Putin’s mistakes.

Spoiler: The psychopath in the Kremlin has made an unprecedented miscalculation. His war machine and the Russian economy which he has neglected, is about to have a meltdown.

The sanctions are hurting and will hurt even more. Financial sanctions against his banks, exclusion from Swift, closed airspace and ports will make it extremely tough for him to finance his industries’ production of weapons, vehicles, computers, medicines and more that he needs to kill Ukrainians. In the end of this post you can find links detailing the sanctions and a list of firms turning their backs to Putin. The lists of firms and sanctions are not complete. The number of sanctions and firms leaving Russia keep growing. 

The focus of this post is to look at how sanctions will hurt the Russian industries. To have an idea about the effects of these sanctions, this post will investigate how much of Russian total domestic final demand (public and private consumption + investments) that is sourced from other countries. It is a signifiant share in many industries.

This is bad news for Putin. He overestimated the capacity of the Russian economy. He underestimated the Russian economy’s reliance on the rest of the world. He overestimated his military’s capacity. He underestimated other countries’ solidarity with Ukraine. But his biggest mistake was that he underestimated the Ukrainian people. The Ukrainian people’s fight for freedom and democracy is draining his resources.  

Putin is facing very tough financial sanctions including exckluding most Russian banks from SWIFT, and freezing the Russian Central Bank’s access to its foreign currency reserves hold in western countries. The sanctions will of course affect the real side of the Russian economy. The effects on the real side of the economy will be felt through trade. The effects of lower trade flows depend on Russia’s industry structure, i.e. what it is able to produce itself and what it needs other countries to supply.

In the previous post, I looked at our “dependence” on Russian products. This post flips the coin. As mentioned in the above mentioned post, Russian exports consist mainly of energy and raw material. Reflecting his low-technology economy which I have shown here, here, and here, consist mainly of high-technology products, parts and components, c.f. Figure 1.    

Figure 1. Russian imports in 2019.

Source: https://oec.world/en/profile/country/rus

 

Most of it are manufacturing products. Some of it can be used to kill Ukrainians. The Kremlin needs vehicles to transport their orcs who need weapons to kill civilians and medicaments when Ukrainians defend themselves. To fire missiles, fly airplanes, fight cyberwars, Putin needs computers and electronics including semi-conductors. Russia also needs to pay for this stuff. That will be difficult now that the sanctions have hit Russia. Significantly reduced imports will not only make it more difficult for Putin to murder. 

 

The Russian economy’s capacity to produce advanced products is lagging since Putin became president.

 

As Ukraine resists, Putin’s murder machine begins to experience shortages. Restricted imports will make it more costly and difficult for Putin’s industry to manufacture weapons and more. And this is a serious problem for Putin. Russia relies to a high extent on other countries for its war against Ukraine. And this reliance is due to the staggering capacity to produce advanced products. According to The Observatory of Economic Complexity, Russia is lagging other countries since Putin became president, c.f. Figure 2.

Figure 2. Economic complexity index for Russia during Putin’s regime.

Source: https://oec.world/en/profile/country/rus

 

Do you know the name or brand of any Russian product except for vodka, weapons, gas and oil? Nor do I.  I don’t consider cyber-attacks to be a successful branding strategy. I Russia has comparative advantages in nuclear reactors, metal products and some agricultural stuff. Its most complex products include waste or scrap, c.f. Figure 3.

Figure 3. Russian comparative advantages and most complex products.

Source: https://oec.world/en/profile/country/rus

 

Molybdenum, which is mostly used for alloys but also scrap and waste! Not that impressive. However, Russia can also produce complex radar, radio navigation and remote control apparatus. I’m afraid that a lot of that can be used in Putin’s war against Ukrainians.

 

Putin has created a rent-seeking low-technology economy which is relying on other countries to make high-tech products.

 

Since Russia is not very good at producing its own complex products, they need us. But they should be able to. Russia has a lot of highly educated people, skilled scientists working at very good research institutes and universities. The problem is not on the “input side” of the Russian innovation system. It is on the “output side” of the innovation system and the poor functioning of the Russian economy. And that is Putin’s fault as I wrote about here.

“Putin has not undertaken any reforms that would change the rent-dependent economy (Gaddy & Ickes (here and here). The rents are the profits earned from the extraction and exporting of oil and gas. These rents are redistributed by the regime which means that rents are distributed to where they are needed to balance the power elites. The beneficiaries of the rents are very often loss-making companies which are dependent on subsidies for their survival and represent important political support for the regime. This system creates a distorted allocation of resources, inefficiency and excessive costs of production that are borne by all actors.”

The Russian economy is reliant on other countries, especially Germany. As you saw in Figure 1 above, German imports constituted the largest share of total Russian imports, 13%.

 

Thirty percent of Russian GDP stems from foreign final demand.

 

Foreign final demand constituted 29% of GDP in 2018. That is large for an economy that big. The only G7 country equally reliant on foreign final demand is Germany. For the USA, foreign final demand only constitutes 10% of GDP. Normally, large countries harbour many industries producing a very large range of investment and consumer products for final demand.  But Russia is more reliant on revenues from foreign markets than other large countries. And for Russian energy sectors, the reliance of foreign demand is even larger, c.f. Table 1.

Table 1. Russian shares in domestic value added embodied in foreign final demand as percent of total value added in 2018.

Source: OECD database. Trade in value added indicators. Note: the information in the table is based on “Indicators based on the origins of Value Added in Final Demandhttps://www.oecd.org/sti/ind/measuring-trade-in-value-added.htm

 

 

Russia relies heavily on other countries for computers & electronics and transport equipment.

 

Now, finally flipping the coin as I mentioned in the beginning of this post, is done by showing the shares of foreign shares in Russian total final demand (private and public consumption + investments). For all industries, the foreign share in final demand is 20%. It’s higher in final demand for total manufacturing products, 40%. And even higher in critical manufacturing necessary to produce weapons and other instruments for Putin’s murder machine. Foreign value-added accounts for two thirds of Russian final demand for computers and electronics.

That’s stuff that is critical for not only shelling rockets and missiles at civilians but also for the complex systems which are used to coordinate the slaughter. And foreign value added makes up an even bigger chunk of final demand for machinery, i.e. lots of stuff needed to produce weapons and kill Ukrainians. That includes German parts in Russian drones that kill Ukrainians. Moving on, almost half of value added in Russian final demand for Transport Equipment is sourced abroad. These are everything on rail, roads, water, and air that carry out Putin’s murder. Also, services industries are needed to kill Ukrainians. Telecommunications services and IT services are included in the aggregate Information industries below. Foreign value added constitutes more than a third of Russian final demand for those services, c.f. Figure 4

Figure 4. Foreign value-added shares in Russian final demand 2018. Percent.

Source: OECD database. Trade in value added indicators. Note: the information in the figure is based on “Indicators based on the origins of Value Added in Final Demandhttps://www.oecd.org/sti/ind/measuring-trade-in-value-added.htm

 

Foreign shares of Russian final demand for energy and finance are smaller. But that doesn’t mean that they are of less importance. The above figure shows very broad aggregates. It could be, and probably is the case, that there are very specific components and parts used in the energy industries that are critical for the Russian energy industries. And if the supply of such parts dries up, then the industry will run into problems. It could also be that the figure above, exaggerates Russian reliance on foreign products. Even though foreign value added makes up for 65% and 75% of final demand for Computers & Electronics and Machinery respectively, it could be that Russia has focused on being self-sufficient in production of critical parts, components, and final products in those industries.

The numbers need to be qualified also for another reason. Foreign value-added shares is of course all other countries. It matters which countries account for the largest shares, i.e., are the most important suppliers. (The “EU numbers” UK since the tables and figures are based on 2018 data).

 

EU industries hold the largest foreign value-added shares of Russian total final demand.

 

EU accounts for the largest foreign value-added shares of Russian final demand for products produced in most of the industries depicted below. The EU footprint is most visible in pharmaceuticals where the value-added originating in German and Irish pharmaceutical industries are relatively large. Swiss (not shown) value-added shares are also relatively large. Value-added created by EU firms account for 40% of the value of total Russian domestic final demand for products produced by firms in the machinery industries.

As mentioned above, the bars representing value-added created in different industries show broad aggregates. And, as hinted above, a small value-added share in Russian domestic final demand may be critical in excess of its share. That certainly applies for the Taiwanese value-added share for Computer & Electronics. Most of the semiconductors in the world are produced in Taiwan. So, even if the Taiwanese value-added share only accounts for 3.3% of Russian domestic final demand, its importance goes far beyond that number.

Semiconductors are everywhere. In vehicles on rail, road, sea and air. In computers, measuring instruments, weapons and weapon systems, communication systems, Russian mobile phones. Wherever you look, you see a lot of semiconductors. And Taiwan refuse to supply more semi-conductors to Russia,c.f. Figure 5.

Figure 5. Largest foreign shares of final domestic demand in Russian final demand 2018 (%).

Source: OECD database. Trade in value added indicators. https://www.oecd.org/sti/ind/measuring-trade-in-value-added.htm

 

As you can see, Chinese value-added shares account for relatively large shares in Russian final demand. Putin will try to find supplies there. But China does what is best for China. If the pressure on China becomes too hard, it may be that China finds excuses for not being able to fulfil Russian industries demands to the extent that Putin can keep his war machine running.

Putin’s military-industrial complex is not functioning very well as pointed out by Vladislav Inozemtsev, the Director of the Centre for Post-Industrial Studies in Мoscow. Inozemtsev argues that Russia in general and the Russian defence sector in particular faces at least three key challenges. Fírstly, the lack of innovation in the defence sector and the poor quality of engineering education. Secondly, Russia’s lagging in knowledge-intensive production such as micro-electronics, new materials and computer technologies. Thirdly, the defence sector consists of state-owned monopolies without any competition but suffering from financial mismanagement and corruption.

“Even though Russia’s military spending somewhat exceeds the U.S. one as a share of gross domestic product, the economic effect is strikingly different: in Russia the military expenses seem to be a burden on the national economy while in the U.S. they rather contribute to the country’s development.”

And the world is starving Putin’s war machine. Maersk has stopped delivering to goods to Russia. Countries are closing their air spaces and ports. Supply no more.

To conclude: Putin relies on us to fight his war against the Ukrainian people. But. Ukraine resists. The sanctions keep coming. The foreign firms keep leaving Russia. The more of that above, the more problems will Putin have to supply his murdering orcs with weapons, and equipment.

This is the beginning of the end for the Putin.

This list of sanctions is far from complete:

https://www.whitehouse.gov/briefing-room/statements-releases/2022/03/02/fact-sheet-the-united-states-continues-to-impose-costs-on-russia-and-belarus-for-putins-war-of-choice/

https://ec.europa.eu/commission/presscorner/detail/en/ip_22_1484

https://www.gov.uk/government/news/uk-introduces-new-sanctions-against-russia-including-ban-on-ships-and-fresh-financial-measures

This list of firms turning their backs on Russia is far from complete.

Apple Pay – полный  блок

Apple – полный выход с рынка. Как говорится, последний iPhone – это тот, который у тебя есть

Adidas – отказ от работы со сборной по футболу

Audi – выходят с рынка

AMD – запрет поставки микрочипов и вскоре запрет на поставку видеокарт

Amazon – полный блок всего ритейла будет на десерт

Adobe – пропаганду будут теперь рисовать в paint. А, стоп! Тоже вряд ли. От руки.

British Petrolium – вышли из Роснефти 20% акций

BBC – отзыв лицензий на вещание

BMW – закрывает заводы, блокирует поставки

Bolt – 5 млн евро помощи Украине

Boeing – внутри страны только на лоукостах победа

Chevrolet – выходят с рынка

Cannes Festival – блок рф делегации

Cadillac – выходят с рынка

Carlsberg – ограничение экспорта

Cex Io –  крипто площадка банит ру юзеров

Cinema 4D – не работает приложение

Coca Cola – выход с рынка

Danone – выход с рынка вместе с дочерней компанией “Простоквашино”

Disney – отмена всех фильмов

Dell – выход с рынка

Dropbox – перестанет работать в рф через несколько дней

DHL – уходят из рф

Eurovision – дисквалификация

Ericsson – выход с рынка

Exxon Mobil – отзывают всех специалистов из нефтяных компаний рф

Etsy – блок всех балансов на ру счетах

Facebook – бан аккаунтов рф сми

FedEx – полный запрет поставок

Formula 1 – отмена турнира в Сочи

Ford – закрывает все магазины

FIFA – дисквалификация сборной на ЧМ и запрет на проведение любых международных матчей в рф

Google Pay – частичный блок

Google – 15 $ млн на гуманитарную помощь Украине

Google Maps – блок инфо для русских

General Motors – останавливает экспорт

HP – ноутов больше не завезут

Harley Davidson – прекращение поставок, ночные волки теперь будут рассекать на ижах с колясками

Instagram – блокировка пропаганды

Intel – запрет поставки микрочипов

Jaguar – выходят с рынка

Jooble – удалили сервис и сделали заявление. работа скоро останется только у омона

KUNA – майнить крипту ру юзерам без шансов

Lenovo – выход с рынка

LinkedIn – готовятся к полному выходу из страны

MOK – отмена всех соревнований

Mastercard – приостановка производства карт, отключение нескольких банков

Maersk – остановка поставок в/из рф –  чао, Ali express и ASOS

Mercedes – выход из страны

Megogo – удаление всех русских фильмов

Metro – 10к сотрудников – на выход

Mitsubishi – работники 141 сервисного центра – на выход

Microsoft Office – обсуждается широкий комплекс мер

Mobile World Congress – ру делегацию не акредитовать

NFT – блок средств юзеров рф и рб, перевод их денег Украине

NHL – полный блок для игроков из рф

Netflix – блок для русских подписок, остановка производства рф сериалов

Nike – закрывают все магазины

Nintendo – запрет на покупки в рублях

Nestle – закрывает все 6 фабрик в рф

OnlyFans – закрытие в стране, девочки – на панель

Paysera – блокировка

PayPal – заморозка счётов на вывод

Paramount – блок кинопроката

Parimatch – отозвали франшизу

Play Station – невозможно совершить оплату

Pornhub – запрет на доступ к контенту

Porsche – выход из рф

Renault – выход с рынка

Samsung pay – блокировка сервиса

Snapchat – аут из аппки в рф, 15 млн $ помощи Украине

Scania – выход из рф

SpaceX – поставка Starlink Украине

Shell – разрыв контракта с Газпромом

Spotify – невозможна оплата подписки

Sony – блок кинопроката

Twitter – нельзя регистрировать аккаунты гражданам рф

Toyota – 2600 сотрудников, гоу в автоваз

UEFA – отмена финала ЛЧ в Питере, запрет всем клубам на участие в ЛЧ и ЛЕ, 1 млн $ помощи Украине, разрыв контракта с генеральным спонсором газпром

UPS – полный запрет поставок

Universal pictures – блок кинопроката

Viber – 9 млн $ помощи Украине от CEO Rakuten

Visa – приостановка производства карт как минимум

Volvo – выходят из рф

Yandex – исключение акций компании с котировок на NY бирже

YouTube – блокировка сотен каналов и их монетизации

Warner Bros – отмена всего кинопроката

Webmoney – запрет транзакций

Wolkswagen – выходят из страны

Zoom – отзыв лицензий на разработку ПО “

5 thoughts on “Putin’s mistakes.

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