Russia no longer has the economic means to wage offensive warfare

Ambrose Evans-Pritchard

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.
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 70pc 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. 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 $40bn (£33bn) national project to produce 90 nm chips en mass 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. It leaves them critically dependent on foreign technology,” 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” twenty times higher. James Lewis, technology chief at Washington’s Center for Strategic and International Studies, says it would take two to three years to reconfigure platforms to accept many of these Chinese imports. “They don’t make all the types of chips the Russians need. While they could gear up to do this, they’ve seemed reluctant,” he said.
RUSI’s James 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. The surprise is that Russia has continued to rely on US chips a full year later to keep the war industry going, obtaining them illicitly without the knowledge of the manufacturers.
“Can Chinese manufacturers replace all those components? I am sceptical. We’ve hardly seen any of these Chinese chips in Russian weapons platforms. They haven’t actually done it,” 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.
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 20pc of GDP in the early months of the war, before the G7’s oil and gas sanctions began to bite. It had a fossil-funded budget surplus that permitted guns and butter at the same time. Hence the apparent resilience of the Russian economy. It did not shrink by 10pc to 12pc as expected. The central bank says GDP contracted by just 2.5pc 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 46pc and the budget swung to a $25bn 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 $38bn to $148bn in January. Lumpy outlays on weapons may have distorted the figures but a “burn-rate” of this magnitude means that Russia will soon have to face draconian austerity if it wants to keep fighting.
Putin can still sell his oil under the G7 oil price cap, activated in December. But the West controls 90pc of the trade through insurance, financing, and ship ownership. His “shadow fleet” has mostly failed to materialise. The ships are too big to dock in Russian ports. China, India, or Turkey are all driving hard bargains, knowing that Russia is a distressed seller. Urals crude has been trading at a $40 discount to Brent.
Some Russian oil ends up in Europe again after a round trip to the Far East – with shocking CO2 emissions – but that does not mean the sanctions are futile. The point is to deprive the Kremlin of money. Russia has lost its primary gas market in Europe forever. The price for liquefied natural gas that it can still sell has dropped 70pc 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 $200 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 out-powered by the West. How does one go bust, to borrow the immortal line from Hemingway? “Two ways: gradually, then suddenly.”
The Telegraph