I found this paragraph from a Re:Russia article of interest:
The macroeconomic situation in 2023 will be fundamentally different to that of 2022. 2022 was the year of import sanctions, the destruction or adjustment of existing supply chains and the construction of alternative chains in the face of excess financing and inflows of foreign exchange earnings. 2023, on the other hand, will be a year of relatively adjusted supply chains, but it will also be a year of declining export revenues and an influx of foreign exchange financing in the face of persistent budget deficits. In this sense, 2023 will more closely resemble a typical international crisis (what we call a ‘sudden stop’), with a decline in capital inflows, devaluation pressures and growing problems with financing the entire economy – both in terms of banking and production.
So far (measured) inflation has been quiescent, relatively speaking, in Russia. This article by Oleg Vyugin, Evsei Gurvich, Oleg Itskhoki, and Andrei Yakovlev suggests that as revenues decline, Russia will be forced more and more to financing a big deficit using money financing.
Ken Rogoff argues that the sanctions have so far been ineffective because of limited implementation of secondary sanctions.
Hence, 2023 may be the year to further tighten the constraints on the Putin regime, by putting into place widespread secondary sanctions. This will further reduce access to critical and noncritical imports as well as output capacity, thereby increasing inflationary pressures. Hence, we might see much faster inflation than the current (as of February) reported inflation rate of 11.8% y/y.
While most of the articles focused on the macroeconomic demand side business cycle crises that Russia is likely to face, for me the most insightful comment came at what seemed to be something of an afterthought or throwaway line:
There are also a number of structural and conjunctive risks. For example, a lack of qualified labour appears to be a significant factor that has already dampened economic dynamics and increased wage costs in 2022. New waves of frontline mobilisation and resulting population flight will exacerbate this trend. Furthermore, if modern equipment imports and technology transfers remain unaffordable as a result of technological sanctions, the increasing technological dysfunctionality of Russian industry will become apparent in productivity. Finally, the country’s population is concentrated in its European part, and as a result trade logistics infrastructure has historically been designed to capitalise on the country’s proximity to Europe and integration with European markets. Both consumption-oriented imports and exports are now primarily routed through Asia, increasing the burden of transportation and necessitating the creation of new infrastructure and related investments.
If we think in terms of some old school neoclassical growth model then what’s happening to the Russian economy can only lead to a shrinking production function over the next generation. Fewer prime working age males due to insane casualty levels. The effective replacement of a price system to allocate inputs and outputs with an old style Soviet command economy. And limited access to technological advances. Over the long run Russia will not only see falling potential GDP, but an even greater drop in potential NDP due to the destruction of physical and human capital.
Excellent point. A downside of old fashion military Keynesianism.
I think that this view is the significant one. The big question is not whether the war in Ukraine is “won” or whether Putin suddenly has a flash of reality. It is whether the western countries slowly and permanently reduce a country that has been a long-term international troublemaker to a lesser role.
China will be enough of a threat – commercially more than militarily – without a territoriality aggressive dictatorship constantly threatening multiple neighbors. Yes, there is Taiwan, but that’s not on the same scale as Putin’s and the Russian war hawk’s desire to rebuild the failed USSR with a czar at the top.
The great loss here is to the Russian people… but at the same time it is also on them to the degree that they tolerate what amounts to their virtual enslavement by dictatorship after dictatorship over centuries. They have no tradition otherwise, I suppose, which is probably the best explanation.
the loss of a strong russia will make china more difficult to deal with. even if they were allies, a strong russia forced china to split its defenses, just in case disagreements occurred between the nations. now russia is showing itself as a neutered cat with nukes. china still needs to worry about those nukes, but that is about it. the failure of russia will cost the usa in terms of neutralizing china in asia.
One criticism we hear of economics is “Ecocomists don’t understand that GDP is an imperfect measure of the economy.” Any criticism which is predicated on an assertion that non-specialists understand a specialized area of study better than specialists is a evidence of the bloated ego of some non-specialists. Man, it felt good to write that! Now on to my point.
The usual suspects have fallen back on GDP, a measure they otherwise denigrate, in cheering for Russia’s “success” in the face of sanctions. The authors at Re:Russia make the point that GDP (based on dubious Russian inputs) has shrunk less than expected because of Russian government efforts to rejigger spending to the detriment of public welfare, which seems a particularly important cases of GDP failing to reflect actual economic welfare. So, usual sspects, If GDP is flawed one day, why is it reason for celebration on another?
Here is perhaps the most important paragraph in the article:
“…in a democracy or a more balanced and pluralistic political system, questions about whether these losses in citizens’ well-being make sense, and whether such a scenario should be adopted, would inevitably be the subject of intense debate. However, in a repressive authoritarian regime, citizens have no way to influence public policy goals and strategies, or to protect themselves from this kind of cost redistribution.”
On a related topic, if Russia’s cost redistribution, combined with the effect of sanctions, means a bleaker Russian economic outlook, then Russia has weakening prospects on the battlefield, as well as at home. Faux economic triumphalism on Russia’s behalf – ” Weeeee!!! Russia is doing great!” – looks suspiciously like a bluff. Russia wants us to believe it can wait out the end of a protracted war, when odds are, it can’t. Ukraine, for now, seems intent on calling that bluff.
Dr. Chinn notes Russia’s inflation is near 12% and may rise. Of course little Jonny boy will likely chirp that since Russia has yet to see triple digit inflation – Putin is winning. WHEEEEE!
Macroduck I suspect that the way “citizens” under a totalitarian government express their collective will is through alcoholism, indifference and shirking.
Amateurs belittling professionals isn’t just a problem in economics, it’s also true when it comes to military science. And here I’m concerned that President Zelensky is ignoring the advice of military professionals in trying to defend Bakhmut. This strikes me as a strategic mistake. Zelensky’s first concern should be to keep an effective army in the field. He should not be defending a strategically worthless piece of real estate for the sake of hubris. In the early days of the war the Ukrainians successfully turned Russian hubris against itself. Now we need to be concerned that the Russians are playing turnabout and using hubris against the Ukrainians.
my understanding is that ukraine is conducting a tactical retreat from bakhmut. i think they understand russia will eventually take it, but want the price to pay maximized.
Speaking of alcohol, it seems Russia is not importing so much from the West but India has decided to take up the slack:
https://food.ndtv.com/news/indian-liquour-to-replace-western-alcohol-brands-in-russia-report-3827515
India’s largest whisky producer, Allied Blenders and Distillers (ABD), is set to enter the Russian market to replace Western counterparts whose trade in the country has been restricted, leading to a scarcity of whisky. ABD is the third-most-popular whisky producer in the world and produces brands such as Officer’s Choice. India currently produces 60% of the world’s whisky, and ABD exports its products to more than 20 countries. For the first time, ABD will export its products to Russia, with Russian vodka manufacturer Alcohol Siberia Group (ASG) as the distributor for two of their liquor brands, Officer’s Choice Blue and Sterling Reserve premium.
Have a heart for crying out loud. No one deserves that much cruelty. Supply shortages of spirits!!!! Oh the humanity!!!! [ that’s a demented attempt at self-deprecating humor. Oh well, I made myself laugh anyway ]
I see that the head of the Wagner group is now bitching about the Russian military bureaucrats. As mercenaries, maybe they’d like to hire out to the other side? What the US has committed to this conflict would certainly both better equip them and pay them handsomely.
https://www.reuters.com/business/autos-transportation/russias-january-car-sales-down-63-year-on-year-says-aeb-2023-02-06/
significant demand destruction on major items in russia. this is not a symptom of a strong economy. it is a symptom of a weak economy.
I guess the Putin poodles will tell us Russia is spending less on cars so it can spend more on tanks.