The Russian economy is suffering from the consequences of the attack on Ukraine. The armaments industry costs a lot of money, and there is a lack of qualified workers due to mobilization. In an interview with ntv.de, military economist Marcus Keupp, a lecturer at the ETH Zurich Military Academy, predicts a bleak future for the Kremlin – including for German companies that have stayed.
ntv.de: The Russian artillery fire on the front in Ukraine has decreased by 75 percent in some cases. US officials don’t have a statement yet, do you have one?
Marcus Keupp: That’s not a riddle, on the contrary, it already existed in the second year of the First World War. At that time, the warring parties tirelessly fired artillery ammunition at each other until they realized that their defense industries could no longer keep up with the post-production.
In its warfare, Russia relies on artillery. How much longer can the Kremlin troops wage a war like this?
That is the question: either there is an extremely powerful defense industry that can produce these quantities, or they take shells from their Soviet depots. Russia had about 17 million artillery shells before the start of the war, both since 1991 and ex-Soviet stocks. Average rate of fire since February is about 30,000 artillery shells per day, maybe 50,000 at peak in summer. Altogether, almost eleven months after the start of the war, that’s about 10 million artillery shells that Russia has fired so far.
Can the Russian defense industry compensate for this?
The Russians’ production capacity is only 1.2, maybe 1.7 million artillery shells per year. If they maintained their rate of fire, they would have such ammunition for another 233 days. An army cannot go to war if it runs out of ammunition in less than eight months. The country faces a problem: Russia did not expect the war to last so long. They have therefore been rationing their artillery ammunition since last autumn.
For a supposedly military nation, 1.2 million artillery shells a year doesn’t sound like much.
The Russian defense industry has always had two problems, even in the Soviet Union. First, corruption: a large part of the money earmarked for armaments ends up in the pockets of corrupt officials. Secondly, the Russian defense industry is technologically inferior: it can produce, but not particularly modern. What Russia can produce is primarily 20th-century ordnance. That’s not much for a huge country with its supposed wealth. This bears no relation to what the West and its allies can deliver to Ukraine.
What role do sanctions play in this?
The sanctions do not hit the defense industry as badly, especially when it comes to simple systems such as artillery shells or battle tanks. When the full-scale attack began in February, many observers had hoped Western sanctions would stall ammunition supplies. It was overlooked that the entire Russian arms industry has been sanctioned since 2014 – not just by the USA. These sanctions primarily affect the Russian export business, not production. No Western company is allowed to deliver more components, no Russian armaments manufacturer to export to the West. All bypass routes are prohibited.
Despite this, Russia can still get hold of western components.
There is one exception: Iran. Images of Russian armaments containing Western chips, for example, keep popping up. They were then smuggled to Russia via Iran or bought on the Chinese market.
Let’s turn to the overall economic situation. The Kremlin’s budget deficit is expected to last year was 47 billion US dollars. What remains of the Russian economy?
For Russia, it’s back to the Soviet Union. Their economy was based on three principles: First, the primacy of the military – so money goes first into upgrading the army. Second, the pacification of the population – food and rent were subsidized to prevent unrest. And thirdly, the import of the remaining goods. The great irony is that Putin is popular with Russians because he has launched a number of major social programs. He improved the situation of pensioners and tried to alleviate poverty. He financed it with the high profits from the export of gas and oil.
The West hardly gets any fossil raw materials from Russia anymore, so this source of income is gone. Where does the money come from then?
First, Putin takes the money from the national welfare fund, i.e. the piggy bank. In view of the costs of the war, however, this will not last long. Then there’s social spending. The poverty rate in Russia will certainly rise significantly. At some point Russia will look like the Soviet Union again, a gray country with an authoritarian military and an oppressed population. That’s sad, but I think it’s the most likely scenario.
In addition, the Kremlin has mobilized hundreds of thousands of men and will likely continue to do so. These workers are missing in the domestic economy, right?
Russia has so far claimed they would mobilize 300,000 people. But only part of those mobilized are at the front, the rest will probably be retained and apparently trained longer. The number of deaths is the only indication of how many there really are: in Bakhmut, for example, about 600 soldiers are said to have died in a recent Ukrainian attack. The exact number of those mobilized is also irrelevant: it is estimated that the Russian economy now lacks a million qualified workers. In addition to those who were mobilized, this also includes the 700,000 people who fled. To make it clear how serious the situation is: the Russian Digital Ministry issued a statement during the week that all IT specialists who return voluntarily do not have to join the military.
That sounds very desperate.
The labor shortage is hitting Moscow’s economy hard. The financial and service sector in particular is very IT-intensive in Russia. Russian banks are currently starting to think: How do we keep our business going if all the people are missing? The problem isn’t necessarily that they die in the military, but that they fled to Dubai, China or Kazakhstan. These long-term consequences should not be underestimated. Should Putin launch a second, third, or fourth wave of mobilization, the economy will quickly perish.
Does that leave no long-term prospects for Russia?
Yes. There is also a point that some German companies do not have in mind: reparations. Let’s assume the war ends in late autumn 2023 with a Russian defeat. Then I find it extremely unlikely that there will be a major reorganization, such as the 1815 Congress of Vienna, when the continent was reorganized after the fall of Napoleon. But who then pays for the damage that has occurred in Ukraine so far? As of now, it’s $800 billion, and it’s growing every day. A beleaguered Russia that is ultra-nationalist and revanchist will definitely not do this voluntarily.
Rather?
Western states will first confiscate and expropriate all Russian assets. There is already such a law in the USA, and one is being drafted in France. What is likely to follow is retaliatory action by Russia. They, too, will expropriate all Western companies that have remained. This also applies to German companies. I don’t think many Western companies realize this. They have not yet understood that the war is not only temporary, but that a new world order is emerging. The consequences are much greater than the fighting in Ukraine. The whole world is rebuilding. Very few have understood what that actually means.
Sebastian Schneider spoke to Marcus Keupp