In an interview with Peter Golevsky of Rosbalt media, Sergei Tsyplyaev, predicts a rough ride for the Russian economy, as the war in Ukraine is now in its seventh month and has become a war of attrition rather than the anticipated short triumphal operation. Sanctions are causing production difficulties that are compounded by the partial mobilization that has called up key personnel and has prompted others to flee Russia.
Tsyplyaev also highlights a point that has been played down in Soviet and contemporary Russian history. Russia's heroic efforts against Germany during WWII enjoyed massive US support in the form of equipment and food deliveries. In the current struggle, Ukraine is the beneficiary of such assistance from not only the US, but from other countries with huge economic potential. Tsyplyaev signs off with the aside "all this could have been predicted.
The interview with Tsyplyaev follows below:[1]
Sergei Tsyplyaev (Source: Zaks.ru)
"The partial mobilization that started in Russia on September, 21 sparked a heated discussion on the prospects of not only for the further course of the special military operation [hereafter – the SVO], but also for the Russian economy per se. Many experts predict its inevitable transition to a "war footing." Sergei Tsyplyaev, Authorized Representative of the St. Petersburg University of Technology, Management and Economics and Editor-in-Chief of Vlast magazine, analyzes the current situation.
- What are the main economic consequences of partial mobilization for both the public services sector and private businesses?
- First and foremost, any military campaign constitutes a serious burden on the economy. It has always been the case. The question is always the following: will the economy withstand this military campaign, or not? There were times when it simply couldn’t support the war efforts, for instance, at the end of World War I, a lot of countries [including Imperial Russia] simply collapsed.
Therefore, now, when we have a concentration of human, material, and financial resources on the military campaign, it’s clear that all of these resources are being withdrawn from the economy.
There are several factors that have hit it hart. I must say that first and foremost it’s sanctions. The sanctions, that are associated with the departure of high-tech companies, and many of our plants are experiencing problems with the supply of components that many Russian plants are experiencing, as well those sanctions that bar us from exporting certain goods.
The second serious issue, naturally, is precisely the number of people who are involved in the economy and may be mobilized. At first glance, may seem that 300,000 conscripted people is not a lot. The working-age population accounts for half of Russia’s population, about 70 million but we are observing the outflow of people who are simply fleeing the country. I have to say, very often people who work in quite serious public offices are being pulled out. This can have an impact even with a small number of conscripts.
Now there are entire industrial sectors that are beginning to come forward with complaints and requests in order to limit the draft to a certain extent, or to seek accommodation for take business interests. Additionally, they ask for draft immunity for management and key employees. Operations of an entire enterprise will simply grind to a halt no matter how many workers are left there, provided one drafts CEO and few key administrators. This is a serious test for the economy and, in general, its serious restructuring, which is, in fact, underway right now.
- Is this very restructuring of the economy, as they are currently talking, on a "war footing" really implementable considering today’s conditions?
- Naturally, it’s possible to restructure the economy towards a military footing This is an understandable task, and it’s happening. Many defense enterprises operate in three shifts. This means withdrawal of finances and revenues from other spheres. And this means, naturally, the withdrawal of a certain amount of material assets.
Once again, I repeat that the key question: how long will the economy be able to withstand it? It’s obvious that this will cause a drop in living standards. Naturally it means forgoing a lot of things. But if you cross a certain line, the civilian economy will crumble. The military economy is also not isolated from civilian one; it cannot exist without the entire infrastructure of the civilian economy being preserved.
We understand that those people, employed at enterprises that produce tanks, missiles, guns, everything else, they don't go shopping for tanks and missiles, but for meat, milk, bread, and etc. If this is not provided, then, in the end, the economy will simply collapse.
Let’s take, for example, the times of the Great Patriotic War. Back then under the Lend-Lease agreement we were receiving a rather large amount of equipment and goods. For instance, there were three times more Lend-Lease trucks, than locally produced, for locomotives, the Lend-Lease supplies exceeded by nearly 300% the production capabilities of the Soviet Union. Since 1943, food accounted for a very serious volume of Lend-Lease (more than 25%), because one had to feed the country somehow. That is, in fact, the situation.
- In the current year, defense spending increased by a third, from 3.5 trillion rubles to 4.7 trillion rubles. In 2023, the government plans to spend 5 trillion rubles on defense, as well as another 4.2 trillion rubles on national security and law enforcement. Will the budget withstand it?
- It’s not about the budget. The budget is essentially a purse. The question is whether the economy will withstand it, because this money has to be collected for the budget. We are already hearing talks that an additional export duty is being introduced.
There will be additional taxation, which means, that it will be necessary to increase the money withdrawal from the economy for the budget.
All defense spending should show up in the price of meat, milk, bread, housing and utilities, etc., so that this money can then be taxed and withdrawn into the budget. It all depends on the terms of the SVO. If initially there were talks about a very short term and there was hope that it would have almost no effect on the economy, today we already witnessing a seven-month-long history.
It looks like it's going to be a "game of attrition" to see who can hold out longer. Ukraine is largely maintained by the Lend-Lease supplies, an "external supply" regime. According to Kyiv's declarations, 40% of the budget is covered by external revenues. I believe that military equipment will be supplied by a huge number of countries that have quite large economic potentials. Thus, we will face very tough competition ahead, and the economy will be under incredible pressure from this campaign. By and large, it was predictable.
[1] Rosbalt.ru, September 29, 2022.
