One Trillion Dollars In 2023: How Russia's Military Came To Outspend The United States Part 3

What's a Ruble really worth? Part 3

V. The Russian Arms Industry Ruble-Dollar Purchasing Power Parity

Now that we have established a baseline estimate for Russian military spending, let's figure out what does all that spending buy? Should we measure it in Dollars? But if we do that, what do we pick for the exchange rate? Boilerplate Purchasing Power Parity? A better method is to pick comparable military assets and compare price to produce.

Let's start with artillery.

Russia's production for 152mm ammo in 2021 was 733k at supposedly 48,000 Rubles a round: (https://www.eurasiareview.com/14122022-russia-struggles-to-maintain-munition-stocks-part-one-analysis/)(https://www.eurasiareview.com/21122022-russia-struggles-to-maintain-munition-stocks-part-two-analysis/). Shoigu's statements December 21, 2022 (https://tass.com/defense/1553957) give us a sense of increases in production for 2022: arms production up 30%, rocket and artillery ammunition production up 69% to 109%. Even if it only grew 69%, that's going to be 1.238m shells in 2022. Assuming the same rate of growth, that's going to be 2.093m shells in 2023. At a cost of 100.464b Rubles (48k Rubles/round). At 109% that would be 1.531 million shells in 2022 and 3.201 million shells in 2023 at a cost of 153.648b Rubles. This low tech item seems easier to mass produce and it's in high demand so it's quite likely the higher figure is more accurate.

But why would arms inflation go up so much faster than non-arms inflation? The Eurasia Review's figures simply accepts the inflation rate given to the cost of production is much higher than it is for the rest of the Russian economy. 362% total inflation since 2005. The Russian economy was about 65 trillion Rubles in 2005 and the Ruble was 28 to the Dollar, or $2.32 trillion. This 362% total inflation figure makes no sense at all and it's basically trash. And yet, this figure has been used to calculate Russian artillery costs. Since the Russian economy is double the size it was in 2005 in Rubles, and $1.688 trillion in 3/18/2023 Dollars (77 Rubles/$), it seems better to calculate $2.32 trillion / $1.688 trillion = 2005 Russia's economy was 34.44% bigger in Dollars than 2022 Russia's economy. Times twice as many Rubles (growth as proxy for inflation, because we're assuming Russia doesn't 'grow' it just has fluctuating exchange), we have 134.44% inflation. So instead of the cited 48,000 Rubles a shell for 2022, if we use the 13,224 Rubles/152mm shell in 2005 and adjust with our own custom inflation calculation, we get 31k Rubles a shell, or $402 @ 77 Rubles to the Dollar, which seems better. We were supposed to accept that Russia produces a low tech shell for almost the same cost as the US? At half the US cost, this seems more accurate. We also get a military purchasing power parity multiplier of times 2, since the Russian 152mm round is produced for about half the cost of an American 155mm round. ($820/shell)(https://www.fieldartillery.org/news/army-to-cut-155-mm-artillery-spending-citing-budget-pressure).

At best the US is producing 1 million 155mm rounds a year, which means Russia is currently outproducing the US in ammunition. (https://www.nytimes.com/interactive/2023/02/02/us/dc-ammunition.html) This corroborates what we see on the battlefield. El Pais claims that Russia has a 10 to 1 artillery advantage over Ukraine (https://english.elpais.com/international/2023-03-01/ukraine-outgunned-10-to-1-in-massive-artillery-battle-with-russia.html). Considering the USA planned on a downshift in munitions production for 2022 (In 2021 they planned to order 75,357 155mm rounds for 2022!), this production gap seems unlikely to change any time soon. (https://rusi.org/explore-our-research/publications/commentary/return-industrial-warfare). Does this figure hold true in other areas?

Returning to the cited Meduza article (https://meduza.io/en/news/2022/11/30/russian-defense-purchasing-set-to-increase-by-50-percent-in-2023), we see that a cited Forbes Ukraine article uses some non-systematic inductive reasoning that ignores historical data to arrive at its own estimates for Russian military spending at $82 billion (https://forbes.ua/war-in-ukraine/za-devyat-misyatsiv-rosiya-vitratila-na-viynu-82-mlrd-tse-chvert-ii-richnogo-byudzhetu-rozrakhunki-forbes-24112022-9997). This article facilely switches to Dollars when describing Russian military spending as unsustainable, ignoring that all Russian military spending is in Rubles: a currency THEY control. There is a superpower expanding its monetary supply so much it threatens the economy, but it's the United States, not Russia.

Russian supply chains require almost no Western inputs and they can't buy Western goods legally anyhow, so what is the point of dollarizing the production? It is a deceptive metric. This is an excellent example of the bad motives behind pro-NATO journalists when attempting to describe the conflict in economic terms. Forbes Ukraine has an interest in supporting the Western narrative of course. We see this is the way it calculates Russian hardware costs without citation “Russia fired rockets at $700 - $900 million in Ukraine in a few hours...” (https://forbes.ua/news/rosiya-za-dekilka-godin-vipustila-po-ukraini-raket-na-700-900-mln-bilshist-zbili-15112022-9785#:~:text=%D0%97%D0%B0%20%D1%80%D0%BE%D0%B7%D1%80%D0%B0%D1%85%D1%83%D0%BD%D0%BA%D0%B0%D0%BC%D0%B8%20Forbes%2C%20%D0%B2%D0%B0%D1%80%D1%82%D1%96%D1%81%D1%82%D1%8C%20%D1%80%D0%B0%D0%BA%D0%B5%D1%82,%D0%A5%2D555%20%E2%80%93%20%244%20%D0%BC%D0%BB%D0%BD.) “Forbes used the following estimates to calculate the cost of the X-101 rocket – $13 million, «Caliber» – $6.5 million, X-555 – $4 million.” Unfortunately, Forbes doesn't cite the ruble cost, but since the attack was October 15, 2022, we'll use 61 rubles to the dollar, so X-101 rocket – 793 million rubles, Caliber – 396.5 million rubles, X-555 – 244 million rubles.

If we use this Forbes figure (https://forbes.ua/inside/rosiya-vipustila-po-ukraini-raket-na-75-mlrd-otsinka-forbes-29042022-5753), they claim 1300 missiles equaled $7.5 billion, for $5.769 million a missile. Are they using purchasing power parity or Rubles, or are they switching back and forth? It claims 62% (806) of missiles in the sample were Iskander, 30% were Class X (390), and 8% Point-U (104). Another Forbes Ukraine article cites the cost of each of these munitions (https://forbes.ua/war-in-ukraine/rosiyani-za-pivdobi-vipustili-raket-po-ukraini-na-400-800-mln-infografika-forbes-10102022-8899). It doesn't show how this figure was calculated, but Iskander was $3 mil, KH-101 (Class-X) was $13m, and Point-U (Tochka-U) was $300k, which would equal $2.418b Iskander, $5.07b, and $31.2m of Point-U, which adds up to $7.5b. Again, so many scrambled numbers and nobody wants to cite the actual Ruble cost so we are left wondering whether purchasing power parity or an exchange figure was used.

A response article (https://en.defence-ua.com/news/what_is_the_real_price_of_russian_missiles_about_the_cost_of_kalibr_kh_101_and_iskander_missiles-4709.html) interrogates the figures cited in the Forbes article, but really winds up mistaking production cost with retail cost. We want to know the actual productive capacity of the Russian economy, so we need to know the actual Ruble cost, not the Dollar purchasing power parity of the missiles that are being used.

“The only figure known for sure where it comes from is the "cost" of a "Kalibr" cruise missile – 6.5 million US dollars per unit. Most likely, the information comes from the India-Russia 2006 contract on the purchase of 28 Klub-S 3M-14E missiles (export version of the "Kalibr") worth $184 million. This way, a single unit should cost 6.5 million.

“However, the contract includes not only the missiles themselves but related services as well.”

$6.5 million in 2006 Rubles, which would be 28 Rubles to the Dollar at worst for that year, so 184 million Rubles a missile. Using our inflation figure above of 134.44%, that gives us 431.3696 million Rubles per Kalibr, or about $5.6 million each. But related services as cited by the article serve as an impediment to sales. Assuming 25% for training, that means a Kalibr could be as cheap as 323.5 million Rubles or $4.2 million. But the article also mentions corruption:

“Back to the point, when it comes to the production of missiles for the Russian defense ministry, the outcome will comprise the actual production cost, a relatively small and regulated income for the manufacturer and an additional (traditional) Russian "corruption surcharge".

In other words, the real cost of a Kalibr is definitely not 6.5 mln per missile. But the figure has become a reference point for the evaluation of a Kh-101 cost, which is said to be 13 million USD. Presumably, journalists got this figure by multiplying the cost of Kalibr by two.”

For corruption, we have a better, older metric (https://nuke.fas.org/guide/russia/agency/mo-budget.htm) which gives us about a 61% corruption penalty rate from the late 1990s. We should presume this has improved during the Putin Era, though it is hard to say by how much. The real question salient to the 'corruption' multiplier on the missile cost: Is Russian corruption worse, better, the same compared to 2006? It's hard to measure, and since the cost was already baked into the cost of the missile, resolving corruption would only reduce unit costs, which are already quite competitive compared to Western equivalents. The journalist's pro forma doubling of the Kalibr figure ignores the huge profit margin already baked in to the original sale of the missiles to India. A 100% mark-up seems reasonable, so we could be looking at a Kh-101 costing as little as half of the 323.5 million Rubles cited above... 161.75m Rubles a missile, or $2.1 million @ 77 Rubles/$. If corruption/embezzlement improved from 61% in the late 90s to 50% in 2006, then any reduction of corruption/embezzlement since then would reduce unit costs by a proportionate amount. Using this method, a Kh-101 could be as cheap as 80m Rubles each.

We have a better citation (https://jamestown.org/program/russias-futuristic-military-plagued-by-old-problems/) which says 44 Kalibrs cost 2.7 billion Rubles on July 29, 2016 for 61.363 million Rubles each, @ 66 Rubles/$ for $929k/missile. To calculate inflation, Russia's 2016 economy was 88 trillion Rubles (Rostat). It was 4.5% bigger in 2022 so we have identified the inflation rate. Therefore a Kh-101 costs 64.36 million according to this calculation. But Russia's production of the series went up, so we should actual infer that its cost stayed stable, or dropped. It could be as low as 61.363m Rubles/Kh-101, or $796k/unit.

A comparable US AGM-158 JASSM unit costs $1.359m in 2015 (https://www.gao.gov/assets/gao-15-342sp.pdf#page=103), with about 40% inflation since then, for a unit cost of $1.9m/unit. This means the AGM-158 JASSM was 2.39 times more expensive than a Kh-101.

“As for the Iskander missile which may refer either to the ballistic 9M723 or the cruise R-500, they came up with a price tag of $3 mln. Despite the fact that a modern ballistic missile would be much more expensive than any cruise missile because of costlier components and technologies involved in the production process.”

The Ruble was about 61 to the Dollar when this article was written, so it's calling it 183 million Rubles per Iskander. Given the adjustments we just used above, let's just accept the 183 million Ruble figure. The Iskander has no US counterpart. It represents billions of Dollars of R&D. We could try comparing it to the MGM-140 ATACMS, but it's not a great comparison. The ATACMS is worse in almost every way, but it's probably more accurate. Each unit cost $1.476m back in 2015, so with 40% inflation is $2.06m each. Iskander has 5 times more payload. It's hypersonic. So the question is how many ATACMS to equal an Iskander? They are slower and can be shot down, unlike the Iskander. Does it take 8 ATACMS? 10? If 10 ATACMS are worth one Iskander, that should mean an Iskander is worth $20.6 million each. The logic of purchasing power parity when it comes to munitions doesn't make the US compare great, since basically it takes the USA 1.586 billion Rubles to do what Russia can do with 183 million Rubles. When it comes to the Iskander, the Ruble/$ exchange rate should be 8.88/$.

Keep in mind that Russia's cost is in Rubles, but the value is in Dollars. Even if it can't trade in the Dollar zone, that doesn't mean its arms have no value, or should be penalized the same way a Russian car or microprocessor would be. Arms are inherently not traded freely, so they are not subject to the standard PPP calculations.

As we have seen, at least with munitions, Russia's Ruble PPP is 38.5/$ for 152mm ammo, 32.21/$ for a Kh-101, and 8.88/$ for an Iskander. Blended, we get a Ruble Purchasing Power Parity of 26.53/$. So finally, we can get a Dollar value of Russian arms spending.

TABLE 5

Estimated Russian Military Production (Rubles 26.53/$):

2020: 2.22 trillion Rubles / $83.67 billion

2021: 2.715 trillion Rubles / $102.33 billion

2022: 7.568 trillion Rubles / $285.26 billion

2023: 11.352 trillion Rubles / $427.89 billion

As we can see, these are truly impressive figures. Of note is that Russia's estimated 2022 procurement in Dollars, $285 billion, is the same as the sales of the top 41 US military companies (https://sipri.org/media/press-release/2021/business-usual-arms-sales-sipri-top-100-arms-companies-continue-grow-amid-pandemic)

How much and how quickly can Russia scale up production? An article that estimates Russia's pre-war missile inventory can help us get closer to the actual production capacity for Russia's missile industry (https://en.defence-ua.com/weapon_and_tech/how_many_iskander_and_calibr_cruise_missiles_has_russia_left_quantitative_research-2825.html). Russia supposedly had 900 Iskanders before Feb 24, 2022, 500 Kalibr 3M-54, and will supposedly take 3 years to restock and as of May 2022, supposedly only had 3 more months of missiles left at the operational tempo Russia was going at. As of March 19 2023 (in Ukraine), Russia supposedly has 120 Iskanders left (https://www.ukrinform.net/rubric-ato/3609367-russia-has-nearly-120-iskander-missiles-left-in-stock-intelligence.html). So Russia supposedly produced 150 Iskanders and 84 Kalibr a year at the 2021 pre-war rate. Shoigu stated Russian munition production increased at least 69%, so 104 + 150 = 254 Iskanders in 2022, and with another 50% increase in 2023, 381 Iskanders. Same with Kalibrs: 58 + 84 = 142 for 2022. With another 50% increase, 213 in 2023. If we go with the higher figure of 109%, Russia basically will have 4 times the missile production it had in 2021 (600 Iskanders/yr, 336 Kalibrs/yr).

TABLE 6

Kh-101, 213 @ 61.363m Rubles each is 13.07b Rubles / $405.7 million

Iskander, 381 @ 183m Rubles is 69.723b Rubles. / $7.923 billion

152mm, 2.093m @ 31k Rubles is 64.883b Rubles. / $1.685 billion

Major Munitions, in Dollar PPP: $10.013 billion

In Exchange Rubles (@ 77/$): $1.917 billion

VI. Synthesis And Summary Of Findings

As we can see, when it comes to missiles, Russia has a major productivity advantage versus the US. When we look at the Russian Ministry of Defense's procurement achievements for 2020 (https://web.archive.org/web/20210101153832/http://itogi2019.mil.ru/eng.html) we see 6500+ new and upgraded weapon and hardware systems: 624 tanks and other fighting vehicles, 143 aircraft and helicopters, 8 ships, 17 boats, 13 spacecraft, 1 submarine, 4 coastal missile systems. And 2021's spending was very similar.

In 2023 Russian procurement spending looks to be 4.18 times more than it was in 2021. Based off existing data trends Russia's armaments production rate seems to be growing by at least 50% per year. China, North Korea, and Iran can only offer a few billion Dollars in arms per year: the majority of the spending is domestic production.

When we add military manufacturing back into the other industrial figures we have for Russia (and not even including normal manufacturing like food processing, machine tools, and other civilian goods), we have for 2022, Energy: $645 billion, Some Metals: $168.5 billion, Manufactured Exports (not being exported again, but being produced for domestic consumption presumably): $116.119 billion, Arms: $285 billion for a total of $1.214 trillion in dollarized industrial capacity. If we project forward for 2023 we get Russian military industrial output to $427.89 billion which puts total Russian industrial output for 2023 as high as $1.356 trillion. If we wanted to get a final estimate of the Russian manufacturing economy, we could subtract arms from the Rostat GDP figure for 2021 and tack that additional manufacturing ($120 billion/yr) to the GDP figure. I won't, because there is too much risk of double counting items, but it's certainly possible that most of that $120 billion figure is usable.

Using our new and improved Russian industrial figure, we can now use the CIA's figure of industry being 32% of Russia's economy, which comes to $4.237 trillion.

If we use the OECD figures (2.9759, so 26 Rubles/$) the 138 trillion Ruble economy (that we've estimated) is $5.3 trillion. This PPP rate has the advantage of matching Russia's arms PPP.

Returning to the Russian Ministry of Defense's 2021 procurement budget of 2.47 trillion Rubles and comparing it to 2023's 11.352 trillion Rubles, means 2023 should be quadruple 2021's production. We don't know in what areas. When Shoigu says they increased arms production 30%, does that mean armored vehicles expanded 300% and was 10% of total production? It's hard to know. Using this aggregate gives us the ability to estimate.

TABLE 7

2021 to 2023 arms production extrapolation:

6500+ new and upgraded weapon and hardware systems to 26,000+

624 tanks and other fighting vehicles to 2496.

143 aircraft and helicopters to 572

4 coastal missile systems to 16

8 ships to 32

17 boats to 68

13 spacecraft to 52

1 submarine to 4

213 Kh-101

381 Iskander

3.201 million 152mm rounds

While it takes time for naval spending to turn into ships, we can compare our extrapolated naval figures with this chart here (https://smoothiex12.blogspot.com/2023/03/some-tables-on-russian-navy.html). We see 4 Akula sub refits and 2 new submarines (Mozhaysk and Velikie Luki) scheduled for delivery in 2023. This doesn't even include strategic missile submarines.

When we add it all up, we get a procurement schedule that can maintain the operational tempo Russia is sustaining until at least 2024. It also matches our budget thesis.

VII. Conclusions

Like the unraveling of a suit by pulling a single thread, we have interrogated GDP figures for Russia and discovered:

2023 Russia GDP: 138 trillion Rubles @ 26/$: $5.307 trillion Industry: $1.356 trillion, Military Spending (18.144% of Russian GDP): @ 26/$: 25.039 trillion Rubles / $963 billion, Military Industry: $427 billion

- The Russian economy is much bigger than conceived. Third biggest in the world. One quarter the United States, so about the same size as the USSR during the Cold War.

- The Russian industrial base is much bigger than conceived. Half of the United States.

- The Russian military spending and military productive capacity in Dollar terms is equal to the United States or will be at some point in 2023.

- The Russian economy shows an ability to sustain this spending for the foreseeable future. It uses Rubles and exports more than it imports. It trades with China which gives it a secure supply line.

- The sheer scale and diversity of Russian productive capacity has been distorted by bad Dollar conversions

- Russia's cost is in devalued Rubles, but its productive value can be measured in Dollars. We see this effect on the battlefield.

- Accusations of Russian weakness are psychological projections or psyops by NATO powers. Psyops target domestic audiences, in order to garner support for a disastrous war.

Great Power Rankings, 2023:

USA GDP: $23.3 trillion, Industry: $2.648t, Military Budget: $801b

China GDP: $17.4 trillion, Industry: $5.837t, Military Budget: $293b

Russia GDP: $5.307 trillion, Industry: $1.356 trillion, Military Budget: $963 billion

Japan GDP: $4.298 trillion, Industry: $892b, Military Budget: 6.8 trillion Yen / $51.5 billion

Germany GDP: $4.273 trillion, Industry: $761b, Military Budget: $56b

India: GDP: $1.873 trillion, Industry: $389b, Military Budget: $76.6b

UK: GDP: $2.975 trillion, Industry: $242b, Military Budget: $68.4b

France: GDP: $2.516 trillion, Industry: $220b Military Budget: $56b

(https://www.sipri.org/sites/default/files/2022-04/fs_2204_milex_2021_0.pdf)

(https://milex.sipri.org/sipri)

(https://www.sipri.org/commentary/topical-backgrounder/2023/proposed-hike-japans-military-expenditure)

This table shows there are three superpowers: The United States, China, and Russia. The USA has the largest GDP, China has the largest industrial output, and Russia spends the most on military. Russia spends more than the three biggest NATO members combined: USA, Germany, and the UK. We can also see that Russia's military industrial base at some point in early 2023 exceeded China's entire military estimated budget.

Our model of Russian military production seems to accurately depict the material circumstances of the war. Russia is prepared to fight a war of attrition using its own massive military industrial base and is capable of sustaining it. It is possible that it entrapped NATO with effective maskirovka operations and has engaged the alliance in a war of production. If that is the case, then a cease-fire is unlikely, except on Russian terms. It seems more likely that Russia is prepared to fight for an unconditional victory. NATO appears to have made a fatal, but avoidable error. Ukraine's government clearly serves NATO more than the interests of its own citizens.

If this analysis is to be of any value, it should have predictive ability. Given the calculations made, we expect Russia to mobilize a huge offensive of a scale unseen since World War 2. Russia should have thousands of new tanks, hundreds of new aircraft, hundreds of thousands of newly mobilized troops (6 months from the October 2022 mobilization will be April 2023). They aren't massively mobilizing to maintain the status quo in the war, they're in it to win it. Russia will destroy the bulk of NATO hardware absolutely in a crushing war of attrition. Eventually, NATO will need to capitulate and Ukraine in its current form will be no more: probably by the second anniversary of the war, 2024.

By Mil.gov.ua, CC BY 4.0, https://commons.wikimedia.org/w/index.php?curid=125973128