By Glenn Diesen, Substack, 10/30/24

[Links to references available at link above]

The Economist reports that “Russia is slicing through Ukrainian defences” and Ukraine is subsequently “struggling to survive”.[1] Across the Western media, the public is prepared for defeat and painful concessions in future negotiations. The media is changing the narrative as reality can no longer be ignored. Russia’s coming victory has been obvious since at least the summer of 2023, yet this was ignored to keep the proxy war going.

We are witnessing an impressive demonstration of narrative control: For more than two years, the political-media elites have been chanting “Ukraine is winning” and denounced any dissent to their narrative as “Kremlin talking points” that aim to reduce support for the war. What was “Russian propaganda” yesterday is now suddenly the consensus of the collective media. Critical self-reflection is as absent as it was after the Russiagate reporting.

Similar narrative control was displayed when the media reassured the public for two decades that NATO was winning [in Afghanistan], before fleeing in a great rush with dramatic images of people falling off an airplane.

The media deceived the public by presenting the stagnant frontlines as evidence that Russia was not winning. However, in a war of attrition, the direction of the war is measured by attrition rates – the losses on each side. Territorial control comes after the adversary has been exhausted as territorial expansion is very costly in such high-intensity warfare with powerful defensive lines. The attrition rates have throughout the war been extremely unfavourable to Ukraine, and they continuously get worse. The current collapse of the Ukrainian frontlines was very predictable as the manpower and weaponry have been exhausted.

Why has the former narrative expired? The public could be misled by fake attrition rates, yet it is not possible to cover up territorial changes after the eventual breaking point. Furthermore, the proxy war was beneficial to NATO when the Russians and Ukrainians were bleeding each other without any significant territorial changes. Once the Ukrainians are exhausted and begin to lose strategic territory, it is no longer in the interest of NATO to continue the war.

Narrative Control: Weaponising Empathy

The political-media elites weaponised empathy to get public support for war and disdain for diplomacy. The Western public was convinced to support the proxy war against Russia by appealing to their empathy for the suffering of Ukrainians and the injustice of their loss of sovereignty. Yet, all appeals to empathy are always translated into support for continued warfare and dismissing diplomatic solutions.

Those who disagreed with NATO’s mantra that “weapons are the way to peace” and instead suggested negotiations, were quickly dismissed as puppets of the Kremlin who did not care about Ukrainians. Support for continued fighting in a war that cannot be won has been the only acceptable expression of empathy.

For the postmodernists seeking to socially construct their own reality, great power rivalry is largely a battle of narratives. The weaponisation of empathy enabled the war narrative to become impervious to criticism. War is virtuous and diplomacy is treasonous as Ukraine was allegedly fighting Russia’s unprovoked war with the objective to subjugate the entire country. A strong moral framing convinced people to deceive and self-censor in support of the noble cause.

Even criticism of how Ukrainian civilians were dragged into cars by their government and sent to their deaths on the frontlines was portrayed as supporting “Kremlin talking points” as it undermined the NATO war narrative.

Reporting on high Ukrainian casualty rates threatened to undermine support for the war. Reporting on the failure of sanctions threatened to reduce public support for the sanctions. Reporting on the likely US destruction of Nord Stream threatened to create divisions within the military bloc. Reporting on the US and UK sabotage of the Minsk agreement and the Istanbul negotiations threatens the narrative of NATO merely attempting to “help” Ukraine. The public is offered the binary option of adhering either to the pro-Ukraine/NATO narrative or the pro-Russia narrative. Anyone challenging the narrative with inconvenient facts could thus be accused of supporting Moscow’s narrative. Reporting that Russia was winning was uncritically interpreted as taking Russia’s side.

There are ample facts and statements that demonstrate NATO has been fighting to the last Ukrainian to weaken a strategic rival. Yet, the strict narrative control entails that such evidence has not been permitted to be discussed.

The Objectives of a Proxy War: Bleeding the Adversary

The strict demand for loyalty to the narrative conceals unreported facts that US foreign policy is about restoring global primacy and not an altruistic commitment to liberal democratic values. The US considers Ukraine to be an important instrument to weaken Russia as a strategic rival.

RAND Corporation, a think tank funded by the US government and renowned for its close ties with the intelligence community, published a report in 2019 on how the US could bleed Russia by pulling it further into Ukraine. RAND recognised that the US could send more military equipment to Ukraine and threaten NATO expansion to provoke Russia to increase its involvement in Ukraine:

“Providing more U.S. military equipment and advice could lead Russia to increase its direct involvement in the conflict and the price it pays for it… While NATO’s requirement for unanimity makes it unlikely that Ukraine could gain membership in the foreseeable future, Washington pushing this possibility could boost Ukrainian resolve while leading Russia to redouble its efforts to forestall such a development”.[2]

However, the same RAND report recognised that the strategy of bleeding Russia had to be carefully “calibrated” as a full-scale war could result in Russia acquiring strategic territories, which is not in the interest of the US. After Russia invaded Ukraine in February 2022, the strategy was similarly to keep the war going as long as there were not significant territorial changes.

In March 2022, Leon Panetta (former White House Chief of Staff, US Secretary of Defence, and CIA Director) acknowledged: “We are engaged in a conflict here, it’s a proxy war with Russia, whether we say so or not…. The way you get leverage is by, frankly, going in and killing Russians”.[3] Even Zelensky recognised in March 2022 that some Western states wanted to use Ukraine as a proxy against Russia: “There are those in the West who don’t mind a long war because it would mean exhausting Russia, even if this means the demise of Ukraine and comes at the cost of Ukrainian lives”.[4]

US Secretary of Defence Lloyd Austin outlined the objectives in the Ukraine proxy war as weakening its strategic adversary:

“We want to see Russia weakened to the degree that it can’t do the kinds of things that it has done in invading Ukraine…. So it [Russia] has already lost a lot of military capability. And a lot of its troops, quite frankly. And we want to see them not have the capability to very quickly reproduce that capability”.[5]

There have also been indications of regime change and destruction of Russia as wider goals of the war. Sources in the US and UK governments confirmed in March 2022 that the objective was for “the conflict to be extended and thereby bleed Putin” as “the only end game now is the end of Putin regime”.[6] President Biden suggested that regime change was necessary in Russia: “For God’s sake, this man cannot remain in power”. However, the White House later walked back Biden’s dangerous remarks.

The spokesperson of Prime Minister Boris Johnson, also made an explicit reference to regime change by arguing “the measures we’re introducing, that large parts of the world are introducing, are to bring down the Putin regime”. James Heappey, the UK Minister for the Armed Forces, similarly wrote in the Daily Telegraph:

“His failure must be complete; Ukrainian sovereignty must be restored, and the Russian people empowered to see how little he cares for them. In showing them that, Putin’s days as President will surely be numbered and so too will those of the kleptocratic elite that surround him. He’ll lose power and he won’t get to choose his successor”.[7]

Fighting to the Last Ukrainian

Chas Freeman, the former US Assistant Secretary of Defence for International Security Affairs and Director for Chinese Affairs at the US State Department, criticised Washington’s decision to “fight to the last Ukrainian”.[8]

Republican Senator Lindsey Graham outlined the favourable arrangements the US had established with Ukraine: “I like the structural path we’re on here. As long as we help Ukraine with the weapons they need and the economic support, they will fight to the last person”.[9] The Republican leader, Mitch McConnell, cautioned against conflating idealism the hard reality of US objectives in the proxy war:

“President Zelenskyy is an inspiring leader. But the most basic reasons for continuing to help Ukraine degrade and defeat the Russian invaders are cold, hard, practical American interests. Helping equip our friends in Eastern Europe to win this war is also a direct investment in reducing Vladimir Putin’s future capabilities to menace America, threaten our allies, and contest our core interests.… Finally, we all know that Ukraine’s fight to retake its territory is neither the beginning nor end of the West’s broader strategic competition with Putin’s Russia”.[10]

Senator Mitt Romney argued that arming Ukraine was “We’re diminishing and devastating the Russian military for a very small amount of money… a weakened Russia is a good thing”, and it comes at a relatively low cost as “we’re losing no lives in Ukraine”. Senator Richard Blumenthal similarly asserted: “we’re getting our money’s worth on our Ukraine investment” because “for less than 3 percent of our nation’s military budget, we’ve enabled Ukraine to degrade Russia’s military strength by half… All without a single American service woman or man injured or lost”.[11] Congressman Dan Crenshaw agrees that “investing in the destruction of our adversary’s military, without losing a single American troop, strikes me as a good idea”.[12]

Retired US General Keith Kellogg similarly argued in March 2023 that “if you can defeat a strategic adversary not using any US troops, you are at the acme of professionalism”. Kellogg further explained that using Ukrainians to fight Russia “takes a strategic adversary off the table” and thus enables the US to focus on its “primary adversary which is China”. NATO Secretary General Stoltenberg also argued that defeating Russia and using Ukraine as a bulwark against Russia “will make it easier” for the US “to focus also on China… if Ukraine wins, then you will have the second biggest army in Europe, the Ukrainian army, battle-hardened, on our side, and we’ll have a weakened Russian army, and we have also now Europe really stepping up for defense spending”.[13]

In Search of a New Narrative

A new victory narrative is required as a NATO-backed Ukraine cannot realistically defeat Russia on the battlefield. The strongest narrative is obviously to claim that Russia has failed in its objective to annex all of Ukraine to recreate the Soviet Empire and thereafter conquer Europe. This narrative enables NATO to claim victory. After Ukraine’s disastrous counter-offensive in the summer of 2023, such a new narrative was indicated by Ignatius in the Washington Post, where he argued the measurement of success is the weakening of Russia:

“Meanwhile, for the United States and its NATO allies, these 18 months of war have been a strategic windfall, at relatively low cost (other than for the Ukrainians). The West’s most reckless antagonist has been rocked. NATO has grown much stronger with the additions of Sweden and Finland. Germany has weaned itself from dependence on Russian energy and, in many ways, rediscovered its sense of values. NATO squabbles make headlines, but overall, this has been a triumphal summer for the alliance”.[14]

Sean Bell, a former Royal Air Force Air Vice-Marshal and Ministry of Defence staffer, argued in September 2023 that the war had significantly degraded the Russian military to the point it ‘no longer poses a credible threat to Europe’. Bell therefore concluded that “the Western objective of this conflict has been achieved” and “The harsh reality is that Ukraine’s objectives are no longer aligned with their backers”.[15]

The Ukrainian proxy has been exhausted, which ends the proxy war unless NATO is prepared to go to war against Russia. As NATO is preparing to cut its losses, a new narrative is required. As the narrative changes, it will soon be permitted to call for negotiations as a display of empathy for the Ukrainians.

YouTube link here.

By Anatol Lieven, Responsible Statecraft, 10/30/24

One did not have to be an Elijah or an Amos to predict the aftermath of the Georgian elections, but all the same, the Quincy Institute and Responsible Statecraft can claim a modest prize for prophecy. The domestic and international background to the elections and the ensuing crisis are analyzed in a QI policy brief published earlier this month; and as I wrote for RS back in July:

“Parliamentary elections are due in Georgia on October 26, and the universal opinion among Georgians with whom I have spoken is that if the government wins, the opposition, backed by pro-Western NGOs, will allege that the results were falsified, and will launch a mass protest movement in an effort to topple the Georgian Dream government. Judging by recent statements, most Western establishments will automatically take the side of the opposition. This narrative is already well underway, with lines like ‘Government vs. the People in Georgia’ and ‘a crisis that has pitted the government against its people.’ This suggests that Georgia is a dictatorship in which ‘the people’ have no say except through street protests.”

This is exactly what has happened. According to the results issued by the National Election Commission, the governing Georgian Dream Party won 53 percent of the vote to 38 percent for the different opposition parties. The opposition, however, immediately alleged fraud, and declared that its MPs would boycott the new parliament, thereby depriving it of a quorum.

The pro-opposition President, Salome Zourabichvili, stated that Georgians were “victims of what can only be described as a Russian special operation – a new form of hybrid warfare waged against our people and our country.” However, when asked by Western journalists to substantiate this, she could only say that the government had used “Russian methodology.”

She mixed accusations of electoral falsification with an appeal for “the firm support of our European and American partners to the part of Georgia that is European, that is the Georgian population.” This is a quite different argument. It implies that whatever the results of the elections, the only real “Georgian population” is the part that identifies with the West. Only their voice is truly legitimate, and a government that does not unconditionally follow the “European Path” is inherently illegitimate, elections or no elections.

Much of the Western media immediately responded with headlines like “Georgians join mass rally” and “Georgians protest contested election results,” suggesting (without directly asserting) that this is indeed a case of “the people” against a government, as if the government has no real support at all – despite the fact that even if the government’s election victory is contested, there can be no doubt at all that a very large proportion of the Georgian population voted for them.

The Biden administration and other Western governments and institutions have not even waited for detailed reports from their own observers to call the election results into question. Moreover, it must be stated with regret that many of these observers can hardly be called objective.

President Biden, absurdly, “cited international and local observers’ assessments that elections in Georgia were not free, nor fair;” absurdly, because the local observers are overwhelmingly from NGOs closely linked to the Georgian opposition. As to monitors from the West, in many cases their parent institutions have spent months denouncing the Georgian government as undemocratic and under Moscow’s sway.

The most reliable monitoring historically has come from the OSCE’s Office for Democratic Institutions and Human Rights (ODIHR). Its preliminary comments on the elections:

“Imbalances in financial resources, a divisive campaign atmosphere, and recent legislative amendments were of significant concern throughout this election process… Yet the engagement shown on election day—from the active voter participation, robust presence of citizen and party observers, and rich diversity of voices—gives the sign of a system that is still growing and evolving, with a democratic vitality under construction.”

Though far from a ringing endorsement, this does not allege that the elections were rigged. Moreover, the government’s use of its financial and administrative resources to tilt the result have been true of every Georgian election since independence (as well as some in the West). As to the “divisive campaign atmosphere,” responsibility for this is obviously shared between government and opposition. The Georgian Election Commission has called a recount in a small number of constituencies, which should be closely and independently observed.

All Western institutions and commentators should therefore wait for the final OSCE/ODIHR report before drawing firm conclusions. However, two early assessments seem plausible: First, that there were most probably a good many cases where the government bought votes, intimidated voters, and engaged in other acts of electoral manipulation. Second, however, to legitimately endorse the reversal of a 53% to 38% government victory will require proof of rigging on a very large scale. Maybe that can indeed be provided. Let us wait and see.

Aspects of the Western response have troubling implications that extend far beyond Georgia. Much media “reporting” from Georgia has been closer to opinion articles based on interviews with the Georgian opposition. Interviews with voters who favor the government, with explanations of their reasons for doing so, have been rare indeed. Many Western journalists also seem to feel — if only unconsciously — that the only Georgians (and others in the world) who truly deserve a voice are those who identify with the West and the opinions of the journalists asking the questions.

This is also reflected in an amusing headline from the U.S. government-funded Radio Free Europe/Radio Liberty — “How the World Sees the Disputed Georgian Elections” (accompanied by a large photograph of Secretary of State Antony Blinken). Who is “the world” as quoted by RFE/RL?

One U.S. official, five EU officials, two Western NGOs, and — no doubt to give an impression of “balance” — one Hungarian and one Russian. The views of people in Asia, Africa, the Middle East, Latin America? They belong in RFE/RL’s “world” to the same degree that they take part in the World Series.

I often observed this tendency when I was a foreign correspondent myself, but especially since the Ukraine war and in any question touching on Russia, it has become a dominant and stifling pattern, enforced by editors, and encouraged by Western governments and lobbies. Journalists should ask themselves whether this really corresponds to their self-image as free, independent, and honest reporters from democracies that value honest and open debate.

The Georgian government has undoubtedly greatly exaggerated the degree to which the West and the opposition desire to push Georgia into a new war with Russia — though probably not the degree to which they would break economic relations with Russia, thereby damaging the Georgian economy and impoverishing many Georgians.

There is, however, something deeply unpleasant about well-paid Western commentators sitting safely in Washington, London, or Berlin, and dismissing as innately illegitimate and stupid the concerns of citizens of a small and poor country about relations with a very large and dangerous neighbor.

For if one factor in the Georgian government’s continued support among many Georgians has been fear of confrontation with Russia, another has been resentment at arrogant dictation from the West, and especially the EU, often without any regard to Georgian national interests or national traditions.

This of course is a feeling that is shared by a great many people who are citizens of the EU. It helped to explain Brexit, and the rise of “Euroskeptic” populist movements in many European countries. If you want people to support you, it is probably not a good idea to begin your appeal to them by implying that their views don’t count in any case because they are ignorant, illiterate Russian puppets who do not really deserve a vote anyway.

***

Duda Claimed That Georgia’s Pro-Western President Has No Evidence Of Russian Meddling

By Andrew Korybko, Substack, 10/30/24

French-born President of Georgia Salome Zourabichvili, who also used to be the French Ambassador to Tbilisi, accused Russia of conducting a “special operation” after the ruling Georgian Dream party with whom she’s feuding won a majority during last weekend’s parliamentary elections. This figurehead leader then called on her people to protest, which can be considered a punitive Color Revolution for her opponents’ refusal to sanction Russia and open a second military front against it in the South Caucasus.

Her Polish counterpart Andrzej Duda, who by no stretch of the imagination can be smeared as a “Russian agent” or suspected of even being remotely sympathetic to that country after all that he’s done to help Ukraine fight against it since 2022, just dropped a bombshell that completely discredits her narrative. Here’s what he told Radio Zet that they talked about last month and on Monday as translated into English from his remarks that were published in Polish on that outlet’s website: 

“We talked about the general political situation and she outlined to me that Georgian Dream will probably win, but there is no indication that it will gain such an advantage that will allow them to govern on their own. The result that is being announced clearly contradicts what the president told me [last month]…(And during our latest talk,) The president did not say clearly [that Russia meddled], because there is no clear evidence for this, but let’s say that [Georgian Dream are] in a sense pro-Russian forces.”

Poland co-founded the EU’s Eastern Partnership in 2009 that was employed by the bloc to expand its influence in the remaining six former Soviet Republics in Europe besides Russia that had yet to join. It therefore considers itself to be a regional leader whose top representatives’ positions on newsworthy events in those countries are authoritative. Although he supported Zourabichvili’s call for an international inquiry, his contradiction of her claims about Russian meddling is thus very significant.

He could have lied about what they discussed a month ago and on Monday, not to mention leaving out how she lacks any evidence to back up her claim of Russian meddling during last weekend’s polls, yet he told the truth to his credit and consequently complicated the West’s narrative. Foreign Minister Radek Sikorski, who represents Duda’s party’s rival in Poland’s complex political set-up after last fall’s elections, swiftly rebuked him in a similar manner as he did in spring when Duda talked about hosting US nukes.

Just like back then, Sikorski reminded Duda that “Foreign policy is conducted by the Council of Ministers, so before making a decision on a possible trip to Georgia, President Duda should familiarize himself with the government’s position on this matter.” This was in response to Duda telling Radio Zet that he considers it his “duty” in travel to Georgia “if there is a situation where it will be necessary”. The message is that Duda should stop sharing foreign policy opinions that contradict the aforesaid Council’s. 

With that in mind, Duda was either uninformed of the Council’s position when he shared what he discussed with Zourabichvili or he subverted it, both possibilities of which are plausible but speculation about this is moot since the indisputable outcome is that he completely discredited her narrative. It could also be that he was aware of the OSCE’s preliminary election observation report and naively assumed that the Council would go along with it since they hitherto relied on the group for guidance.

To be clear, Poland hasn’t claimed at the time of writing that Russia meddled in the elections, but Sikorski’s rebuke of Duda after he spilled the beans about his two recent conversations with Zourabichvili suggests that the Council is displeased with him for disclosing those sensitive details. Poland’s ruling coalition, which doesn’t include Duda’s party, might want to keep its options open for now and appears reluctant to endorse her meddling claims due to the OSCE’s politically inconvenient report.

Instead of confirming Zourabichvili’s fraud and meddling accusations like she assumed they would, they only shared some minor criticisms like they do with practically every election they observe, and they also surprisingly had some very positive things to say about the electoral process. This includes writing that “the legal framework provides an adequate basis for conducting democratic elections” and “Election day was generally procedurally well-organized and administered in an orderly manner”.

They also noted that “The initial phase of processing results protocols and election materials by [District Election Commissions], observed in all 73 electoral districts, was generally positively assessed.” Nevertheless, because of the OSCE’s minor criticisms and the disproportionate attention that the West paid to Zourabichvili’s scandalous accusations, Georgian election officials announced that they’ll recount ballots at five randomly selected polling stations in each voting district to confirm the polls’ legitimacy.

Considering the OSCE’s politically inconvenient report, Duda’s revelations about what he recently discussed with Zourabichvili, and the ongoing random recount that’ll dispel all reasonable doubt about the results once it’s done, there’s no reason to lend credence to Zourabichvili’s claims. This doesn’t mean that external forces might not orchestrate another Color Revolution, but just that the pretext upon which that might happen is totally false, which all honest observers should keep in mind going forward.

***

Here’s a video discussing arrogant comments made by State Department spokesman Matthew Miller about the recent Georgia election.

YouTube link here.

By Ben Aris, Moscow Times, 10/11/24

Production at the largest Russian enterprises grew rapidly in 2012-2023 despite the pandemic, sanctions and weak impact of production growth on wages. Productivity at the largest enterprises is up as owners scramble to counter a swathe of new problems and maintain their competitiveness, according to a survey from the Higher School of Business.

The survey comes at a poignant time following the recent release of the report from former Italian Prime Minister and ex-European Central Bank boss Mario Draghi that found Europe has lost its competitive edge and has fallen badly behind both China and the U.S.

Moreover, the war in Ukraine has also shown that the EU is well behind Russia in terms of the military-industrial complex, which is massively outproducing that of Europe after President Vladimir Putin put the economy on a full war footing. Europe faces the prospect of falling behind not only the U.S. but also Russia; as bne IntelliNews reported, China and Russia are the most powerful manufacturing countries in the world and Europe respectively. Despite everything, Russia’s economy is flourishing — for now.

But Russia is still facing multiple challenges. Recruitment for the war in Ukraine has driven unemployment to an all-time low of 2.4% and sent nominal wages soaring, making the issue of productivity more important than ever before. Increased production costs, as well as the inaccessibility of Western technologies and industrial equipment, have only added to the headaches and reduced the number of technological solutions.

The pandemic and sanctions crises have worsened Russia’s pre-existing problems with low productivity dynamics. In 2020, it fell by 0.4%, then in 2021 it grew by 3.7%. In 2022 it decreased by 3.6% compared to 2021, and in 2023 it recovered, but not much — by 1.7%, according to Rosstat. The need to increase productivity is now widely talked about at the highest levels, as Putin made clear in his guns and butter speech in March that maintaining the growth and development of the civilian part of the economy is as important as developing the military-industrial base.

The largest companies are at the forefront of the effort to lift productivity. HSB conducted a study of productivity and remuneration in the largest Russian companies in 2012-2023 — more precisely, the relationship between unit production, capital expenditures (CAPEX), the number of employees and personnel costs, Vedomosti reported. The sample included 71 companies that published financial statements under IFRS for 2012-2023 and disclosed the consolidated number of staff in annual reports or reports on sustainable development.

The classic approach to determining labor productivity involves calculating the added value per employee, but the costs needed to make this calculation are not included in the IFRS declarations. Instead, a company’s annual revenue per employee was chosen to assess labor productivity in the study.

Since 2012, Russian enterprises have experienced three unprecedented foreign economic crises: pandemic 2020 and two sanctions periods — 2014-2015 and 2022-2023. In 2020, due to lockdowns, revenue fell in most industries, and in 2023, enterprises had losses due to the sanctions restrictions. Sanctions were particularly painful as they led to losses even in the most efficiently run companies through no fault of their own.

The revenue performance in the sample was not even, with some companies enjoying leaps in revenues during the sanctions period while others suffered heavy losses. About two-thirds of organizations were affected by the sanctions imposed in 2022.

According to the respondents, for 39% of companies, sanctions restrictions created only problems, for 3% had only positive consequences, and for 25% experienced both.

According to a separate hh.ru survey: 31% of respondents had an increase in production over the past five years, another 22% had a constant increase in production depending on market conditions, and 19% had no change or decreased slightly.

Vedomosti summed up the main effects on the various sectors in the HSB survey:

Oil and gas companies had a decrease in 2020 and 2023. But the decline in 2023 for all companies, except Gazprom, turned out to be small. Russian oil companies have reoriented oil exports to China and India, friendly countries of Africa, Latin America and Southeast Asia. Oil production in Russia in 2023 decreased by only 2.2% to 523mn tonnes.

Sanctions against Russian gas were not imposed, but imports of pipeline gas from Russia to the EU in 2022 were halved. Domestic companies, primarily Novatek, began to very successfully increase LNG exports to the EU, and Russian liquefied gas began to displace LNG from the United States in Europe. The company’s revenue and output rose in 2023.

Iron and steel enterprises’ revenues fell in 2019, then in 2021 there was a noticeable increase, followed by a decline in 2022 due to sanctions. According to Worldsteel, steel production in Russia in 2022 decreased by 7.2% to 71.5mn tonnes. But according to RosStat, already in 2023 the total metallurgical production in Russia climbed by 6%. The domestic market became the main driver of growth.

Among non-ferrous metallurgy enterprises, UC Rusal showed the largest increase in revenue from 2020 to 2023. At first, the rise in aluminum prices helped, but in 2023 dollar revenue fell by 13% due to sanctions, supply chain disruptions and price reductions. However, UC Rusal managed to step up the production of aluminum, bauxite and sales of primary aluminum and alloys, according to the company’s IFRS.

The chemical industry group includes the manufacturer of polymers and rubbers Sibur and manufacturers of mineral fertilizers. In 2023 Sibur increased sales of polymers in the domestic market, replacing foreign supplies of synthetic materials. Thanks to significant investments in R&D, the company replenished the range with new brands of products, continued import substitution of critical special chemicals. For Sibur, 2023 was a year of rapid take-off.

In 2020-2022, the revenue of fertilizer manufacturers grew, and only in 2023 there was a decrease. Most of the products of these companies traditionally go abroad. In 2022, exports decreased by 15%, according to the Russian Association of Fertilizer Producers, and in 2023 they exceeded the level of 2022 by 5% in physical terms. Nevertheless, the companies’ revenue decreased due to a decrease in export prices by 1.5-2 times compared to the first half of 2022.

The sanctions crisis benefited Russian banks, insurance companies and the Moscow Exchange. In 2023, all of them increased revenue (banks had operating income before the formation of reserves) and production. In 2023, banks received a record net profit of 3.3 trillion rubles ($34 billion), according to the Central Bank. The main contribution was made by the growth of interest and commission income.

2020 turned out to be a turning point for transport and infrastructure enterprises. But in 2021-2022, almost all companies with data were able to recover, except for airlines. Revenue and production grew at Rostec, Transmashholding (TMH), Kamaz and Rosatom (Atomenergoprom).

For telecommunications companies, the sanctions meant that it would be impossible to purchase new equipment, which was 90% imported from operators, in the EU and the United States. Companies had to look for new suppliers. They manage to maintain services and infrastructure, but it becomes increasingly difficult to develop. Operators’ revenue is rising and production is also expanding, although not much.

Food retail grew steadily in 2020 and 2022-2023. The two leading supermarket giants X5 Group and Magnit had the best revenue growth rates.

Russia’s biggest companies do best

In general Russia’s largest enterprises fared well during the crisis, buoyed by rising real disposable incomes climbing to a record 9.6% in July or through state investment and spending boosting demand for their products: 67 of the 71 large firms said they saw production rise in the period.

Another factor protecting the big companies is that many of them enjoy a monopolistic power in the market that was dramatically boosted in 2022 by the departure of international firms, many of whom had been competing with these Russian leaders. This handed the Russian companies large slices of market share overnight. The unconditional biggest winners of the sanctions crisis are companies in the financial sector and the IT industry, according to the study.

In terms of revenue per employee the biggest winners were (10 million rubles/employee is circa $100,000/employee): in the oil and gas industry in 2023, Lukoil and Novatek had the highest labor productivity (75.4 million rubles and 69.6 million rubles per person respectively); in metallurgy and mining, NLMK and UC Rusal (21 million rubles and 19.4 million rubles per person); in chemistry and production of mineral fertilizers, Sibur and Fosagro (31.3 million rubles and 20.2 million rubles per person); in the financial sector, Moscow Exchange (40.6 million rubles per person); in the telecommunications and IT industry, Yandex (30.4 million rubles per person); in retail trade, M.video (15.3 million rubles per person); in the transport infrastructure and transport infrastructure industry, Transcontainer (61.9 million rubles per person per year); and in mechanical engineering, Kamaz and TMH (12.8 million rubles and 11.8 million rubles per person per year).

In terms of percentage productivity gains, the leaders in terms of production growth for 2012-2023 were Far Eastern Shipping Company (DVMP) and Transcontainer (25.2% and 20.2% of average annual production growth respectively); insurance companies Sogaz (17.1%) and Alfastrakhovanie (16.3%); banks Alfa-Bank (16.4%) and VTB (15.7%); machine-building enterprises TMH (17.3%) and Kamaz (14.6%), as well as manufacturer of mineral fertilizers Fosagro (15.7%), and oil company Tatneft (14%).

Can Russia compete with the biggest foreign companies?

The American Center for Productivity and Quality (APQC) calculated cross-industry performance indicators of employees according to the sample of the largest American enterprises that are members of APQC.

The median value of production of one employee is $310,000 per year (26.6 million rubles), employees of 25% of the best enterprises generate an average of $564,706 (48.5 million rubles at the average exchange rate of 2023); the worst 25% yield an average of $176,471 (15.1 million rubles).

In a sample of 71 Russian companies, only 10 companies, including Rosneft, Gazprom Neft, Moscow Exchange, Russneft, Sibur, Yandex and Unipro, had better indicators than the American median. And three companies — Lukoil, Novatek and Transcontainer — corresponded to the group of 25% of the best American largest enterprises, reports Vedomosti.

The Russian indicators improve if the average ruble exchange rate is used, as the Russian national currency has weakened recently due to the mounting yuan liquidity crisis that has depressed Russian exports, confusing the picture.

According to APQC calculations, the median output of an employee in the United States is about four times higher than the employer’s costs, and in the most efficient companies this figure is 7.3 times. According to this parameter, Russian enterprises are ahead of American ones: 38 companies out of 71 correspond to the group of 25% of the best enterprises in the United States. And only six sample companies had worse than the median figures in 2020.

The greater gap between the employee’s output and his costs is explained by the fact that interest rates and bonuses for business risks are higher in Russia and in general, lower personnel costs compared to revenue are typical for poor countries.

Capex comparisons

The impact of Capex on labor productivity depends on the technical equipment and quality of the organizational form of the enterprise: the level of Capex, the qualification of the workforce, as well as the quality of management and operational processes, HSB says.

However, the study showed a weak impact of Capex on production in the largest companies in 2012-2023. There was a weak positive correlation (0.24) between the dynamics of production and the growth of Capex. And between the dynamics of production and the average ratio of Capex and revenue, there is a weak negative correlation (-0.29) — the more you spend, the less growth gains you get. The most capitalized enterprises in the sample are Novatek, whose Capex exceeded personnel costs by 4.71 times on average, DVMP (4.1) and Gazprom Neft (3.87).

In Russia, companies that spend a lot on Capex almost never share the benefits of productivity growth with employees. Before the pandemic, organizations with significant investments in fixed assets hired qualified specialists at good salaries, while all others recruited unskilled personnel to train them later and paid them badly. But due to the shortage of qualified personnel today, enterprises with high and low capital costs have ceased to differ from each other in the hiring policy; the growth of personnel costs has accelerated for everyone.

Four growth strategies

The study found that the largest Russian companies can be divided into four main groups, reports Vedomosti:

Group A: optimizers which consistently reduced the number of staff in 2012-2023, their output increased by a greater percentage than the number decreased, and the growth in revenue was ahead of the growth of personnel costs. This group consists of 20 companies, metallurgy is most fully represented (seven companies), there are also Sberbank and VTB, Russian Railways, Transcontainer, FGC UES, Transmashholding and Rostelecom.

Group B: optimizers with a weak dependence of revenue on changes in the number of staff. Their revenue growth depends mainly on the customer base or market prices. The group’s companies systematically reduced their staff, the output of employees grew more than the number decreased. This group includes 12 companies, including MTS, Lukoil, UAC and Alrosa.

Group C: the most numerous; these are companies that expand their business or open new directions and hire employees for this purpose. Their revenue, due to the growth of demand, prices or other external factors, is ahead of the growth in numbers and entails production. The group includes 34 companies, including the entire retail group and a significant part of the oil and gas, Yandex and VK, Sibur, Moscow Exchange, DVMP, etc.

Group D: consists of four companies with declining production (on average by less than 0.5% per year). For one of the companies, this was the result of the division of the business, for the rest it involved a change in the accounting policy.

With growing salaries and rising cost pressures, about half the companies in the sample are focusing on boosting labor productivity and operational efficiency. A third of the companies in the sample have set up special units to hunt for operational gains or cost cuts. Top managers have been trained in lean production, process optimization tools and a culture of continuous improvement has been nurtured over the last five years.

Training staff has become increasingly important with three quarters (76%) of the sample reporting investments into improving the skills of their managers over the last five years and more generally training between 5-20% of their staff. Every fifth respondent said they have retrained at least half their staff.

A separate survey carried out by Vedomosti found the most common reason for improving productivity was improving business processes (55%), followed by staff training (48%) and introduction of new IT or automation (45%). Staff reduction was the least popular in sixth place. As companies are increasingly investing in their staff’s training Russian companies have become increasingly reluctant to sack them to simply save money.