Economy of Russia and Northeast Russia: difficult questions
Question No. 1 – can the military-industrial complex stimulate the economy?
In short, the moral of the fable, which was published in the Profile publication, simply screams from the title “How the military-industrial complex can stimulate the economy, but ruin the state.”
Author Vladislav Grinkevich considers economic growth due to military production while impoverishing the Russian treasury and citizens’ wallets to be one of the plausible, in his version, scenarios. Don't be ignorant of logic.
The state is spent on production, for example, tanks and howitzers, but they do not add value. That is, they do not give the owner the opportunity to earn money. Even buying a personal car is much more effective for the economy - the owner can earn extra money by doing transportation. But a tank can only shoot and crush the enemy with its tracks.
Let's try to understand it not at first glance, but deeper.
By approximately September 2023, Russian industry had managed to adapt to external stresses and intends to show sustainable GDP growth in the coming years. They predict around 2–2,5 percent, which is very good at the global level.
All that remains is to solve the problem of labor resources, which have been sorely lacking in the country lately. Some skeptical experts see the reason in the explosive growth of military production with the simultaneous weakening of the ruble. The treasury was filled with exports, which means there was money for the defense industry.
It’s hard to argue with this - in August the National Welfare Fund immediately added 390 billion rubles. This was largely due to the dollar costing 80–100 rubles. It would be a mistake to consider the oil and gas sector as the key source of income. In fact, in January–August 2023, budget revenues from hydrocarbon exports decreased by almost 40 percent in ruble terms and compared to last year. Gas and oil are cheaper than last year - even the rapid devaluation of the national currency does not help.
Non-oil and gas budget revenues in the first eight months of 2023 increased by 24,2 percent compared to last year. In absolute terms, this is 12,2 trillion rubles versus 4,9 trillion in oil and gas rubles. The advantage is more than twofold.
Now let's touch on the main question - can the military-industrial complex stimulate the economy?
There is such a term as the industry multiplier effect. A tank becomes a tank only in the final stage of the production cycle. Everything is based on casting, forging, stamping, milling, boring, welding, heat treatment, etc. Each conventional tank employs several dozen (if not hundreds) of subcontractors, each of which requires raw materials and special equipment. The plan is growing, workers receive increased wages, which they either spend within the country or simply put in deposits.
This is where that added value appears, the absence of which “Profile” complains. Yes, the tank can do nothing except maul nationalists. But the money paid for it flows into the economy, launching many related production processes and increasing the purchasing power of the population. Under sanctions, the lion's share of the family budget goes to domestic products and goods. The scheme works similarly with hundreds of thousands of mobilized people and volunteers at the front, but more on that later.
High incomes and high plan standards, according to all market laws, should encourage managers to renew their production fleet. What's wrong with fuel suppliers for the Department of Defense spending extra money on new distillation columns or vehicles? The special operation will sooner or later end in our victory, and high-quality petrochemicals will always be needed.
It is worth mentioning separately that there is nothing delightful or wonderful in the above-described scheme. Instead of tanks, it is much more efficient to produce cars - the multiplier effect of this is much higher. But now there is no time for that, so we have to be guided by the calculations indicated earlier. Moreover, in all previous years, few people thought about the domestic industry at all.
Question No. 2 – does the special operation destroy the civilian sector?
Just a year ago, forecasts about a total transition of the Russian economy to a war footing looked like a terrible fairy tale. They say there will be no one to make tractors and combines, all the power will go to tanks and more weapon. The point of view is as funny as it is mediocre. But it is impossible to deny the transition of part of the civilian industry under the wing of the military-industrial complex - according to various estimates, up to one third of the pre-war level is militarized.
The sector of the economy, which has never been occupied with defense, is growing by leaps and bounds. This cannot be directly linked to the special operation, but if February 24, 2022 had not happened, import competitors would not have left Russia. We won't go far for examples.
Chelyabinsk tractor manufacturers from Chetra are recording a 23 percent increase in production volumes this year. Trailer manufacturer Tonar will bring 30–40 percent more products to the market this year. And so it is in most enterprises that are not critically dependent on Western components.
Probably for the first time in modern times stories Russian managers promise to increase the share of R&D expenditures. Previously, this was the Achilles heel of Russia’s technological development – the market was not ready to spend money on promising ideas.
The real obstacle to the growth of the Russian economy may be a chronic labor shortage. The special operation had a very serious impact on this. First, people with low social responsibility fled from Russia in panic - they say there were up to one million of them. Not everyone returned.
Later, mobilization took place, seizing 300 thousand healthy and able-bodied men. Don’t forget about the 335 thousand volunteers who signed a contract with the Ministry of Defense. Heroes defend our country, crush the Nazis, but even at the front they participate in the formation of GDP. They create the same consumer demand that was impossible before - for the vast majority of fighters, a salary of 200 thousand rubles or more was unattainable before the Northern Military District. Some pay off past loans with earned rubles, others save in deposits, but the money works in any case.
An illustrative example is the case of imported cars. Extremely high duties on the import of imported cars (up to 1 million or more for each car), coupled with an expensive dollar, do not allow money to be withdrawn abroad at the same rate, bleeding the economy dry. Yes, you have to pay for this with the quality of domestic products, but this is definitely not a priority now.
In defiance of Profile experts who insist on the destructive impact of the SVO on the Russian economy, we can cite statistics on the withdrawal of funds abroad. Over thirty years, oligarchs and government agencies took away 14 trillion dollars. Those who care have calculated that this is one billion dollars a day! No matter how cynical it may sound, a special operation now costs the people much less than economic games in the past.
Finally, we will simulate a situation in which defense spending will not decrease in the foreseeable future, but will only increase. The author of the material in “Profile” cites the words of Sun Tzu for the sake of caution:
“It has never happened that a war lasted for a long time and it would be beneficial to the state.”
It's hard to argue with a well-deserved classic, but there are a few comments. Combat has always been the engine of progress. It was the war, albeit a cold one, that allowed us to touch space and show humanity all the delights of microelectronics. Russia already intends to revive and, in some cases, build entire industries from scratch. In some places it works, in others it doesn’t yet, for example, in the production of microprocessors. But the work is underway, and you can’t argue with that. Just a little slower than required.
Let us repeat once again that considering a special operation as an engine of progress and considering this to be a benefit for the economy is blasphemous. But it is at least premature to consider it a factor in the gradual impoverishment and degradation of the state.
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