Russia Cannot Afford Putin's Ambitions

The Jaded Consumer doesn't want to amplify economic nonsense by linking to it, but the international news sources that uncritically publish economic numbers approved by authoritarian regimes aren't doing the public any favors in understanding the impact of nations' military and economic policies and appreciating the prices caused by their conflicts. This note is intended to provide an evidence-based view of the global conflict underway between expansionist tyrannies and the more democratic nations authoritarians have targeted.

Russia claimed to have bulletproofed itself against sanctions in order to enjoy normalcy as it prosecutes ongoing war against Ukraine. Claims that Russia thrives while democratic adversaries suffer economically are undermined greatly by the data. Russia's central bank's announced interest rate is worse than I've paid on credit cards. At the time of this writing the rate has been raised to 21%. Russian propagandists had been trying to convince democratic nations that imposing sanctions on Russia injured free people more than the subjects of what's left of the Russian empire. The claim Russia's economy is strong has two basic problems. First, Russia's auto industry is now wholly dependent on manufactured goods from China, and Russians buy these with funds obtained selling raw materials to China (primarily unrefined energy products). If acting as a source of raw materials while buying finished goods from one's sponsor state sounds to you like the role of a colony, you've figured out that Russia is now a de facto colony of China. The second problem is that even suffering the colonization sucks: unlike the U.S., which has got inflation in the low single digits and is close enough to its ultimate target inflation rate that the federal reserve bank is cutting interest rates to avoid allowing inflation to fall too much, Russia still has an official inflation rate that is in the high single-digits (and a real inflation rate estimated at 27%). It might be worse, but a lot of what Russians want to buy isn't available at any price. Whoops.

Russia isn't alone in living in a fantasy land. China has been making public policy on the basis of fictitious population data, and that's going to cost it. The longer China can get cheap fuel from Russia to prop it up from collapse, the longer the West has to reconfigure supply chains so as to avoid dependence on authoritarian regimes and the legal quicksand the tyranny there imposes on all who do business there.

Russia is dependent on North Korea and Iran for weapons and is burning cash while it goes all-in on Putin's dream of re-establishing the lost empire of the Russia of his imagination, with Soviet-era borders. Unless some outsider throws Putin a lifeline, he's going to drive himself and his government into the same kind of bankruptcy-driven collapse that put an end to the Soviet Union. China will just take the eastern territories Russia continues to occupy but hasn't anyone there to defend it. China has already updated its maps of Russian territory with its preferred Chinese names.

Productivity (or not) in Russia

After reading an American business article breathlessly gushing about the supposed strength of Russia's economy, with such details as a high employment rate under 3%, it seems worthwhile to draw attention to facts known about the topic.

More than 40% of the enterprises in Russia – including both civilian business and firms dedicated to military production – are shorthanded. Want to expand your business, or buy a house? The Bank of Russia has set its benchmark rate at 16% and still expects inflation not to fall quickly. A commercial loan isn't going to be made at the bank benchmark rate.

The same article that celebrated Russia's economic "strength" reported that Russia's employment situation benefitted from Russia's "voluntary" military recruitment model. Sure, there are some Russians who signed contracts to kill Ukrainians for $2,000 per month; that's true. But there's also a regularly scheduled conscription system that pulls several hundred thousand young Russians into the military each conscription cycle and, despite Russian law that states conscripts cannot be sent abroad to war, they've been sent to Ukraine from the very start of the war. These hundreds of thousands of men haven't had an easy time of it; Western estimates put the number of dead and wounded over 400,000. Few of them will work normal jobs again. More workers have fled Russia to avoid conscription – the UK Ministry of Defense estimated fleeing Russians numbered 1,300,000 in 2022 alone. Many of the fleeing Russians have been the most employable: young people in technology work who left because it was easy to do their work abroad.

That full-employment picture looks less cheery when one considers how many Russians fled the country or were sent to Ukraine to die, to get Russia to its low unemployment rate. And those who are working are being courted by military supply firms to lure them from economy segments that sustain and improve Russians' quality of life. Inflation is a direct result of military suppliers outbidding civilian employers to satisfy Russia's demand for weapons and ammunition.

When calculating GDP in Russia, translation into dollars is tough: selling rubles for dollars is illegal, so there is no market value for rubles. The rate of exchange for rubles is a government-promulgated fiction. Who knows what it'd be worth.

Russia is still in the war in Ukraine for the simple reason that enemies of the democratic West – primarily China, Iran, and North Korea – are showering Russia with supplies from which to make war materiel. It should be no surprise that Ukraine requires support itself. Like the Cold War ended when Russia bankrupted itself in an arms race against the so-called "Star Wars" (technically the Strategic Defense Initiative) defense programs, the conflict with fascist dictatorships allied against the West may be won luring them into an escalation of commitment to an unwinnable fight to expand Russia's borders.

And the more Russia embarrasses itself failing to defeat Ukraine, the more Russia's neighbors will be emboldened to reach out to make alliances with the capacity to support them in improving their quality of life.

Trump's Civil Trouble

An unsuccessful defendant who wants to stop collection a judgment's enforcement for he duration of an appeal is generally allowed to halt enforcement by posting a supersedeaas bond, which assures the court that delay won't prejudice collection because the amount due is available to pay the winner if the appeal fails. The bond isn't required to pursue the appeal, just to halt enforcement. Concerns about how fair this procedure is can appreciate the problem best by considering the alternative: should an aggrieved public bear the risk of delay and the possibility that deception or other creditors render a defendant judgment-proof during appeal? The bond is the compromise.

Lat month Mr. Trump induced the major insurer Chubb to underwrite the supersedeas bond to stay execution of a January judgment for his longtime defamation victim E. Jean Carroll. Chubb's CEO gave interviews explaining its position had been fully secured and that its terms with Trump were no special favor: the terms were meant to earn a return for investors. The bond was less than a hundred million dollars.

Donald J. Trump is no stranger to the courts, but he's no longer allowed to harm victims with impunity as when he bullied suppliers out of payment when he was setting up his long-failed casino in Atlantic City. the economic impact of his lies has grown. He's being sued, and successfully, in the communities upon which he's preyed. Now Mr. trump hopes to forestall execution of New York's judgment, awarded when New York proved that Mr. Trump and his co-defendants fraudulently misrepresented assets and collateral to obtain loan terms and outsized profits not available in the market. Disgorgement of profit from fraud in this one New York case amounts to nearly a half-billion dollars. Trump has been unable to get a surety to stand for him to make a supersedeas bond in New York, and he hasn't got the cash to post himself.

Newsweek published a list of properties subject to execution to cover the defendant's debt to New York from his financial frauds. While it may look impressive, the debts secured by these properties make clear that the properties are not all equity; Mr. Trump doesn't actually own them outright, and what he owes his creditors significantly erodes the equity in them.

Mr. Trump faces another deception case next month involving his treatment of a personal hush-money payment as if it were a business expense in order to cheat the government out of tax revenue.

The son of one of Mr. Trump's scam victims, a contractor Trump cheated out of his final payment for woodworking that had been completed and accepted as good work by Mr. Trump's own general contractor, said of his now-deceased father "He would be embarrassed that Donald Trump is actually going to be the nominee for president for the Republican Party in 2016." 

He hasn't apparently become any more reliable.

Russia Handling Sanctions Worse Than It Pretends

 The cost of shipping energy products to more distant customers, the loss of workers to frontline duty and to international flight, and the inability to tap foreign resources to support local operations have left Russia in an economic crisis that its propaganda efforts and international denials cannot hide. The price of eggs increased 18% last month (December 2023) in that one month alone. The Russian Federation has been propping up the economy by directing long-husbanded resources into military-oriented manufacturing, but causing an explosion in Ukraine does nothing for quality of life within Russia; the transformation of Russia into a wartime economy currently directs a third of the federation's national expenditures into the military. 

While Putin claims in his speeches that Russia's economy thrives despite foreign barriers to trade with most of the free world, much of the nation's current production does nothing for Russians: rockets aren't infrastructure, they destroy infrastructure. This game of economic chicken is profitable only if Russia ultimately seizes Ukraine and its natural resources and can compel the service of its millions of inhabitants. Forcing people to serve Russia's tyrants isn't a particularly efficient way to build national wealth, but it's all tyrants know. And they're used to the inefficiency: per-capita GDP within the Russia's empire is so small that despite having many times the population of Texas, the empire's overall GDP was lower even before sanctions cost Russia all the foreign expertise that had kept its energy industry in business. GDP per capita in Russia has been on par with China, at a fraction of GDPs typical of democracies in Europe or Asia.

If nobody throws the Russian tyranny a lifeline, it will likely digest itself trying to threaten neighbors into surrendering to Russia's appetite for geographic expansion. 

Halting Russia's advances into Ukraine has been an efficient investment for the United States. For only a few percent of the existing US defense budget, the United States has created a state of emergency in its most aggressive international adversary which is spending not just a third of its military budget, but a third of its entire national budget, to hand onto its untenable position. Especially since Ukraine is willing to contribute all the combat personnel, supplying them with equipment to test and improve American tactics and methods against Russia's current best technology and electronic systems is a fantastic investment in the future of our defense of American interests and the interests of democratic trading partners around the world.

Wagner Felons Turn Out To Commit Felonies

 So, this happened. Was anyone surprised?

Russia Over the Long Term

 Much ink has been spilled arguing about the impact of sanctions on Russia using such evidence as the "price" or the Russian rouble or GDP figures that turn on the sales volume of exported energy products, but these metrics don't offer much insight into the strength of Russia's ability to sustain itself while antagonizing the world's democracies with renewed imperialist ambition. (This article won't describe those ambitions; anyone interested in them is well served to read Putin's speeches going back the last few decades to appreciate his longing for the era of Stalin and his hope to return Russia to a similarly feared global power of similar size and international influence.)

What's wrong with looking at the price of the rouble to understand the nation's economic strength? The question one might ask is, whose price? The price available in a free market can hardly be assessed in Russia, where post-invasion law promptly forbade forbade banks and brokers to sell dollars, euros, and other foreign currencies to rouble-paying buyer. If you can't sell roubles, how do you know its price? Russian gaming of currency didn't end there, either. Despite having long-term contracts that required Russia to supply energy products to foreign buyers in currencies such as the euro, yen, or dollar, Putin declared that all purchases would be made in Russian roubles or not at all. Basically Putin declared the power to unilaterally change contract terms at a whim and held energy products hostage to enforce it. The upshot is that nobody knows what the rouble is worth in a free market because there is no free market in roubles after Russia's invasion of Ukraine. Nobody who wants to bail out of roubles can. Indeed, nobody who wants to bail out of Russian assets can: foreigners can't sell stock on Russia's exchanges, they can't sell their interests in Russian energy programs, and they can't liquidate any proceeds they do have in local currency in order to leave with their own currency.

Russia simply seized Western investment. Since nobody will be selling it for foreign currency, the "market" in Russian assets, firms, and currency will not depict the exodus.

What will?

Production.

A look at Russia's production of domestic cars yields some insight into the effect of Russia's policies on Russia's ability to produce passenger cars. The year ending March 2023 shows Russia's automotive production suffering a short-term near-halt, with eventual recovery to about one third of the nation's pre-invasion:

Automobiles don't really show the whole range of Russian production capability, but consider the non-mobilized population of Russia and its interest in normal life. With foreign auto makers bailing out of Russian production partnerships and halting export to Russia, Russians face the alternatives of domestic production or imports from Chinese firms which Russians historically avoided. Although Russian auto sales plummeted over 60%, Chinese share of those sales more than tripled to nearly a third of Russia's ailing auto market. Soviet-era auto brand revivals feature Chinese designs and key components.

As interesting as the evolution of seized foreign plants into Russian production centers may be, the story of Russia's consumer vehicle market isn't the story of Russian GDP. Consider something closer to the priorities of Putin's war machine: trucks required to support war logistics. Russia actually needs trucks to re-establish the empire Putin imagines in his fantasies. Trucks have a certain priority. Before Russia's invasion, a February 2022 estimate foresaw Russia's commercial vehicle market growing at over 3% per year through 2028 on the strength of joint ventures with foreign firms bringing their expertise to the Russian market. The dislocations described above killed growth in Russian commercial vehicle production just as the war in Ukraine destroyed thousands of trucks driven by Russia to lose in Ukraine:

Outside the realm of trucks, Russians find themselves relying on suddenly slower, costlier, and more tenuous supply lines for foreign goods ranging from perishable food items to teabag paper.

Given that Russia now apparently depends on China for its domestic supply of automobiles and trucks, one must ask where Russia is getting the money to pay China for the exported parts. Here, at least, there is no mystery: exported raw goods, primarily in the form of energy products. With the departure of experienced foreign operators, Russia's gas production has already fallen 10% in the last year. Gas is kind of a problem, because its existing pipelines to China won't take more volume and Russia lacks the ability to create LNG terminals to shift gas production to export by ship. Making big capital investments isn't really the style of the Russian empire: it expects others to make the investments on which it depends. By contrast, Russia's oil exports have declined only slightly since its invasion of Ukraine:

Russia is selling all the oil it can to the closest buyers it can manage, because each round trip with an oil transport ship to Europe took something like one week whereas it can take months one-way to India. There's not enough ships to handle all Russia's export if Russia ships oil to India, and Europe has slammed the door on it. It turns out that China is close. And it doesn't matter so much what currency China pays for oil, as Russia must immediately pay Chinese firms that same currency to buy the auto parts, computer chips, cell phones, automobiles, drones, communications equipment, food, and everything else Russia imports from China. 

By reducing itself to a raw good supplier and a finished goods buyer, Russia has remade itself into, in effect, a colony. China, recognizing this, has approved a new map model that renames Russian border cities with old Chinese names (e.g., Vladivostok swapped for Sea Cucumber Bay ("Khaishenvai")), and is already publishing the new maps. Border territories are also renamed. Xi does to Putin what Putin does to former Soviet republics: he's reneging on border-fixing deals Yeltzin made in the '90s. 

Putin can hardly object: he's rendered Russia so wholly dependent on Chinese matériel and funds that he's got to accept what China offers. A Chinese-speaking informant who saw Putin appearing with Chinese officials noted that the Chinese translation of Putin's remarks appeared to suggest the entire speech had been written by the Chinese, as the Chinese text veritably drips with language of a vassal addressing his emperor. Putin either accepted this, or he's an oblivious fool. And it doesn't matter which: he's helpless. Russia no longer poses a credible threat of projected military power. China will enjoy this for a while, no doubt, observing the developments in Ukraine, before taking action. However, Russia will have no practical ability to oppose China when China starts changing street names and flags in former Soviet lands that interest Xi. 

As Russian population has failed to keep Russian resources productively employed, Chinese have taken over former Soviet farms and now own and live on land in Russia. There aren't a lot of ethnic Russians in the eastern reaches of what is left of Russia's empire, so the takeover is already well underway. Putin's Russia endures like a frog in a heating pot: at the sufferance of a chef who's already got the rest of the dinner cooking.

On the Supreme Court's Ruling in Dobbs

The headline today in legal matters will surely be that Roe v. Wade (1973) has been overruled, but the problem goes further. The reasoning employed by the Supreme Court in Dobbs v. Jackson Women's Health Organization (2022) undermined the reasoning employed in Lawrence v. Texas (2003) under which Bowers v. Hardwick (1986) was overruled to end anti-sodomy statutes, which is the same line of reasoning ultimately used to prevent states from banning same-sex marriage (e.g., that the State had no legitimate interest to protect), and in fact the same line of reasoning used by the Supreme Court to strike down laws criminalizing birth control.

We have not seen the end of this.