Streetwise Professor

February 20, 2012

Putin’s Arms Race

Filed under: Economics,Military,Politics,Russia — The Professor @ 11:04 am

In the immediate aftermath of the Duma election, I predicted Putin would do the following:

  1. Even more populism, with lavish promises regarding pensions, state investments, limitations on increases in utility tariffs.
  2. Nationalist appeals, complete with dark tales about foreign conspiracies to destroy Russia.
  3. Relatedly, even more truculence in foreign policy, e.g., Syria, BMD, the Near Abroad.

All is  going according to form.  Insofar as the truculence and nationalism is concerned, Putin’s promises of a lavish binge on weapons procurement fits right in.  The latest of his mind-numbingly long articles on his future plans focuses on defense.  He promises $770 billion in expenditures on weapons over the next 10 years-an increase of $120 billion over and above what had been mooted last year.

Putin gives two rationales for this binge.  The first is that the defense industry can be the catalyst for a revitalization of technologically advanced industries in Russia.  This is a common assertion, and one that has little basis in reality.

The second is that Russia is under siege:

“New regional and local wars are being sparked before our eyes,” Mr. Putin wrote. “There are attempts to provoke such conflicts in the immediate vicinity of Russia’s borders.”

Note the phrasing: “attempts to provoke conflicts.”  Only the truly dim will not understand the code and fail to identify whom Putin believes it he provocateur.

Several quick comments.

First, when Kudrin was sacked for criticizing Medvedev’s lavish defense spending plans-a mere $600 billion or so-I said that Kudrin was really attacking Putin, because Putin was the driver behind increased defense spending.  It is now clear that this was definitely the case: Kudrin’s (admittedly guarded) move to opposition provides further evidence.

Second, this plan is technologically fantastical given the actual performance in Russian weapons programs in recent years.

Third, Putin completely misdiagnoses the real source of Russia’s military weakness. It is a software problem, not a hardware problem.  Just where are all the soldiers, sailors and airmen needed to operate these new weapons going to come from?

Fourth, Putin warned defense contractors against price gouging on new contracts.  Hahahahahahahaha! What a card! Good luck with that! Especially given Putin’s own policy of consolidating Russian defense contractors into a few huge politically connected behemoths.

Fifth, this is fiscal insanity. This is especially true as there is little prospect for raising additional revenues from the energy industry.  Indeed, the opposite is likely true (h/t R):

Russia’s 12-year oil boom is nearing its peak, forcing the next president to decide whether to cut taxes and revive production or use the windfall from $100 oil to boost public spending and quell mounting unrest.

As Vladimir Putin campaigns for a second stint in the Kremlin, the nation’s existing fields are losing pressure and oil companies OAO Rosneft, OAO Lukoil and TNK-BP (BP/) say production taxes give little incentive to invest. Since Putin first became president in 2000, crude output has grown 57 percent to 10 million barrels a day, surpassing Saudi Arabia and flooding the state treasury.

“The cream has been skimmed off the top,” said Leonid Fedun, the billionaire deputy chief executive officer of Lukoil, Russia’s second-largest oil company. “Further steps require taxes based on different principles,” or production will start falling within three years, he said.

Any cuts in the oil and gas industry’s 5.64 trillion rubles ($190 billion) in taxes mean less cash to combat the biggest anti-government protests since the 1990s. Deputy Energy Minister Sergey Kudryashov said Feb. 2 the need to strike a balance between revenue and oil output levels is one of the most difficult questions facing the state.

To which I would add that future competitive threats to Gazprom will put additional pressures on revenue in the medium-to-long term.  (Note that Gazprom has already given price cuts of around 10 percent to big European and Turkish customers.  The pressure on pricing will only increase in the next several years, certainly within the 10 year defense budget horizon Putin discussed.)

Sixth, the need for revenues to pay for such outlandish promises makes the Retroactive Oligarch Tax all the more attractive.  And we can see that Putin gave a very clear hint at how Putin might propose that this tax be paid: he lavished praise on TNK and Surgutneftgas for paying  for the continued operation of a submarine base in 2002.  We can expect Putin to extract similar “contributions” from other big companies to pay for his defense splurge.  (As a too funny sidebar, Prokhorov said that the oligarchs should decide themselves how much they will pay.  Good luck with that!  And I’m pretty sure that was the real Prokhorov who said that, not @fake_prokhorov.)

Seventh, the centerpiece of Putin’s plans are the building of 400 MIRVed ICBMs.  This is occurring when the Obama administration is mulling a unilateral cut in US nuclear warheads-perhaps to as low as 300.  It will be quite interesting to see whether Putin’s announcement makes the slightest dent in these dreamy plans.  Sadly, I believe that is unlikely to be the case, given (a) Obama’s bizarre strategic views, and (b) his obsession with the Reset.

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  1. I believe the $770bn figure covers the period to 2022, whereas the older $600-650bn figure covered to 2020. Hence the discrepancy.

    From what I read in Putin’s article, the conscript portion of the armed forces is going to be drastically reduced, to 145,000 by 2020. They will be far outnumbered by 700,000 contract soldiers by 2017. At least that is the plan.

    I suspect that is the reaction to the software problem.

    I also suspect that a big chunk of the much higher spending is tied not so much with procurement but with the professionalization of the Army; it should be noted that military salaries have been increased by 2-2.5x in the past few months, to the extent that they are now respectable and above the average national wage.

    Comment by Sublime Oblivion — February 20, 2012 @ 8:21 pm

  2. @S/O-you are right, I think, re the discrepancy.

    Re the contract/software issue–they’ve been talking about that transition for several years now, and it has been a complete failure. There will not be 700K contract soldiers in 2017. Yeah. That’s the plan. The plan will never be achieved.

    And no, the salaries are not respectable. I posted on this in January, based on analysis by Dmitri Gorenberg.

    The ProfessorComment by The Professor — February 20, 2012 @ 9:05 pm

  3. As far as I remember, Gorenberg was writing about conscript stipends, not contract soldier salaries.

    On the latter, a lieutenant, say, is going to have his average salary raised to 50,000 rubles ($1700) as of the start of this year, relative to 14,000 rubles beforehand ($500). For comparison, the average salary in Russia for 2004 was 24,000 rubles ($800).

    Here is an infographic.

    Furthermore, another article notes that 1.7 trillion rubles will be spent in 2012-14 alone on the additional costs associated with the higher salaries. Extended to 2022, this would account for maybe 5 trillion rubles of the extra spending; more like 10 or 12 trillion, perhaps, once you factor in the increasing numbers of contract soldiers, and any further salary increases. So that’s basically half of your $720 billion binge.

    Comment by Sublime Oblivion — February 20, 2012 @ 9:41 pm

  4. Yes, my memory was correct.

    Dmitry Gorenburg provides data on the new, improved, increased pay scale for conscripts:

    Comment by Sublime Oblivion — February 20, 2012 @ 10:07 pm

  5. One more comment, as you got me interested in this. I found this article, which compares the new and old pay rates (pre-bonus) with the ones in NATO. For lieutenant rank:

    Russia (old): $500
    NATO Eastern Europe: $800-$1400
    Russia (post-2012): $1600
    France: $2300
    US: $2800
    Germany: $3000
    UK: $3500

    If this data is accurate, and it seems to be, it implies that under the new pay scale a military career would actually be fairly rewarding and lucrative compared to many others.

    Comment by Sublime Oblivion — February 20, 2012 @ 10:15 pm

  6. @S/O. Which is why the Russian military is having no problem filling the contract ranks.

    The ProfessorComment by The Professor — February 20, 2012 @ 10:25 pm

  7. S/O. There is also a concept in economics, dating back to Adam Smith, of “compensating wage differentials.” Smith used it to explain why executioners were so well paid relative to others of similar skill (to compensate them for the public opprobrium associated with their profession. The disamenities of military service in Russia are so severe, a similar premium will be required to attract people. The difficulties in attracting and retaining kontraktniki are well known=>the compensation is still far too low.

    The ProfessorComment by The Professor — February 20, 2012 @ 10:28 pm

  8. “If this data is accurate”

    It appears that the word “data” is yet another one of the many, many, many, many words that SUBLIME ILLITERATE PSYCOPATH does not understand the meaning of.

    In order for there to be “data” about military salaries “post-2012” it would HAVE TO BE LATER THAN 2012. You can’t collect data for “post-2012” salaries WHEN IT IS STILL 2012.

    SUBLIME ILLITERATE PSYCHOPATH does not yet know the difference between “data” and guesswork, or in this case between data and propaganda.

    Comment by La Russophobe — February 21, 2012 @ 6:49 am

  9. When you resort to pointing out trivial mistakes like me writing “post-2012” when I meant post-January 1, 2012 – AND which in any case can’t feasibly be misinterpreted as I also wrote “average salary raised to 50,000 rubles ($1700) AS OF THE START OF THIS YEAR” – it means you have no arguments and are only interested in trolling.

    Comment by Sublime Oblivion — February 21, 2012 @ 7:22 am

  10. On the latter, a lieutenant, say, is going to have his average salary raised to 50,000 rubles ($1700) as of the start of this year, relative to 14,000 rubles beforehand ($500). For comparison, the average salary in Russia for 2004 was 24,000 rubles ($800).

    Any reason why you’re using a comparator which is 8 years old?

    Comment by Tim Newman — February 21, 2012 @ 1:11 pm

  11. The other to consider is whether the salary of a junior officer is truly represenative of the increase in wages so that it attracts candidates for all positions. Please correct me if I’m wrong, but isn’t the problem with attracting enlisted men and NCOs? I would suspect that the issues with hazing and bad experiences are for those levels, not the officer corps. I am having trouble opening the link that S/O provided, so I don’t know if it addresses that.

    Comment by Chris Durnell — February 21, 2012 @ 3:34 pm

  12. Please correct me if I’m wrong, but isn’t the problem with attracting enlisted men and NCOs? I would suspect that the issues with hazing and bad experiences are for those levels, not the officer corps.

    One of the main problems is that the officers couldn’t care less about what goes on in the barracks and let the NCOs run the place however they like. Not that this is anything new. I read Zinky Boys a few months back and was astounded at the way ordinary soldiers in Afghanistan were treated by the senior soldiers and NCOs. And I mean, astounded. The abuse they dished out to those in their own unit was mind-boggling, if for no other reason than you would be relying on those same people to stop you getting killed. I’ve read enough books on Vietnam to know the soldiers there were treated pretty badly in an operational sense, but I never read accounts of new recruits being starved almost to death by their senior squad members and having all their basic equipment stolen on the day they arrived. Nor did I hear of Americans charging their “buddies” the equivalent of 2 years wages for a ticket back home at the end of their tour (the army used to pay only for the journey to Tashkent, after that the soldiers had to pay their own way home. Sure enough, the clerks used to charge returning soldiers twenty times the face value of the ticket purely because they could.) The degree to which Russians are prepared to fuck each other over is staggering.

    Comment by Tim Newman — February 21, 2012 @ 3:46 pm

  13. @Chris-Definitely it is at the NCO/EM level. Indeed, Russia doesn’t have proper NCOs, and their efforts to create a western-style NCO corps have been yet another massive fail.

    In fact, the Russian military has far too many officers. But it can’t get rid of superfluous officers b/c it has nothing to offer them, and this would create a group of very po’d people who could actually do the regime some damage.

    @Tim. Tell it. How much would they have to pay you to put up with that? Russian army for EM->Lord of the Flies.

    The ProfessorComment by The Professor — February 21, 2012 @ 5:23 pm

  14. Here’s a nice blog that touches on some of these issues. Pull quote:

    Putin gives the familiar figures–there are 220,000 officers and 186,000 sergeants and soldiers who now serve on contracts.

    Note the completely upside down ratio.

    The blog also discusses in some detail that acute housing shortage for retired/supernumerary officers. Putin acknowledges this in his article. It has been a problem for years, and promise after promise has been broken. Keep that in mind when evaluating the credibility of all the other promises Putin makes.

    The ProfessorComment by The Professor — February 21, 2012 @ 5:41 pm

  15. Any reason why you’re using a comparator which is 8 years old?

    Seem to have a lot of types. Figure refers to 2011, not 2004.

    Comment by Sublime Oblivion — February 21, 2012 @ 6:10 pm

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