and a growing number of Russians fear those Soviet era travel restrictions will return, because without such restrictions Russia will lose a critical number of skilled personnel needed to operate a modern economy. The current government seems unconcerned about this and has an attitude of “good riddance”. Some members of the government do realize the implications of these migration patterns but know better than to go public with their misgivings. If this trend is not reversed, Russia will continue to have a smaller, and less Russian and less educated population. If the current Russian leadership have their way the size of Russia and population will grow via conquest. As in the past, many of the neighbors are willing to resist.

One of the less publicized casualties of the current Russian aggression is the nuclear disarmament efforts that have been underway since the 1980s. Russia is no longer interested in nuclear disarmament but rather in further developing nuclear weapons. Russia sees its nukes as its most reliable and intimidating weapon.

Ukraine is also coping with economic problems caused by Russia. The major one is natural gas supplies. In the last year Ukraine has increased natural gas imports from the west by 138 percent and cut Russian imports by 44 percent. Even with that and reduced use of natural gas, Russia still accounts for over 70 percent of natural gas used in Ukraine.

April 1, 2015: In Yemen the Russian consulate was looted by Shia rebels who have entered some parts of the port city of Aden. Arab bombing attacks on the Shia rebels in Aden blew out most of the windows in the Russian consulate. Meanwhile a Russian transport sent to the capital (Sanaa) to evacuate embassy staff was turned away because of the Arab air attacks. The Russian transport landed in Egypt and plans to try again in a day or so.

March 31, 2015:  Russia and Turkey are negotiating terms of Turkey joining a barter arrangement with Russia. To get around the banking sanctions Russia has, in effect established a barter system with China, North Korea and Iran. China has become a major trading partner of Russia. As a result Chinese businesses with Russian dealings have been advised by their government to use the rubles they are paid for goods to buy Russian assets, which are finding far fewer other foreign buyers because of the Russian economic crises. This Chinese aid comes with strings, mainly in terms of Russia agreeing to sell more military tech (design and manufacturing methods) to China. Turkey is also looking for some payback although it is unclear so far what that is.

March 30, 2015: A Russian newspaper published an interview with Syrian president Assad thanking Russia for continuing to deliver weapons. Assad said these were orders from before the 2011 revolution and after (when a UN arms embargo went into effect). Russia did not respond to international media queries but inside the country it’s a different story. Since 2011 the Russian government openly boasted (at least inside Russia) of how it was backing the Syrian government against a popular uprising and how this had been successful. Russian arms shipments (via air and sea) increased after 2011 and has included armored vehicles and UAVs. Syria accounted for seven percent of Russian arms exports in 2011, and Russia wants to show that they always deliver. Russia was also building a naval base at the Syrian port of Tartus in 2011 but the several hundred Russians who there working on the project were soon withdrawn from Syria and the Tartus project suspended until the war is over. 

March 29, 2015: Russia agreed to let Chinese banks with questionable finances (even by Chinese standards) to operate in Russia. This is because Russia needs access to investment capital as the sanctions have deprived Russia of this. Russian economists caution against this sort of involvement with China but are ignored because the struggle with the West is considered a higher priority than the future health of the Russian economy.

March 25, 2015: The U.S. delivered the first ten of 230 armored hummers. The Americans are also providing UAVs, radars and other electronics.

March 23, 2015: The Russian Finance Ministry has gone public with its warning about how much the government is depending on the $85 billion Reserve Fund to cover budget deficits. In 2015 the government is spending $50 billion of the reserve fund to cover deficit spending. When the Reserve Fund is gone the government risks ruinous hyper-inflation by simply printing more money. At this point the government is betting it will win its war of wills with the West by 2016. Meanwhile a fifth of the 800 Russian banks are in financial trouble because of the sanctions and the plunging price of oil. Most economists believe Russia needs oil selling at $100 a barrel to avoid an extended economic recession. Currently oil it at less than $50 a barrel and the Arab Gulf oil states are not inclined to help Russia out by cutting production and forcing oil prices back up. This is because Russia is increasingly very open in its alliance with Iran, which the oil price war is mainly aimed at. Meanwhile the Finance Ministry worries that the sanctions are doing permanent (or at least long term) damage to the Russian economy. Europeans no longer want to buy Russian natural gas, or much else Russian because now West Europe sees Russia more of a threat than a reliable and profitable trading partner.

March 21, 2015: in the south (Dagestan) police clashed with Islamic terrorists and killed seven of them.

Russia threatened Denmark with nuclear attack if Denmark decides to participate in the construction of an American anti-missile system to protect Europe from such attacks out of Iran and, apparently, now Russia as well.

March 20, 2015: Ukrainian troops near Mariupol clashed with pro-Russian rebels and killed three and wounded six. The rebels appear to be bringing in more troops and weapons forward in preparation for another effort to take Mariupol. This is in violation of the truce and is nothing new as far as the Russians and rebels are concerned.

March 19, 2015: EU (European Union) leaders agreed that their sanctions on Russia would remain in force until Russia made peace with Ukraine.

The U.S. has agreed to send 290 American paratroopers from a brigade based in Italy, to Ukraine and being training 750 Ukrainian troops in April.

March 16, 2015: Russia began nationwide military training exercises involving 38,000 troops, 3,360 vehicles, 41 surface warships, 15 submarines and 110 warplanes.  This is expensive but the government is willing to pay what it costs to increase the combat capabilities of its troops.

The U.S. made clear that the economic sanctions against Russia will go on as long as Russia continues meddling in Ukrainian affairs. The EU nations have already said the same thing.

March 15, 2015: Ukrainian leaders are going public with their misgivings about the current ceasefire with Russian and Ukrainian rebel forces in the east (Donbas). The rebels continue to fire on Ukrainian troops and sometimes even try to advance, often retreating only after taking casualties. The rebels also block European ceasefire monitors. Russia denies any problems exist except those caused by Ukrainians and NATO agents.

March 14, 2015: Iraqi media has been playing up the aid Iran is providing to defeat ISIL. This makes Iraqis more eager to do business with Iran. That is important for Iran because of a new agreement between Iran and Russia signed today. The two countries worked out details and agreed to form a joint supervisory board for a joint bank which would enable Iran to evade sanctions, at least with Russia, by gaining access to the Russian banking system. While this subterfuge could expose Russia to more international banking sanctions, Russia apparently sees that coming anyway and is seeking to build a separate international banking system for outcast nations. Iraq has become an unofficial member of this new banking system with a growing number of Iranian firms establishing themselves in Iraq. Afghanistan is also a growing trade partner but because Afghanistan relies so much on Western aid to stay solvent, Iran cannot get as involved in manipulating the Afghan economy to help Iran beat the sanctions. If China can be persuaded to join this arrangement it will be a formidable competitor for the existing international banking system.

March 10, 2015: The U.S. accuses Russia of continuing to send weapons to Donbas rebels in violation of the recent ceasefire.





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