One Trillion Dollars In 2023: How Russia's Military Came To Outspend The United States Part 1
What's a Ruble really worth? Part 1
(Note: Commodity and Exchange Rates are as of 3/19/2023)
I. A Gas Station With Nukes
The premise behind the war against Russia rested on the assumption that they're just a gas station with nukes. Obama called Russia a regional power. If we armed Ukraine and used them to attack Russia, so what? The Russians lack the industrial base to be a superpower anymore. They are too poor to win a great power conflict. NATO assumes it has total conventional dominance and that the Russian government will collapse in the face of a lost conventional war. NATO has decided the Russian government would prefer collapse to nuclear war.
Putin has said that this war is an 'existential threat' to Russia. He has said “Why do we need a world, if Russia is not in it?” A little ambiguous, but not so ambiguous that a Journalism Major couldn't catch it. If they can comprehend a threat by John Gotti, they should be able to comprehend a threat of very 'unenvironmental' (https://www.bbc.com/news/world-europe-64957792) nuclear war. Right there, reality conflicts with the Western narrative, so the official censors at Google, Facebook, The New York Times, and The Washington Post play it down. Media reports as if NATO and maniac Western politicians in general weren't trying to turn Cuban Missile Crisis fan fiction into a real life inferno. Militarism in Ukraine is celebrated as if it was another regional war: not a proxy war against a nation with the most nuclear weapons in the world (https://www.bbc.com/news/world-europe-60564123)... oh, you thought that was the USA? That's okay, Gary Kasparov makes the point that we get fatigued rebutting a government's obscene lies (
)... and that this is the point of obvious, obscene lies: to exhaust our critical thinking faculties. Smokescreen is part of that. The diarrhea stream of lies ablates even the most disciplined and sanitary of information handling processes. This is why life is better understood by statistics that haven't been manipulated yet to reinforce the mainstream narrative.
Ignoring for a moment that flawed analyses are usually projections of the analyst onto the subject, let's look at information that the wealthy use to make money every day: financial data. If the world is run by plutocrats, they still need reliable information so they can profit.
It goes unnoticed in the Western media milieu that the Dollar exchange rate value of the Russian economy is less than the value it generates in Dollars per year. It roughly matches Russia's commodity and export value and completely disregards the value of all other services and manufacturing. The amount of stuff Russia produces each year is worth more than what financial markets are willing to pay, because Russia 'must be punished' for being... Russia. Refusing to trade with Russia and devaluing its entire productive base in Dollars in order to harm it in case trade occurs, does not help anyone understand the actual productive capacity of the Russian economy.
Western estimates of the Russian economy were flawed and failed to predict its resilience when exposed to sanctions (https://www.latimes.com/world-nation/story/2023-03-13/russia-economy-holds-up-sanctions-challenges-ukraine-war)(https://www.fierceelectronics.com/sensors/russia-faces-chip-shortage-missiles-parts-ukraine-invasion). Russia's ability to supply its military (https://www.msn.com/en-us/money/other/russia-is-successfully-evading-western-technology-sanctions/ar-AA18gasM) for over a year now during a stand-off with NATO backed Ukraine is proof of its ability to fight a Great Power war. NATO does not have the discipline to enforce a sanctions regime like COCOM (https://en.wikipedia.org//wiki/Coordinating_Committee_for_Multilateral_Export_Controls). Trade with China and sanctions circumvention intermediaries has nullified most of the sanctions damage, because Russia is mostly self sufficient in terms of its productive military supply chain. Chips it needs for missiles and modern fire control are available to it. Its economy grew at its QUICKEST pace since 2008 (https://www.bloomberg.com/news/articles/2022-02-18/russian-economy-grew-4-7-in-2021-quickest-pace-since-2008), despite sanctions. So much for the Ruble becoming 'rubble.' (https://www.politico.com/news/2022/03/31/ruble-recovery-russia-biden-sanctions-00021850)
Failure to predict Russian strength is a failure of the current political-economic model paradigm: ie the Washington Consensus. Too many empty suits in the policy analysis world led to this intelligence failure.
They didn't and still don't know what a Ruble is worth.
II. How Big Is Russia's Economy?
Is Rostat right when it reports that Russia's GDP of 92.319 trillion Rubles is worth $1.1989 trillion Dollars at 77 Rubles to the Dollar? One nineteenth the size of the US economy? Is Russia's manufacturing sector really 75% of Britain or France? Does it really have less industrial capacity than India?
TABLE 1
Manufacturing GDP: 11,687.4 billion Rubles @ 77 Rubles/$: $151.784 billion
Mining GDP: 7846.8b Rubles @ 77 Rubles/$: $101.9 billion
Utilities GDP: 2328b Rubles @ 77 Rubles/$: $30.233 billion
(https://tradingeconomics.com/russia/indicators)(https://rosstat.gov.ru/)
Total: 21,862.2 billion Rubles / $283.917 billion
For anyone paying attention to Russia for more than three seconds, we can see right away that those stats are wrong. Way wrong.
When we add up the entire known value of the Russian commodity sector, metals, manufactured exports, and arms, we come up with a figure basically equal to Russia's exchange rate Dollar value. We also see that Russia's energy market alone dwarfs all cited industrial statistics.
Currently Russia produces 3.741 billion barrels of oil per year. Urals crude right now is $49.89/barrel (3/19/2023) and trades at about 68.37% of Brent at $72.97/barrel (https://tradingeconomics.com/russia/crude-oil-production) (https://www.eia.gov/) so at minimum, Russian oil production is worth $186.63 billion at the spot market price. But Russian oil trades at a discount because it's Russian and penalized with sanctions. We see that in March, 2021, Urals were trading at 90% or so of Brent. Assuming we actually believe in commodities and their fungability, if Russian oil was trading at 90% of today's Brent it would be about $65.673/barrel which would mean Russia's oil sector in a pure commodity environment (the purpose of this analysis) would be worth $245.68 billion. Since we are measuring the strength of its economy, the larger number makes more sense. The West wants Russia's resources, which was the cause of all the sanctions against Russia in the first place. One could argue that since Russian oil can't find a market, its price should reflect that. However, one could also argue that the current war is a conflict between political economic paradigms—and since the modern world can't run without oil—a critical commodity is a commodity despite political blockading. Therefore when measuring industrial output, independent of trade, the pre-war commodity rate seems a better measure.
Russian Oil Sector Value 3/19/2023: $245.68 Billion @ $65.673/barrel.
Russia Exported 2.5 billion megawatts of gas power in 2021. Current TTF prices are $42.86/MWh, so the value of that gas to Europe is $107.15 billion. Russia's total gas production in 2021 was 26.6 Quadrillion BTU or 7.796 billion megawatt hours (https://www.eia.gov/international/data/world/natural-gas/dry-natural-gas-consumption?pd=5&p=0000001001vg0000000000000000000000rg0000000000g&u=0&f=A&v=mapbubble&a=-&i=none&vo=value&t=C&g=none&l=249--197&s=94694400000&e=1640995200000&ev=false&), or $334.136 billion at today's TTF gas prices. Since we are valuing the industry of Russia, this again, is more effective in helping us understand the size and quality of its economy. https://www.eia.gov/international/content/analysis/countries_long/russia/
With coal, it's the same story. Russia produced 10.5 quadrillion btu of coal in 2021, or 378 million tons of coal equivalent (27.778mm btu = 1 ton coal). Coal today is $173/ton, so $65.394 billion in production.
TABLE 2
Oil: $245.68 Billion (3.741 billion barrels/yr) @ $65.673/barrel (90% Brent)
Gas: $ 334b (7.796b MWh @ $42.86/MWh)
Coal: $65.394b (378 million tons x @ @ $173/ton)
Total Energy: $645.074b
Other Commodity Figures, as of 3/19/2023:
Steel: 158m tons; @ $615.58/ton (4234 Yuan/ton; 6.87799 Yuan/$); $97.261b
Aluminum (https://www.statista.com/statistics/1027666/russia-primary-aluminum-production/) 3.93m tons; @$2283/Ton: $8.972b
Copper: ; 1.354 million tons @ $3.9135/lbs; $5.3b (https://investingnews.com/daily/resource-investing/base-metals-investing/copper-investing/copper-mining-in-russia/)
Nickel: 220k tons; @ 23147/Ton: $5.092b (https://www.statista.com/statistics/260770/russias-mine-production-of-nickel-since-2006/)
Gold: 320k kg; 10,208,000 troy oz @ $1988/t. oz, $20.293b (https://www.ceicdata.com/en/indicator/russia/gold-production)
Precious Metals: Platinum/Palladium/Diamonds: $31.59b (https://tradingeconomics.com/russia/exports-by-category)
Subtotal of Some Metals: $168.508b
Manufactured exports in 2021 show other industrial production and we use it when we have an absence of other reliable data: Machinery & Equipment: $32.63b, Diesel: $26b, Liquid Fuels: $22.8b, Lumber: $6.1b, Fertilizer: $12.489b, Gasoline: $2.5b, Plywood: $1.937b, Misc manufactured exports: $11.663; Subtotal: $116.119 billion. (https://tradingeconomics.com/russia/exports-by-category)
Russia exported 19% of the global arms in the 2017-2021 period. (https://www.sipri.org/sites/default/files/2022-03/fs_2203_at_2021.pdf) The World Bank, which cites a SIPRI report from 2020, states Russia exported $3.2 billion in arms (https://data.worldbank.org/indicator/MS.MIL.XPRT.KD?most_recent_value_desc=true) and the Ruble averaged about 75/$ that year, so 240 billion Rubles of additional arms production. We can see that the entire Russian arms sector had $26.4b in domestic sales in 2020 with another $3.2 billion in export sales (https://sipri.org/media/press-release/2021/business-usual-arms-sales-sipri-top-100-arms-companies-continue-grow-amid-pandemic) which puts the Russian arms industrial industry for that year at about 2.22 trillion Rubles, or $29.6 billion.
TABLE 3
Energy: $645.074b
Some Metals: $168.508b
Manufactured Exports: $116.119 billion.
Arms: 2.22 trillion Rubles, $29.6 billion.
Total: $959.44 billion
If we add up all Industry (Energy + Some Metals + Manufactured Exports) and exclude arms production, we get $929.619b. Many times larger than all those combined mining and industrial stats.
Russia is also an agricultural superpower (https://www.dtnpf.com/agriculture/web/ag/blogs/an-urbans-rural-view/blog-post/2021/02/19/russia-dominate-world-agriculture) and we should include agriculture in the commodity figure. We're going to use Statista's figure, which shows Russian Agriculture at 8.85t Rubles, $114.93b (https://www.statista.com/topics/6923/agriculture-in-russia/#topicHeader__wrapper). Even here, Rostat is unreliable, showing 3.556 trillion Rubles for the Russian agricultural sector. That's $46 billion (https://tradingeconomics.com/russia/gdp-from-agriculture) @ 77/$. But this is again impossible, because Russian wheat production by itself (https://www.euronews.com/next/2022/08/16/russia-grains) was 94.7 million tons, 3.156 billion bushels, @ $7/bushel is $22 billion. Almost half of agricultural production. Add in beef ($4.88b), chicken ($5.64b), pork ($5.69b), corn ($3.7b), and potatoes ($5.681b) (https://ipad.fas.usda.gov/countrysummary/default.aspx?id=RS), and we already have a bigger number than Rostat provides.
Total Dollar Value of industrial and commodity production, excluding manufacturing: $1.0445 trillion
We're to believe that Russia is running on $154 billion in services per year because it has a $1.1989 trillion economy? This is impossible. Something is wrong with the reporting.
We see that these figures do not at all match the ones offered by Rostat, neither by exchange rate Dollars, nor in Rubles.
If we add up all the metals production we have (some metals, not all), we get more than the mining production.
If we add up just gas, we get much more than manufacturing, mining, and utilities combined.
What explains this? First off, one explanation for much of the discrepancy comes from the Soviet nature of the Russian economy. Dual use supply chains exist to serve civilian and military needs: optimized for the latter. These don't convert great to Dollars. A tractor factory that makes mediocre tractors (competitive as import substitution) can convert to making cheap and good tanks is not going to be valued in global finance. Downstream suppliers won't be either.
Just like there wasn't a Reichmark-Dollar market in World War 2, there isn't a Ruble-Dollar market now. The Dollar wasn't convertible into Reichmarks in WW2, but that didn't mean one should have measured the US economy by all traded Reichmark-Dollars because there was no market liquidity. That would have been absurd. Just because we can't use a Ruble doesn't mean it has no value. But since value is measured in Dollars, there is an illusion that the Ruble has limited value and this is where political-economic analysis fails.
One could argue that Russian production isn't 'profitable' so it isn't of any value and deserves the liquidity famine. This disregards heaps of Western zombie companies with credit ratings they don't deserve (if credit rating is to mean anything)(which it doesn't). If financialization is the standard by which assets are valued and measured, then denial of liquidity will necessarily destroy the book value of 'unprofitable' assets. Google didn't make a profit for years. Nor did Facebook. By this argument, those 'unprofitable' companies should have been worth zero. Oh, they were growth? Their era hadn't arrived yet? One could say the same about munition factories in a time of peace. War doesn't make assets, it destroys them. Military production is in service of destruction: the opposite of fixed capital investment. Blending military assets in with financial assets confuses their purpose. Financialization is how the West holds its military assets, but that hardly means that financialization is the way to measure military assets or their downstream productive facilities.
Another explanation is that there haven't been major updates on the Russian economy since September 2022 and information since December 2021 has been unreliable at best. There's no way that such a huge discrepancy between commodity prices and stated industrial figures could emerge in such a short period of time and it also doesn't explain why the discrepancy existed back then.
Shouldn't we ask if such misreporting would benefit anyone? What if Russia wanted to misreport the nature of the Russian economy? This segues to an important Russian concept known as Maskirovka: Russian military deception (https://en.wikipedia.org/wiki/Russian_military_deception). Since political-military-economics are an aspect of war, economic statistics is a domain of war. But why would Russia want to deceive the West with its economic statistics? Numerical analysis provides an answer.
The OECD analyzes components of members' GDP and has published the result (https://data.oecd.org/trade/trade-in-goods-and-services.htm), showing that Russia's Value Added by activity: Manufacturing 14.74% Industry: 27.65%
We're using incomplete figures for Russia in the most conservative way possible. If we separate out Manufactured Exports ($116.119b), and 2020 Arms Spending ($29.6b) from other industrial figures, that equals $145.719b which is close to the official manufacturing GDP ($151b).
If we add up other industrial figures (Energy: $645b and Metals: $168.5b), we get: $813.5 billion.
When we divide known industrial and manufacturing figures by the OECD value added by activity calculation, we get:
GDP by OECD Manufacturing ($145.719b, 14.74%) Method: $988.59 billion
GDP by OECD Industry ($813.5b, 27.65%) Method: $2.942 trillion
Industry 2.942 /Manufacturing .98859 = Industry/Manufacturing Ratio: 2.9759
To match Manufacturing to Industry ratio, either manufacturing needs to be 2.9759 times bigger, or industry needs to be 2.9759 times smaller. Our other methods show that industry can't be smaller. That suggests that manufacturing needs to be bigger. 2.9759 x $145.719 = $443.65b. This gives us a sense of manufacturing purchasing power parity, but it's very rough. This method also gives us a better sense of unaccounted for manufacturing.
Using this method (PPP Manufacturing ($443.65b) + Exchange rate industry($813.5b)), we see total Russian industrial and manufacturing output at $1.257 trillion making it the world's third biggest industrial power. If we use unmodified manufacturing and we use 2020 figures, we get $813.5b + $145.719b = $959.219b
China ($5.8t) (https://tradingeconomics.com/china/indicators)
USA ($2.648t) (https://tradingeconomics.com/united-states/indicators)
Russia ($1.257t / $959.219b)
Japan($892b)(https://tradingeconomics.com/japan/indicators)
Germany ($713b)(https://tradingeconomics.com/germany/indicators)
Applying the CIA World Factbook's (https://www.cia.gov/the-world-factbook/countries/russia/) estimates for the Russian economy, we see manufacturing and industry estimated at 32% of its GDP. When we plug in our corrected industrial figure ($1.257t / 32%), we get a $3.928t economy. For a 92.319 trillion Ruble economy, that means the Ruble should trade at 23.5 to the Dollar.
Is this a gerrymandered result? Compared to a pro forma Dollar PPP method, this seems principled by comparison. By measuring Russia's economy in Dollars or even PPP, there is an attempt to distort total Russian economic capacity or to misdirect away from actual Russian industrial capacity. We just showed that Dollar PPP is not an effective estimate of Russia's economy. If anything, it appears to prove that the official statistics the West is using to evaluate Russia, have been manipulated to deceive.
Human capital is another good measurement that explains Russia's power as a country. Does Russia have the labor force to support its supposed economy? The OECD has stats on that (https://data.oecd.org/eduatt/population-with-tertiary-education.htm). Labor Force: 75.6m workers. 62.1% /50.3% blends to 56.2%: 42.487m with Tertiary or higher education. USA has about 80m by comparison. But Russia has almost twice as many science and engineering graduates: 454k for Russia vs 237.8k for USA. Of course the USA is importing graduates from other countries, but this should demonstrate that Russia has more than one nineteenth the technical power of the United States.
Looking again at the number of Russian engineering graduates, we see that Russia might have more technical and engineering talent than the United States. Engineers: 454k Graduates (#3) (https://www.eit.edu.au/the-top-5-engineering-graduate-producing-countries/)(Educational achievement: https://data.oecd.org/eduatt/adult-education-level.htm#indicator-chart
OECD (2023), Adult education level (indicator). doi: 10.1787/36bce3fe-en (Accessed on 05 March 2023)). For a labor force half of the USA's to have almost double the number of Engineers means Russia might be up to four times more technical per capita than the United States.
Now that we've demonstrated that there are many factors that suggest the Russian economy is much stronger than popularly conceived, we return to the question: why would the Russians want us to underestimate their productive capacity?
Photo By Vitaly V. Kuzmin - http://www.vitalykuzmin.net/Military/ARMY-2016-Demonstration/, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=52213498
Part 2:
Good work, Arron. Thank You. I have just been introduced to it today.
Where did you get your Autodidact Degree?
:-)
The US makes movies, Russia make things that are useful