Ukraine’s despair index, which indicates the amount of pain felt by the bottom third of society, has spiked in the last two months, driven up by soaring inflation, rising unemployment and increasing poverty levels, while that for Russia peaked in April, but appears to be falling again.
Invented by bne IntelliNews several years ago, the despair index is a rough measure of the amount of pain the more vulnerable parts of society in emerging economies feel during crises. It is simply the addition of inflation rates, unemployment levels and poverty levels.
Poverty has been increasing in Russia as the economy faces a prolonged recession. In the first quarter of 2022, the number of Russians living below the poverty line grew by 69%, Rosstat reported in June.
The number of Russians living below the poverty line was 20.9mn people against 12.4mn a year earlier, according to RosStat estimates, an increase of 8.5mn in only the first three months of 2022.
However, the level of poverty remains relatively modest in Russia and on a par with the lower end of most EU countries when purchasing power parity is taken into account. The poverty line in Russia is set at RUB12,916 ($221.26) against the national average income of $765 per month in the last quarter of last year.
Russia had a poverty ratio of 14.5% before the war in Ukraine started, which compares favourably with the EU average of 21.7% in 2020 before the various crises hit the globe. Indeed, in May 2020, when bne IntelliNews last surveyed despair in Emerging Europe (see chart), Russia’s poverty rate was even lower than most of the EU and US levels at 12.9%.
With high inflation and an 8%-15% economic contraction anticipated this year, the Russian poverty rate is expected to rise. The government, anticipating problems, is in the course of rolling out a social spending programme of up to RUB4 trillion to cushion the blow.
Compared to the fourth quarter of 2021, the average income of Russians decreased from RUB47,694 to RUB36,234, a drop of 24%, although part of that fall has been offset by the incredibly strong rally in the value of the ruble, which is up by about 30% thanks to swift and stringent action by the Central Bank of Russia (CBR) after Russian troops crossed Ukraine’s border.
Average salaries have also decreased from RUB62,828 to RUB60,101, or by 4.3% in the same period, reports RFE/RL, and unemployment has risen by 800,000. But here too, the increase in unemployment remains modest and overall unemployment is currently 4.2%, according to the most recent data, close to the all-time post-Soviet lows.
Despair index
Taken together, the results allow a fresh calculation of bne IntelliNews’ despair index.
bne IntelliNews’ despair index is based on the so-called “misery index”, which is simply the addition of inflation and unemployment. Crises increase both these variables, which disproportionately hurt the lower income strata of society.
To the misery index, bne IntelliNews added poverty to better capture the pain on societies in emerging markets which don’t have well developed social welfare networks.
An ideal despair index should score below a value of ten if residual indicators are taken into account: inflation (2%) + residual unemployment (4%) + poverty (0%).
Unfortunately, while 2% inflation and 4% unemployment are regularly reported, no countries have ever managed to eradicate poverty, which runs at least 12% in the developed world and averages in the mid-teens or above in most developing countries.
Of course, where you set the bar for poverty makes a big difference and each country has a different level, making direct comparisons between countries problematic, but the despair index remains a useful indicator of how much a country is suffering from economic problems.
At the end of last year Russia posted a very modest 21.1 despair index. Compared to bne IntelliNews’ last despair index survey in May 2020 that put Russia ahead of all of Western Europe, where all the countries were reporting results in the high-20s to mid-30s.
Since the start of this year Russia’s despair index has started to climb, mainly driven up by soaring inflation. The economic shock to the system has yet to have an impact on poverty levels or unemployment. In the first quarter of this year the despair index was up to 30.2, but adding in the recent peak inflation rate of 20% set in May and assuming a jump in unemployment to 8% – the peak value during the coronavirus (COVID-19) pandemic – then that lifts the despair index to an uncomfortably high 42.5.
Stagflation
The rapid intervention by the CBR into the economy has successfully contained much of the pain. The central bank cut rates for the fourth time last week, bring the prime rate back to 9.5%, where it was before the war started, saying that inflation pressure had been successfully curbed. Industrial production has slowed, but in the last PMI survey, companies are not reporting an increase in dismissals this year. It seems likely that in the next quarter the despair index will fall back to 30, whereas strongly rising inflation will be pushing up the rest of the world’s despair indices to comparable or higher levels.
The poverty rate in the US was 14.4% in February – on a par with Russia’s poverty rate now – and unemployment was 3.6%, giving it a misery rating of 18. But with inflation soaring to 7.3% in March and 7.4% in April, the US despair index rate has climbed to 27.4, which was almost exactly the same as Russia’s despair rate in the first quarter of this year.
This week the Fed indicated that it has not tamed inflation and will probably hike rates by 75bp as the US looks like it is entering into a phase of stagflation – high inflation and high interest rates that will slow the economy and also send unemployment up. The Fed, like many central banks, needs to hike rates aggressively to contain the situation.
In other countries it may already be too late to prevent a nasty bought of stagflation. Czechia broke another record this week, posting inflation up to 16% – its highest level since December 1993 – which is showing no sign of slowing down. With a prime rate of 5.75%, Czechia’s real interest rates are already deeply negative and it seems impossible for the central bank to reverse the trend without some massive rate hikes.
Currently Czechia’s unemployment rate of only 3.3% currently means it has a misery rate of 18.3%, and the country also has a modest poverty level of 12.2%, according to the last bne IntelliNews survey, but thanks to the high inflation rate it now has a despair index value of an uncomfortably high 30.5%. That’s on a par with Russia, but while the Russian despair index value is expected to fall in the short term, that for Czechia will almost certainly rise once the central bank is forced to hike rates. Both Czechia and the US are now anticipated to go into a recession as a result of the stagflation, says Charlie Robertson, chief economist at Renaissance Capital.
Ukraine despair
Despair is unfortunately well known in Ukraine and the war is expected to inflict a lot of pain on the population. Inflation has spiked in Ukraine like everywhere else, reaching 16.4% in April, before falling back somewhat to 12.9% in May.
But the inflationary pressures are very strong, leading the National Bank of Ukraine (NBU) to put through a massive hike at the start of June to bring the prime rate to 25% from 10% in one step. That will have a heavy toll on growth, where the economy was already expected to contract by 30% or more this year due to the war.
Unemployment was already running at 10.6% in the last quarter of 2021, but it is anyone’s guess where it is now. At least a third of Ukraine’s firms shut down in the first months of the war and over 90% say they have been affected. Now the country is starting to come back to life after Russia withdrew from most of its territory. While 42% of Ukrainian entrepreneurs did not work in March and 26% in April, only 17% of SMEs are currently out of work as of the start of June.
Still the impact on unemployment will be high. Assuming a modest 11% for May then Ukraine has a misery score of at least 24% in May and probably closer to 30% in reality.
The poverty level is more difficult to gauge. Officially Ukraine had a poverty rate of only 1.1% before the war, but that is based on a count of the number of people living on less than $5.5-$13 a day, or $165-$390 a month. Poverty is still so high in Ukraine that the poverty level is measure in terms of a dollar-a-day numbers rather than a minimum salary.
As bne IntelliNews reported, average incomes in Ukraine have been growing fast in the last two years, and dramatically closing the gap with Russia, but Ukraine remains one of the poorest countries in Europe, whereas Russia’s $765 average wage, in purchasing power parity terms, is on a par with the lower end of the EU.
Ukraine had a poverty level of 27% in bne IntelliNews’ last survey, which would give it a despair rating of around 55 now, guesstimating the actual inflation and unemployment. But UNDP said last week that poverty could reach 90% as a result of the war, which would drive the despair index up to 115, even taking the current estimates for inflation and poverty into account.
That is an extremely high result, but not quite as bad as the worst of the chaos of the 1990s, when the despair index went over 200. In Russia the despair index went over 200 in those years as it seems the total collapse of the economy, sustained over several years, causes more despair than just a war.
Ukrainians have to look forward to a lot more suffering until the war is over. There is the prospect for a rapid bounce-back if the West follows through on its promise of a multi-billion dollar Marshall Plan, but in the meantime life will be very hard.
“Rejection of Russian energy resources means that Europe will become the region with the highest energy costs in the world. This will seriously undermine the competitiveness of European industry which is already losing the competition to companies in other parts of the world…. Our Western colleagues seem to have forgotten the elementary laws of economics, or simply prefer to ignore them.” Vladimir Putin, President of the Russian Federation
On Tuesday, Russia announced a 40% reduction in the flow of natural gas to Germany through the Nord Stream pipeline. The announcement, that was made by Gazprom officials, sent tremors through the European gas market where prices quickly soared to new highs. In Germany—where prices have tripled in the last three months—the news was met with gasps of horror. With inflation already running at a 40-year high, this latest reduction in supply is certain to tip the German economy into recession or worse. All of Europe is now feeling the impact of Washington’s misguided sanctions on Russia. Here’s more from Oil Price website:
“Russia’s Gazprom said on Tuesday that it would limit natural gas supply via the Nord Stream pipeline to Germany by 40 percent compared to planned flows because of a delay in equipment repairs… The lower supply of gas via Nord Stream to the biggest European economy, Germany, sent Europe’s gas prices surging by double digits…
Russian gas deliveries to Europe… have already been down after Ukraine stopped last month flows from Russia to Europe at … one of the two transit points… thus supply was cut off for a third of the gas transiting Ukraine onto Europe.” (“Europe’s Gas Prices Surge 13% As Russia Reduces Nord Stream Flow“, Oil Price)
The United States and its European allies have imposed more sanctions on Russia than any country in history. But Tuesday’s announcement helps to illustrate who is actually suffering from the sanctions and who is not. Russia is not suffering, in fact, Russia does not seem particularly perturbed at all. It has calmly brushed aside Washington’s attacks as one would whisk-away a fly at a family picnic. Even more surprising is the fact that the sanctions have strengthened the ruble, increased revenues from raw materials, sent Russia’s trade surplus into record territory, and pushed gas and oil profits into the stratosphere. By every objective standard, the sanctions appear to be benefiting Russia which, of course, is the opposite outcome that was expected.
Washington’s Economic Sanctions on Russia: Success or Failure?
The Russian currency (the Ruble) has rallied to a five-year high.
Russia’s commodities are raking in windfall profits
Russia’s trade surplus is projected to hit a record high this year
Russia’s oil and gas sales have risen sharply
There’s no evidence that Washington’s sanctions have achieved the objective of “weakening” Russia or damaging its economy. There is, however, considerable proof that the sanctions have backfired and inflicted a heavy toll on their supporters and their people. And while it’s hard to quantify how much damage has actually been done, we’ve tried to identify specific categories where the impact has been most dramatic. The sanctions have:
Triggered a sharp rise in food and energy prices. (soaring inflation)
Caused major disruptions in global supply-lines (Deglobalization)
Greatly increased food shortages and the likelihood of famine
Precipitated a severe slowdown in the global economy
So far, Russia has withstood these attacks patiently and without any retaliatory response. But we must assume that the sudden 40% reduction in gas flows to energy-dependent Germany is intended to send a message. Keep in mind, Nord Stream 2 was a massive multi-year, $10 billion project to which Russia was fully committed until Germany ‘pulled the rug out from under Putin’ at the eleventh hour. Germany proved that—when push comes to shove—Berlin will always march in lockstep with Washington rather than fulfill its business agreements or act in the interests of its own people. What Germany is discovering now, however, is that acting as Washington’s poodle comes at a very high price indeed. Here’s more from Reuters:
“Gazprom said on Tuesday it has curbed supplies via the Nord Stream 1 undersea pipeline to Germany to up to 100 million cubic metres (mcm) per day, down from 167 mcm, citing the delayed return of equipment that had been sent for repair….
Gazprom no longer exports gas westwards through Poland via the Yamal-Europe pipeline following Russian sanctions against EuRoPol Gaz, which owns the Polish section. Flows via Yamal-Europe continue eastwards from Germany to Poland.
“Due to the delayed return of gas compressor units from repair by Siemens … and technical engines’ malfunctions, only three gas compressor units can currently be used at the Portovaya compression station,” Gazprom said..
“Due to the sanctions imposed by Canada, it is currently impossible for Siemens Energy to deliver overhauled gas turbines to the customer. Against this background we have informed the Canadian and German governments and are working on a viable solution,” the company said.” (“Nord Stream gas capacity constrained as sanctions delay equipment“, Reuters)
Not often. Russia is sending a simple but poignant message to Germany: “You made your bed, now sleep in it.” Russia’s reaction is perfectly normal after having been “stabbed you in the back.”
And, Germany’s travails are just beginning because it has no way to make up for the energy shortfall it will face in the near future; a shortfall that will precipitate rolling blackouts, freezing homes, and a relentless strangulation of its domestic industry. As the German government is discovering, there is no viable substitute for Russian hydrocarbons which is neither readily available nor does the quality fit Germany’s particular requirements. In other words, the US has led Germany down the primrose path believing that they could simply switch to other energy suppliers and everything would be just dandy. That is certainly not the case. As it happens, Germany and all of Europe are going to pay more for their energy than any region in the world which will severely undermine the EU’s competitiveness. This, in turn, will lead to a sharp decline in living standards as well as growing social unrest. Here’s more from the Wall Street Journal:
Naturally, the media is going to point to a maintenance snafu as an excuse, but how credible is that? How often is supply of a vital resource cut by nearly half due to a compressor malfunction?
“For decades, European industry relied on Russia to supply low-cost oil and natural gas that kept the continent’s factories humming.
Now Europe’s industrial energy costs are soaring in the wake of Russia’s war on Ukraine, hobbling manufacturers’ ability to compete in the global marketplace. Factories are scrambling to find alternatives to Russian energy under threat that Moscow could abruptly turn off the gas spigot, bringing production to a halt.
Europe’s producers of chemicals, fertilizer, steel and other energy-intensive goods have come under pressure over the last eight months as tensions with Russia climbed ahead of the February invasion. Some producers are shutting down in the face of competition from factories in the U.S., the Middle East and other regions where energy costs are much lower than in Europe. Natural-gas prices are now nearly three times higher in Europe than in the U.S.” (“Some European Factories, Long Dependent on Cheap Russian Energy, Are Shutting Down; Industrial energy costs are soaring in the wake of Russia’s war on Ukraine, hobbling European manufacturers’ ability to compete globally”, Wall Street Journal)
The Wall Street Journal would like you to believe that Russia is responsible for Europe’s poor choices, but, it’s not true. Putin didn’t raise prices. Prices rose in response to the EU’s increased demand due to shortages brought on by the sanctions. How is that Putin’s fault?
It’s not. And the same goes for the EU officials who accused Putin of “blackmail”, a claim for which there was no basis whatsoever. When that accusation was made, the price of gas in the EU was one-third of its price today. Is that how blackmail works, by charging less than the market price?
Of course, not. It’s ridiculous. Europe was getting a great price on a scarce resource until they decided to take Uncle Sam’s bad advice and ruin it for themselves. Now they’re paying through the nose, and they can only blame themselves.
Did you know that EU leaders are already making plans to ration energy this winter?
It’s true. Europe has agreed to become another basket-case US lapdog in order to faithfully execute Washington’s ambitious global strategy. Here’s the story:
“Europe could be forced to start rationing energy this winter, starting with industrial uses of natural gas, especially if the winter is cold and China’s economy rebounds, the Executive Director of the International Energy Agency (IEA), Fatih Birol, told the Financial Times in an interview.
“If we have a harsh winter and a long winter . . . I wouldn’t exclude the rationing of natural gas in Europe, starting from the large industry facilities,” Birol told FT.
The world faces a “much bigger” energy crisis than the one of the 1970s, Birol told German daily Der Spiegel last month.
“Back then it was just about oil,” Birol told the news outlet. “Now we have an oil crisis, a gas crisis and an electricity crisis simultaneously,” said the head of the international agency created after the 1970s shock of the Arab oil embargo.” (“IEA: Europe Could See Energy Rationing This Winter“, Oil Price)
She’s wrong, isn’t she? We don’t have “an oil, gas and electricity crisis”. What we have is a political crisis. All of these shortages can be easily traced back to the foolish choices that were made by incompetent politicians doing the bidding of neocon fantasists who think they can turn the clock back to the heyday of American global primacy. But those days are over, and everyone seems to know they’re over except the insulated group of self-deluded fanatics at the Washington think tanks and their political spawn at 1600 Pennsylvania Avenue.
Bottom line: We all would have been much better off listening to Kissinger who advised his pals at the World Economic Forum (WEF) to wrap up the Ukrainian war pronto before Russia made changes that could not be reversed. Unfortunately, Kissinger’s appeal fell on deaf ears and Putin has already started redirecting his energy flows eastward. Check out this eyepopping excerpt from an article at oilprice.com:
“The biggest reshuffle of oil trade flows since the Arab oil embargo of the 1970s is underway—and things may never return to normal. The Russian invasion of Ukraine and the sanctions on Russian oil exports are changing global oil trade routes. Over the past nearly five decades, oil flowed more or less freely from any supplier to any customer in the world…
This free energy trade is now over, after …. the Western sanctions that followed, plus Europe’s irreversible decision to cut off its dependence on Russian energy at any cost…
By the end of this year, Europe expects to have effectively banned 90% of all its imports of Russian oil before the war… For oil going to Europe, crude from the Middle East will now travel longer distances to European ports compared to the shorter routes to India and China…
For Europe, the choice of oil supply is now political, and it will be willing to pay a premium to procure non-Russian oil. This will tighten supply options and continue to support elevated oil prices for months to come.
Commenting on the EU’s embargo on Russian seaborne oil imports, Fitch Ratings said last week:
“This ban will have a significant impact on global oil trade flows, with about 30% of EU’s imports needing replacement from other regions, including the Middle East (Saudi Arabia and the UAE have sustained production spare capacity of about 2MMbpd and 1MMbpd, respectively), Africa and the US.” (“The Biggest Reshuffle Of Oil Flows Since The 1970s”, Oil Price)
What does it mean?
It means that inflation will continue to rise as Russia’s prodigious crude supplies are redirected eastward. It means that Washington has abandoned its 30 year-long ‘pet project’, Globalization, and splintered the world into rival blocs. It means that the dollar, the bond market, the western financial system and the so-called “rules-based order”—all of which are inseparably linked to economic growth that depends almost-entirely on the availability of cheap energy—will begin to creak-and-groan beneath the weight of feather-headed policy decisions that have brought certain ruin to the nations of the west and their people.
We’re going to pay a heavy price for Washington suicidal power-grab.
Ukrainian President Volodymyr Zelenskiy this week visited troops around Bakhmut to thank them for the sacrifices that the war against Russia is demanding from them. Some thanks are certainly justified. Contrary to my expectations of 40 days ago, Ukrainian forces have successfully (so far at least) held open the jaws of the trap which Russia has been trying to close around their rear from north and south of the deep salient that stretches from Slovyansk in the west to Severodonetsk in the east.
How has that been possible, in the face of Russian superiority in the air and in artillery firepower? On paper Russian forces should have overwhelmed Ukrainian defences weeks ago. Ukraine has few or no tanks and little to no air power (video reportage from the Donbas salient shows no Ukrainian tanks or aircraft in action, and no aircraft). If Ukraine had any tanks or aircraft they would struggle to find fuel. Ukrainian artillery is present, but thinly, and only slowly being supplemented with retired US howitzers (at least the guns that have survived their journey from west Ukrainian airfields to the salient). Artillery ammunition is also in short supply.
In spite of these material disadvantages Ukrainian infantry cling on to the salient front lines, and only last week were they finally pushed out of Severodonetsk itself. Russian advances are measurable in fractions of kilometres. It all feels uncomfortably like WWI trench warfare.
A closer look at the conflict, and the two sides’ agendas, reveals the likely reasons for Russia’s apparently sclerotic advance, and spoiler alert, Russian incompetence is not one of them.
On the material side the key factor is that Ukrainian forces have had many months in which to dig deep, well-constructed and well-positioned trench and bunker systems in front of Russia’s objectives. A well-sited trench can be stormed by infantry but only at great cost in lives. In 1917 and 1918 the trench systems were breached by using a revolutionary new weapon (tanks), new infantry tactics (effectively storm-trooper tactics with small combined-arms infantry units infiltrating into gaps in defensive positions), new artillery tactics (intense barrages falling metres ahead and to the flanks of the advancing infantry) and a willingness to take very high casualties. Mortality for a single trench attack ran at 10% in 1916, falling to 2% by 1918.
Artillery accuracy
Today the presence of effective front-line anti-tank guided missiles (the Javelin, the NLAW and others) makes the use of tanks to breach trench lines too dangerous, while the presence of man-portable air defence systems like Stinger (MANPADs) does the same for close air support. That leaves artillery, which Russia has in abundance (both weapons and ammunition). However, what has passed unremarked is the painful fact that even first-class artillery, well handled with good target data provided by drone flights, is not a precision weapon.
A large artillery piece firing a single shell from, say, 10 km behind the contact line is surprisingly inaccurate. Targeting is not the precise science that we have grown used to seeing in the context of air-launched precision-guided weapons. The trajectory of the shell is ballistic and unguided.
The shell’s flight through the atmosphere from gun barrel to aiming point is about 50% longer than the line-of-sight range, so a gun fired at a target 10,000 metres away gives its shell a 15,000-metre journey through an unpredictable atmosphere. That takes about 25 seconds. During its flight the shell is subject to atmospheric winds from ground level up to its apogee and back to ground level. The air through which it is passing also provides changing levels of friction according to varying temperature, density and water content. None of these are measurable to the gun-layer or to his fire control computer.
Another major variable comes from changes in the muzzle velocity of each shell. A precise fire control solution depends on an exact prediction of muzzle velocity, but velocity too depends on unpredictable inputs, including the temperature of the propellant charge, the age of the charge (propellant oxidises very slowly in storage, gradually losing its power, so old stock provides a different muzzle velocity to new stock) and even the conditions in which the propellant has been stored over time.
A larger variation in muzzle velocity comes from the level of wear in the gun barrel. As the barrel is abraded by use, more propellant gas escapes around the shell in its passage up the barrel and muzzle velocity falls. Old knackered guns (like America’s retired 155mm howitzers) are removed from service partly because their accuracy falls, but a gun starts wearing as soon as it enters service.
Finally, a gun barrel heats up during sustained use and actually starts to droop under its own weight, marginally yes, but enough to change the ballistic trajectory.
When we combine all of these sources of error the result is that a single shell will have an aiming error of about 0.1%-0.5% of its line-of-sight range. Over a 10,000-metre range that means 10-50 metres.
Some of these errors can be corrected by firing test-rounds at the target. The test rounds provide a real-time measurement for the atmospheric errors and gun barrel wear errors, which are then fed into the firing solution. However, that approach demands that the battery has real-time observation of a target beyond its line of sight, and they warn the target that a salvo may be incoming. Finally, the artillery observer must be able to connect a single shell impact with a single gun (or a salvo with a single battery) to be able to join the dots. Good co-ordination is required along with sight of the target, either from a high vantage point or from a drone.
Muzzle velocity errors can be partly corrected by measuring muzzle velocity for each round. Modern guns are equipped to do this (with a small attachment at the end of the muzzle which is visible), but older ones are not – those US 155mm howitzers again.
Using these aids, accuracy for a single shot can be raised to plus or minus a few metres for indirect fire, but this is where ground fortifications come in. Ukrainian army trenches are typically one metre across – just wide enough for two men with equipment to squeeze past each other – so to hit a target inside a trench you need a +/- 0.5m firing accuracy, or a lot of luck. Strongpoints and bunkers are slightly larger, but buried under metres of earth, steel and even concrete. To destroy a strongpoint Russia needs not only a direct hit, but also a direct hit with a large shell (small shells just move the earth around).
So what we see in the drone video of Ukrainian defence lines is hundreds of shell holes from misses, and a very small number of actual hits on those defence lines.
The same logic applies to shellfire aimed at the roads along which Ukrainian supplies and reinforcements are moving into the salient. A road itself is a larger target, but the vehicles moving along it need not only +/- 1.5m accuracy to be hit, but are also fast moving targets. A road can therefore be well within effective fire range but remain open (if dangerous – fire enough shells and you will get lucky), and that is what we are seeing in the Donbas salient – the supply roads are within 15 km of Russian artillery lines and subject to indirect fire, but have remained open.
These combined circumstances can create a situation in which infantry units stand still while batteries on each side try to hit them, and each other. In this conflict Russia has a large material advantage. Ukrainian batteries are deprived of real-time forward observation of hits (because Russian air defences can take down drones as soon as they appear), are using older, more-worn guns and stocks of ammunition, and have less of it to replace accuracy with volume.
What’s taking so long?
So if Russia is winning the artillery exchange, why has it not also taken the salient? The answer to that probably reveals Russia’s agenda. Kyiv and the western media are presenting the Ukraine war as a traditional conflict for territory, in which victory is measured by the number of square kilometres won. On those terms it is possible to present Russia as both losing and incompetent – it occupies little more Ukrainian territory now than it did 40 days ago when Mariupol fell.
Where Moscow has fought hard for ground (for example towards Popasna) the reason is probably in order to bring the main road into the salient that runs north-east from Bakhmut to Lysychansk within the 20-km effective range of Russian artillery.
But Moscow is almost certainly fighting a completely different type of war – one whose target is not territory but men. Evidence for this assertion (and it is an assertion, as President Putin has not shared his agenda with me yet) can be found in the original statement of Russia’s war aims – “de-militarisation” – and in observation of Russia’s actions in the Donbas salient.
Rather than recreate the lethal battles of WWI by throwing infantry against prepared defensive lines, Russian forces appear to be simply using intensive artillery bombardment to play the odds against Ukrainian lives. Men in trenches and strongpoints are almost impossible to kill, but men need to cycle into and out of those lines for rest and resupply, and when they do that they must move through the open. In open country a large shell has a killing radius of some 50 metres – comfortably within the aiming error of heavy guns. And it is here that Ukrainian forces are losing men at a steady and terrible rate.
This style of warfare also lends itself well to the use of Multiple Launch Rocket Systems. These have poor accuracy but compensate with saturation, payload and range. Firing from the Russian rear, where they are invulnerable to counter-battery artillery fire, they can reach deep behind Ukrainian lines to areas where troops are resting or assembling in open and unprotected areas.
The rate at which men are being killed is in dispute. Russia’s Ministry of Defence releases its estimates of the number of Ukrainian men “neutralised” almost daily. It does not define “neutralised”, which might include serious injuries as well as deaths, and of course its information may be faulty (how would it know?). For what it is worth, the daily tally rarely falls below 200 and often rises to 500. This has been the case since the fall of Mariupol three weeks ago. In contrast, Kyiv for the first time reported its own casualties at about 100 dead per day and 500 injured, a ratio consistent with past dead/injured ratios in a conflict with excellent front-line medical care, but almost certainly a significant under-estimate of the dead.
The truth probably lies somewhere in the middle of the two extremes. If the actual number is 200 dead per average day, and 400 seriously injured (with many more lightly injured but returning quickly to duty), then Ukraine’s forces in the Donbas salient will have seen some 4,000 dead and 8,000 hospitalised since the start of the Donbas phase of the war.
At the start of the assault on the Donbas salient Ukraine appears to have had two full brigades at the eastern end of the salient – the 95th and 81st brigades. At full strength these would have had some 10,000 men. When we estimate the number of Ukrainians captured in the salient (badly reported, but somewhere in the low thousands), we can see some numerical support for my contention that Russia’s agenda is to kill, wound or capture Ukrainians while losing the absolute minimum of its own men in the process.
The loss rates above appear to correlate with the reported movement of Ukrainian reserve forces from west Ukraine into the salient – one report cites eight brigades (some 30,000 men) moving east from Ukraine’s western districts. Reserve forces (all with past basic or professional infantry training) may stand little chance of success, or even survival, in an offensive action or in fast-moving manoeuvre warfare, but they are adequate to hold a well-prepared line of trenches and strongpoints.
If Moscow’s agenda is the demilitarisation of Ukraine then drawing men into the Donbas salient where they can be killed steadily by artillery appears to me to be a highly effective and low-cost way of serving it.
If that is clear to me, it must also be clear to Kyiv, so why are Ukrainian forces holding on to ground which, in the end, doesn’t matter that much? Some point to political reasons (while the war continues so does the flow of money and material to Kyiv), but there may be a less Machiavellian reason.
As I said earlier, it is very hard to kill a soldier who is positioned in a well-built trench or bunker. However, when that soldier moves into the open the artillery targeting problem I mapped out above disappears. If the Ukrainian army were to withdraw from the salient en masse much of it would have to do so on foot (Ukraine is short of tanks, armoured cars, trucks and fuel). Walking slowly in the open to the west would expose the army to a murderous bombardment. We have been here before.
On February 26 1991 some 10,000 soldiers of the Iraqi army tried to withdraw north from Kuwait along Highway 80, a six-lane motorway. Caught in the open by Coalition forces, a slaughter ensued, so large that no official figures for the number of dead have ever been released. Those who were not killed or wounded fled. If Ukrainian forces decided to withdraw from the Donbas salient a similar experience might await them, only in larger scale.
It is likely that Moscow is working to trigger an amorphous point of collapse in Ukrainian morale with its relentless whinnying down of the latter’s forces with relentless shelling, while protecting its own forces from the same pressures by avoiding pointless attempts to gain territory. If the strategy succeeds that territory will fall into Russia’s hands anyway.
The US army estimates that on average when a unit has lost 30% of its men it can suffer from a collapse in morale and cease to be an effective fighting force. When highly motivated, as Ukraine’s soldiers are, that percentage can be higher.
Time is the unknown factor here, because it is impossible to measure the hearts and souls of Ukraine’s forces. We know that at the outset Ukraine had some 60,000 men of the first quality based in and near the Donbas salient. We can estimate that some 4,000 of those are now dead, some 8,000 are too injured to take part in the conflict, and that some thousands have surrendered or been captured. Adding in losses incurred between day one of the war and the fall of Mariupol (unquantified and probably unquantifiable at present), the original force has probably suffered some 30% total losses, and is probably losing 1% of its men per day.
That means a collapse might occur at any time between now and twenty days from now (when losses reach 50%). Replacement of degraded brigades by fresh reserve formations will delay collapse, but not man for man, since reserve forces may be expected to have collapse trigger points at much smaller mortality percentages than regular units.
Ukrainian counter-attacks (like this week’s attempt to retake part of Severodonetsk) actually play into the Russian strategy. An attack requires men to leave the safety of their defences and move in the open on ground which has been perfectly mapped by Russian artillery. As Russian forces move back Ukrainian forces move into what becomes in effect a killing-ground, where they are likely to suffer around 10% mortality in the space of an hour or two of the attack.
Collapse is contagious – once a major unit collapses it is likely to take its neighbours with it. The collapse of the Azov Brigade was not contagious to the main Ukrainian army because it was physically isolated and 150 km away from the Donbas salient, and because it took place gradually over two weeks, through the siege of Azovstal (which may be why that siege was forced on it by Kyiv).
The arrival of western weapons in the salient serves to delay collapse by a small amount. Outgoing fire (whether 122mm shells or MLRS warheads) will marginally destroy some Russian artillery units and ammunition stocks and reassure Ukrainian men in their trenches, but the margin cannot be large enough to change the dynamic. The only game-changer in this context would be a reversal in control of the airspace over the salient, and that has no chance of happening.
And so the agony of the Ukrainian army continues. Russia may succeed in closing the jaws of its trap (which would lead to complete and sudden collapse and mass surrender) or it may just continue to kill a few hundred Ukrainians each day until collapse comes, like a thief, silently and by night.
Sanctions against Russia are a blessing in disguise, according toAlexey Butrimov, the general director of BJet, a Russian aviation company. Although he readily admits that the new restrictions have created significant complications for businessmen such as himself, he is confident that in the long-term, they will provide Russia with the much-needed stimulus to revive its long-dormant aviation industry.
“On the one hand, we look at all the problems caused by sanctions with sadness, but we also understand deep down inside that we can finally resurrect our aviation,” he said. “When times are good, you don’t have much incentive to develop anything quickly. But now that we find ourselves in a situation where we don’t have anything, the only path forward is to build up our own aviation system.”
Since Russian President Vladimir Putin’s decision in late February to send troops into Ukraine, Russia has quickly surpassed longtime pariahs such as Iran, North Korea, and Syria to become the most sanctioned country in the world. Almost overnight, the U.S. and its allies in Europe and Asia moved to freeze nearly half of Russia’s financial reserves, severely restrict Russia’s access to their financial and technological systems, and ban Russian planes and ships from entering their airspace and ports. Simultaneously, hundreds of multinational corporations have either suspended or downsized their operations in Russia since the start of the conflict.
The Biden White House has vowed that as a result of these new sanctions, “Russia will very likely lose its status as a major economy, and it will continue a long descent into economic, financial, and technological isolation.” Meanwhile, on the political front, National Security Advisor Jake Sullivan told CBS News in April that sanctions were meant “to make it harder for [Russia] to fuel their war machine,” and thereby overtime help “improve Ukraine’s position at the bargaining table and make an outcome of this war that Ukraine wants to see more likely.”
So far at least, sanctions have done little to alter Putin’s geopolitical calculus or undermine his domestic support. The Biden administration’s most dire predictions for the Russian economy have also not been borne out, at least not yet. Although Western-led sanctions undoubtedly initially caused the Russian ruble to plummet and many ordinary Russians to visibly panic, over three months later, the economic situation in the country appears much calmer.
None of this is to say that tumultuous waters are not ahead for the Russian economy.
Following three decades as part of the globalized economy, Russia will have to completely restructure its supply and production chains away from the West and do so rapidly. Even more dauntingly, it will have to find ways to promote technological innovation despite having its ties with many of the world’s leading scientific powerhouses severed.
Russia has spent years trying to sanctions-proof its economy. Since 2014, when the U.S. and European Union first imposed major sanctions against Russia over the annexation of Crimea, the Kremlin promoted import-substitution and greater economic ties with Asia as a way of reducing Russia’s dependence on Western technology and trade. At the same time, Moscow built up its financial reserves to $640 billion in order to have a significant cushion in the event of a crisis. Finally, Russia slashed its foreign debts and began cutting back its use of the dollar for trade settlements or as a reserve currency. This laid the groundwork in Russia for a potential sudden economic decoupling from the West.
But that’s much easier said than done. Despite the Kremlin’s import-substitution push, many sectors of the Russian economy still remained heavily dependent on the West. A study by the Higher School of Economics, one of Russia’s top universities, published in April found that the U.S., Canada, and E.U. accounted for half of Russia’s foreign value added, including components for machinery, medications, and cars.
Likewise, although Russia succeeded in accumulating vast financial reserves over the past eight years, it stored nearly half of that money in Western and Japanese banks. Consequently, when Russian troops crossed the border into Ukraine, those reserves were quickly frozen. It’s not clear when, if ever, Moscow will be able to recover them.
Oleg Buklemishev, director of Moscow State University’s Center for Economic Policy Research, explained that notwithstanding the growing political tensions over the years, most of Russia’s trade outflows, ports, railroads, and financial infrastructure were oriented around the West. Consequently, many Russian business people opted to continue doing business as usual even as the Kremlin urged them to localize production or pivot to Asia.
“My hypothesis is that 2014 convinced the Russian elite that it was possible to live under sanctions and that what new sanctions will be imposed won’t be critically important,” he said. “There seems to have been the expectation that the West would rattle its sabers as usual, but that business would prevail at the end of the day.”
Therefore, when the West imposed unprecedented sanctions against Russia over its decision to send troops into Ukraine, the initial economic shock was unsurprisingly immense. In late February and early March, the Russian ruble lost almost 30 percent of its value against the dollar, prompting Biden to boast that the currency had been reduced to “rubble.” This rapid devaluation of the ruble caused many Russians to scramble to safeguard their finances. I personally observed long lines at banks and ATM machines in Moscow, as ordinary people tried to withdraw any foreign currency they could. At the same time, instances of panic buying were reported all across the country, with Russians seeking to stock up on everything from buckwheat to electronics.
Interestingly enough, however, this wave of economic insecurity appears to have had little impact on the Kremlin’s political support. The Levada Center, Russia’s leading independent polling agency, found that Putin’s approval rating jumped from 71 percent in February to 82 percent in April, his highest mark since the start of his fourth presidential term back in 2018. At the same time, 74 percent of Russians expressed support for Moscow’s military campaign in Ukraine compared to 19 percent who opposed it. When asked whether Russia should make any concessions to the West in exchange for lifting sanctions, 80 percent of respondents said no.
A similar consolidation process is visible among Russian elites. To date, only two high profile officials have resigned: Anatoly Chubais, the Kremlin’s special envoy for climate change and infamous architect of Russia’s privatization reforms during the 1990s, and Boris Bondarev, a veteran diplomat at the Russian mission in Geneva.
Sergey Karaganov, head of Russia’s Council on Foreign and Defense Policy, a research group that advises the Kremlin, told me that Russian elites increasingly viewed the Ukraine crisis as an existential struggle for the future of their state. “A majority of people understand that a failure to achieve victory could undermine the regime’s stability and lead to the repetition of February 1917 or 1991,” he said, referring to the downfall of Czarist Russia and the Soviet Union. “The biggest fear for Russian elites is collapse, so they will fight until victory and if necessary, will pursue any escalation in pursuit of that goal.”
Karaganov added that sanctions had further weakened the influence of Russia’s oligarch class, the faction within the Russian elite most closely affiliated with the West. “What happened with the oligarchs showed everybody that you should not do business with the West under any circumstances,” he said. “For decades, Russia’s wealthy classes have invested their wealth abroad with the expectation that they will spend their old age in Europe. That has now come to a rapid halt.”
More than three months after sanctions were imposed, life in Russia has a surprising air of normalcy. Following its initial plunge, the ruble has recovered all of its pre-war value and then some in recent weeks thanks to a combination of high global energy prices and the Russian government’s strict capital control measures. Some of the early signs of economic anxiety have also appeared to dissipate: Moscow’s restaurants, cafes, and bars are as packed as ever. Although grocery prices have noticeably increased, supermarkets are still fully stocked with a wide range of products, including foreign snacks. The biggest difference can be seen in shopping malls, where some Western-owned stores have closed their doors. Nevertheless, local and Asian brands are continuing to work as usual and appear to have a fair share of clients on any given day.
Are these signs that the Russian economy is quickly stabilizing or is it merely the calm before a storm? Buklemishev of Moscow State University suggested that it was closer to the latter option. He told me that the ruble’s recent appreciation showed that the Russian economy’s longtime dependence on hydrocarbon exports had reached “new absurd proportions,” since the currency’s current value is primarily driven by the fact that although imports have dropped steeply, energy sales continue to bring significant foreign currency revenue into Russia. Under the current capital controls regime, however, exporters are forced to convert a majority of their foreign currency earnings into rubles.
“There are not a lot of outward signs of economic problems, in Moscow at least, but we are beginning to see rising prices, a gradually disappearing assortment on shelves, and the closing of stores and factories,” he added. “What we are seeing now are probably the final days of a happy, calm existence. Going forward things will be different.”
Buklemishev is not the only one who is warning that hard times are ahead. In April, Russian Prime Minister Mikhail Mishustin admitted that Russia was facing its most difficult economic situation in three decades. Russia’s Central Bank has forecast that the country’s GDP could decline by 8 to 10 percent in 2022, while annual inflation is expected to reach 18 to 23 percent. Similar figures have been put forth by international observers, with the International Monetary Fund and World Bank projecting Russia’s economy to shrink this year by 8.5 percent and 11.2 percent respectively.
During a press conference in late April, Elvira Nabiullina, the head of Russia’s Central Bank, warned that the new trade and logistical restrictions would make it substantially more difficult for Russian consumers and manufacturers to acquire a wide range of finished goods and components. Even highly localized industries of the Russian economy would be affected, she explained, since all it takes is to have one small but key component missing to disrupt production. Nabiullina predicted that Russia would begin to meaningfully feel the sting of sanctions in the second and third quarters of this year, as existing stockpiles begin to run down. Economic recovery, she said, would largely depend on how quickly Russian businesses will be able to establish new production and supply chains.
The E.U.’s recent decision to ban 90 percent of Russian crude oil before the end of the year could further complicate matters for Moscow by potentially depriving it of a major source of revenue.
To better understand the new challenges posed by sanctions, I spoke to several Russian entrepreneurs across different industries about how their life had changed and what they expect going forward. To my surprise, I discovered that many of them expressed confidence that they could not only adjust but even thrive in their new reality.
“Sanctions have activated and mobilized the Russian business community,” said Nikolai Dunaev, the vice president of Opora Russia, a national association of small and medium business owners that counts its membership in the hundreds of thousands.
“Over the past three months, almost everyone we talk to has found some ways to adapt,” Dunaev explained. “Some have found alternative suppliers in China, India, Turkey, and the Middle Eastern countries, while others have had to temporarily lower production or change the assortment of goods they produced. However, the important thing is that everyone is finding solutions to their problems, one way or another.”
Some entrepreneurs have even reported that sanctions are providing their businesses with an unexpected boost. Valentina Andreeva is the owner of Mrs. Ruby, a Moscow-based premium furniture company. She told me that over the past five months, her business had already generated an entire year’s worth of revenues. “Right now we can’t process new orders because our current production capacity is just not enough,” she said. “We are expanding our productive capacity to meet this growth in demand because new orders are coming on every day.”
Andreeva explained that previously, domestic luxury furniture producers such as herself faced stiff competition from Italian brands, which had expended substantial resources over the past few decades to establish a strong foothold in the Russian market. Following the imposition of sanctions, however, the logistical and financial chains connecting Russia and Italy were quickly severed. At the same time, sanctions helped to spark a “wave of patriotism” among wealthy Russians, causing them to flock to domestic brands as a sign of defiance.
“For people in Russia who have become accustomed to exquisite furniture, there is nothing in the world that will cause them to turn away from this luxury,” Andreeva said. “And since the money is still there, they continue to order new furniture. The only difference now is that they buy it from Russia instead of Italy.”
Andreevna predicted that even if sanctions are removed over the next two years and Italian brands can return to Russia, they will struggle to regain their previous market share. After all, why go through the extra trouble and risk of ordering something from abroad when you can just as easily buy that good closer to home?
“If Russian producers can demonstrate that they can produce as well as Italy, then no one will order from Italy in the future because there are numerous barriers involved,” she said.
Butrimov of BJet is similarly confident that sanctions will benefit his industry in the long run. That is undoubtedly a bold position considering that aviation is widely regarded as one of the sectors of the Russian economy that is most vulnerable to sanctions. Butrimov admits that it will be difficult for airplane manufacturers to find replacements for certain Western imports, especially high-tech components such as advanced engines and electronics. However, he believes that Russia will be able to develop its own alternatives over the next five years.
In the meantime, Butrimov contended that Russian manufacturers had ways to “simplify” their designs without meaningfully sacrificing quality or safety. “For example, if you have a cockpit with electronic monitors, nothing is stopping you from temporarily installing an older solution,” he explained. “Yes, we will have to take a few steps back technologically, but once we are able to develop and produce our own monitors, that will help us make a major jump forward.”
According to Butrimov, one of Russia’s biggest advantages is that it possessed its own well-developed aviation industry just a few decades ago. During the Soviet era, the country not only designed its own aircraft but also fully controlled their production cycle. Although much of that capacity was degraded in the decades following the collapse of the Soviet Union, Butrimov told me that Russia still retained a large cohort of well-trained engineers and the ability to produce workable models.
“Russia still has factories for the production of military airplanes, and in the current situation all we have to do is to expand the production of military aircraft to the civilian sector,” he said. “For example, we are still releasing the Il-96 and Il-76 airplanes. Nothing is preventing us from boosting our output of the Il-96, but this time with an upgraded engine and new avionics.”
Butrimov already sees some signs that the Russian aviation sector has begun adjusting to its new realities. “We are seeing the emergence of new small companies that produce key components and the government is trying to promote the manufacturing of Russian equipment,” he said. “So on the one hand you have problems, but on the other hand these problems have finally kicked off the process of import-substitution, the result of which Russia will no longer be dependent on everyone.”
Over the long run, perhaps the most important question is to what extent Russia will be able to continue producing technological innovations while under sanctions. The Russian economy certainly has enough natural resources and industrial know-how to survive, but can it thrive in a world where advanced technologies increasingly reign supreme? As I discovered, the answer to that question is very much up in the air at the moment.
Sergei Abramov is the director of the Institute of Program Systems at the Russian Academy of Sciences, but he is perhaps best known for his work as the chief designer of Russia’s “SKIF-Aurora” supercomputer. Abramov told me that as a result of financial sanctions against Russia, his institute could no longer pay for services such as IP addresses, telecommunication infrastructure, servers, and even apps like Zoom or Dropbox. “You previously didn’t think about these issues,” he admitted. “All of us were so used to the fact that we could easily pull up a browser page or write a line of code, that we didn’t really think about the services that make these simple actions possible.”
The more pressing issue for Abramov, however, is the danger of Russia falling technologically behind as a result of sanctions. As he explained to me, developing cutting-edge technologies in the Internet age is only possible through international cooperation since innovation requires large financial, technological, and knowledge resources. Abramov noted that when his institute developed the “SKIF-Aurora” supercomputer, it formed an alliance with Intel and Italy-based Eurotech company, both of whom significantly contributed to the final product.
“Could we do this all without international cooperation? No, we could not,” he said. “Even though we had some solutions that were technologically cutting-edge, they were not enough to create the final product. A supercomputer requires hundreds of cutting-edge solutions, and that is very difficult to develop completely yourself.”
Sanctions also created other barriers to innovation, Abramov warned. In addition to restricting technological imports, sanctions threatened to force the Russian economy into a prolonged slump, which would mean that other sectors will have fewer resources to order solutions from the IT industry. Perhaps even more worrisome, the difficulty of working under sanctions could push many talented Russian IT specialists to seek better opportunities elsewhere. Abramov said that of his five best students, four had left Russia.
“The IT sector will continue its work and there will be some domestic solutions in software and hardware, but all of this work will be monstrously complicated,” he said. “Under such circumstances, it will be very difficult to talk about Russia developing products with competitive superiority.”
The mass exodus of IT workers since late February has sparked fears that Russia could soon face a major brain drain, although the exact scale of the problem is up for debate. The Russian Association for Electronic Communications caused a sensation when in March it reported that 50,000 to 70,000 specialists had fled the country and that another 100,000 were expected to leave the following month.
By contrast, a study published in late May by the Russoft software developer’s association estimated that only 40,000 IT workers had moved abroad so far this year. Perhaps even more significantly, the Russoft study concluded that up to half of those specialists could return to Russia before the end of the year.
Valentin Makarov, the head of Russoft, told me that there are several reasons why he expects so many Russian IT workers to return home. First, the influx of well-paid Russian professionals to neighboring countries has caused real estate prices in those places to sharply increase, making long-term relocation far more costly. Second, many Russians who moved abroad reported experiencing hostility from locals. Finally, Makarov believes that the Russian government’s new package of incentives for IT companies and workers, which includes exemptions from taxation and military service, could help entice many back to Russia.
“Losing 20,000 specialists is of course very bad, but it’s not enough to seriously affect the quality of the industry’s work,” he said. Looking ahead to the future, Makarov argued that although adapting to the new post-sanctions reality would undoubtedly be difficult, the Russian IT sector was up for the challenge. He noted that some Russian companies had seen their sales increase by 2-8 times in recent months, fueled by a growth in demand for domestic IT solutions following the exodus of Western tech giants from Russia. The next step, according to Makarov, is to look for opportunities to expand into the markets of developing countries, which he says accounts for 40 percent of the total global IT market share.
While Makarov conceded that it would not be possible to fully compensate for the loss of access to Western advanced technologies, he contended that Russia could join forces with companies in emerging tech markets such as China, India, Malaysia, and Indonesia to develop their own cutting-edge innovations. Makarov believes that geopolitical independence from the U.S. could be a powerful selling point for Russia, especially when it comes to establishing closer technological cooperation with Beijing.
“China is obviously more economically integrated with the West than with Russia, but geopolitical confrontation between China and the US is not going anywhere anytime soon,” he said. “On the contrary, as more and more sanctions are imposed against China, it will need to find new partners in technological development and all other areas. Since both Russia and China have very strong programmers, it makes sense for us to work together in building a new technological space rather than remain dependent on the United States.”
In just three months, Russia’s relationship with the outside world has been completely upended. The post-Soviet era of globalization, in which Russia sold natural resources to the West in exchange for key components, technologies, and finished goods, is likely gone for good. But what comes next is far from certain. Will Russia find a way to defy the odds and retain its status as a major global economy? Or is it doomed to become an international pariah that will increasingly find itself technologically left behind? I suspect that we will have a definitive answer to that question only in a few years’ time.
Dimitri A. Simes has written for the National Interest and Nikkei Asia, and was a 2020 Robert Novak Journalism Fellow.
