Russia - General Discussion.

[swerve]

For some time economist and people in market already debating which one is more appropriate to shown real economics size of a nation. Either GDP Nominal (usually in USD) or GDP PPP. So far the answer that many in market see is neither one, more combination of both. As the condition of a nation is differed to each other.

Simplyfied this, if a nation are more depends on Global Trade, most of their productions depends on materials sources from Global Production Chain, then Nominal GDP more appropriate to shown their economics size. However on the opposite, if a nation mostly source their productions domestically using their own production chains from front to end productions cycles then, they are more approprite to used PPP GDP to shown their economics size. This is related to how much the costs of similar type of productions not just costs of production and materials but also cost of manhours.

So especially in Military Industrial Complex it is more differed if we compare China and lesser extent Russia toward MIC of Collective West. The costs to build one Frigates in China and Russia (including all armaments and components) costs much less then what needed in collective west. However if emerging nations like India or Indonesia want to build their Frigates domestically it can turn out more expensives or at least in similar costs then build it in Euro yards.

Put it China and Russia vs India and Indonesia as example to shown the difference levels of domestication matter more then just the costs of manpower etc. Even tough all four have PPP GDP that more or less 3 to 4 times higher then Nominal ones. Simply because the level of domestication sourcing between China and Russia MIC are far higher then Indian let alone Indonesia ones.

This is what I'm saying in this thread for some time. If the embargoes able Russian MIC to sources domestically or from other non collective west their productions materials, then Nominal GDP comparison can not be use as guidance on how far the Russian MIC productivities level after the embargoes. Same thing can not be just shown Western Nominal GDP as comparison to how much they can produce more to emerging market productivities (which Russia and China included).

So comparing how much Collective West can put on their defense Budget compare to what China or Russia can put on theirs, definitely not going to shown comparable productivities output results. It is only shown west increasing their outputs, but not how much Russia or China can put on dollar to dollar base.

Your argument is absolutely correct that different exchange rates are appropriate for different purposes (something often, sadly, ignored - credit to you for bringing it up), but unfortunately, share of PPP GDP as a measure of military spending (let alone effectiveness) isn't necessarily a better measure than share of nominal GDP. Sometimes it is, sometimes it isn't. It depends on various factors.

For a country that imports most of its hardware, e.g. Saudi Arabia, applying PPP to that share of spending would be very inappropriate, for example. Ideally, we'd like to have sectoral PPPs for different parts of military spending.

In the cases of China, India & Russia, defence PPP is very likely between the exchange rate & whole-economy PPP, & might be closer to whole-economy PPP than the exchange rate (though less so for India than the others because of its very large hardware imports as a share of defence spending), so your argument is quite right for them, but not always.

And BTW, the PPP GDPs of China, India & Russia aren't 3 to 4 times nominal. According to the World Bank (2021 figures), they're 1.5 to 3 times. That's a major difference between nominal & PPP, but much less than you stated.
Nominal GDP
PPP GDP

Interestingly, German (& possibly some other western) ammunition production currently appears to have a supply chain vulnerability to imports from China of a rather low-tech item. Shouldn't be hard to overcome, but it'll take some time. Good opportunity for some manufacturers outside China.

 

[seaspear]

Its interesting to note the scale of defence spending in Russia and how this will effect the economy certainly the budget in 2023 will effect other sections of normal government spending to concentrate on defence
Analysis: Surge in Russia's defence and security spending means cuts for schools and hospitals in 2023 | Reuters
This of course leads up to elections in 2024

Russia’s Skyrocketing Defense Spending, 2022–2023 - Jamestown
Previous data suggests Russia's defence spending in decline prior to 2020
Russia Military Spending/Defense Budget 1993-2022 | MacroTrends
Russia Military Expenditure - 2022 Data - 2023 Forecast - 1992-2021 Historical - Chart (tradingeconomics.com)

 

[Ananda]

so your argument is quite right for them, but not always.

That's why I say it is depends on level of domestication on each MIC. That's why I put example on costs of building a Frigates in China and Russia vs India and Indonesia as example. Due to large amount of Imported materials that India and Indonesian use, building domestically not necessarily means lower costs than building in Euro zone. However that's not what happened in China and Russia (to lesser extent).

PPP is not only influence by exchange rate but more on real costs difference on 'pure' local production sourcing. I put 3-4 times difference on PPP vs Nominal GDP are more on average trend this last two decades on emerging markets which those four including. However you are right that the average for Russia and China closing to 1.5 - 3 times lately. The more the level of global chain coming to their production cycle the closer PPP and Nominal GDP will be.

Still it is not as simple as saying Russia economy is only the size of their nominal GDP. Again nominal value also not reflecting the real capabilities of one economy on the level of their productivity. Especially on emerging economies, and especially on emerging economies that has higher level of domestication on their production chains, like China and Russian MIC.

Good opportunity for some manufacturers outside China.

Yes, this's what India with Modi's " Made in India" initiative try to capitalize. Even smaller emerging economies like Indonesia also try to capitalize that on latest MIC initiative (Jokowi's call it "Defense Investment").

So emerging nations try to build their own MIC, but even India level of domestication still far below what China and Russia able to achieve currently. Thus their capabilities on defense procurement still reflecting from their Nominal GDP. While China and Russia defense procurement capabilities can be reflected by their PPP GDP due to their level of domestication.

 

[swerve]

Still it is not as simple as saying Russia economy is only the size of their nominal GDP. Again nominal value also not reflecting the real capabilities of one economy on the level of their productivity. Especially on emerging economies, and especially on emerging economies that has higher level of domestication on their production chains, like China and Russian MIC.

Oh yes, absolutely. That's why "Russia's economy is only the size of Canada's" should be challenged when raised in discussion on sites such as this one. The measure on which it's true (nominal GDP) doesn't reflect real production capabilities.

 

[kato]

Interestingly, German (& possibly some other western) ammunition production currently appears to have a supply chain vulnerability to imports from China of a rather low-tech item. Shouldn't be hard to overcome, but it'll take some time. Good opportunity for some manufacturers outside China.

To be taken with a grain of salt given that information comes from Welt, the flagship of the Springer publishing house. Which, well ... to me the easiest way is to just treat everything coming from them as propaganda.

There is a single company producing nitrocellulose for defense products, specifically for larger calibre ammunition in Germany to my knowledge. That's the Nitrochemie Group, a joint venture of Rheinmetall and RUAG, with factories in Germany and Switzerland.

The reality is that

• Of course said company has a streamlined supply chain. And - according to Welt's sources - in that supply chain deliveries from China for cotton lint (as a precursor for production of nitrocellulose) currently have a 6-9 month lead period on orders, compared to 3 months "before". "Before" refers to before Covid btw, not before Ukraine. The average preorder time for other sources of cotton lint - and yes, Welt does mention that factoid too - is 14 months.
• Now Rheinmetall also just bought an ammunition plant in the country that's the fourth-largest exporter of cotton lint worldwide (China is second). And yes, they've stated (or as Welt terms it "admitted") that access to supply chains have played a role in that.

For small calibre ammunition i'm not so sure where nitrocellulose is sourced actually. Doubt their global sources and lead times are much different though. The single main company producing in Germany for ammunition for security forces is MEN. They are owned by Brazilian company CBC, one of the largest ammunition producers worldwide.

 

[Vivendi]

Reuters updated their "gas storage tracker" on December 14 -- 85.9% of European gas storages are filled. How much of Europe’s gas storage is filled (reuters.com). It has been cold the last few days however warmer weather is predicted starting on early next week. Of course the weather in January and February is completely unknown but given the current storage it's hard to imagine that this will become a disaster for this winter at least.

Germany's first LNG terminal, built after the invasion, was inaugurated in November. Germany inaugurates first new LNG terminal – EURACTIV.com
The first shipment of LNG to this terminal arrived yesterday and gas will start to flow in a few days. Germany’s First FSRU Arrives with Initial Import LNG Cargo (maritime-executive.com)

Germany could have three LNG terminals operating by January. Three German LNG Terminals Expected to Start by January | Energy Intelligence

 

[SolarisKenzo]

EU defence industry: Council reaches general approach on boosting common procurement

The Council adopted a general approach on the proposed regulation establishing the European defence industry reinforcement through common procurement act.

www.consilium.europa.eu

 

[SolarisKenzo]

EU agree 180 euro price cap on Gas.
Germany finally approved the proposal, only Hungary voted against.
The proposal now needs to be finalized.

Price cap a 180 euro, intesa in Ue - Altre news - Ansa.it

Meloni: 'vittoria dell'Italia'. C'è sì di Berlino, Ungheria contraria. Mosca tuona: 'reagiremo' (ANSA)

www.ansa.it

Energiekrise: EU-Energieminister einigen sich auf Gaspreisdeckel

Nach monatelangem Ringen haben sich die EU-Staaten auf eine Begrenzung der Gaspreise verständigt. Der Deckel greift nach SPIEGEL-Informationen bei 180 Euro – und nur unter bestimmten Umständen.

www.spiegel.de

 

[Boatteacher]

Here's an English version of it

EU countries reach compromise on natural gas price cap

European Union ministers have finalized a long-awaited deal to implement a natural gas price cap that they hope helps households and businesses better weather price surges.

www.pbs.org

.
I was a bit alarmed by the headline. After all, if you just cap the price of something like this they you are more likely to cut off supply.
But it is not as simple as that. It is highly conditional on the underlying market price.
That is not to say it might not be a dubious market intervention, but not as bad as it first looks.

 

[Ananda]

Shale Giant Pioneer Explains Why U.S. Drillers Won’t Drill More | OilPrice.com

Investor pressure for higher returns has been one of the reasons given by both industry and analysts for the current unwillingness of the U.S. shale oil industry

oilprice.com

Not really direct post on Russia-West, more on Oil Industry development. However this is explain more or less why OPEC won't follow Biden demand to increase oil production. Bidang can't even ask US oil producers to increase their production.

This is business afterall. Oil Industry already taking hit for sore time during low oil prices environment. This is their pay back time. This is why Western media and politician hope their embargoes on Russian oil will hit and reduce significant Russian export, is also bit delusional. Delusional as Politicians not facing market realities. This is Oil Producers (including Russian) pay back time.

 

[jref]

As expected, from Feb. 1-July 1 2023 Russia will stop exporting oil to countries participating in oil price cap. A separate export ban regarding refined oil products is scheduled for an unspecified date.

Russia intensifies attacks on Kherson in Ukraine's south, Bakhmut in east

Russian forces increased mortar and artillery attacks on the city of Kherson more than six weeks after it was retaken by Ukrainian troops, while also exerting pressure along frontlines in the east, Ukraine's military said on Wednesday.

www.reuters.com

 

[Ananda]

Russia Is Prioritizing Gas Exploration In The East To Supply Asian Partners | OilPrice.com

Russia plans to ramp up the exploration of hydrocarbons in the east of the country in order to increase supplies to its Asian partners

oilprice.com

Another strong indication on how market shifting momentum. Russian and West are shifting altogether. West especially Euro Zone need to find new suppliers, while Russian also increasingly find a way to shift their market.

Whatever the results on Ukraine war in the ground, both Russia and West momentum to decoupling seems will not going to change.

 

[Ananda]

The Era Of Cheap Oil Has Come To An End | OilPrice.com

Investment banks expect higher oil prices, despite a recent slump prompted by expectations of an economic slowdown pretty much across the globe

oilprice.com

Put this in here, as seems there's thinking that Oil/Hydrocarbon embargoes of Collective West to Russia will significantly reduce Russian margin and (many Politicians in West delusionally hope) reducing the prices. Delusional since it is not Politicians that dictates market (as much as Politicians especially in Washington and Brussels hope), but in reality market forces work their own way. In fact Politicians sometimes make it market reacting negatively.

Perhaps Oil prices will not back to USD 100-120, perhaps it's still can. However the average prices of bellow USD 60-40 already gone. Many speculate where the average prices will be for next few years, but seems market analysts conclude will hoover around USD 60-80. That's for established oil producers like Russia is already a healthy margin. In fact the collective west price cap for Russian oil of USD 60 (something that Russia will not follow), already a healthy margin for Russian it self.

As the article put, Industry analysts seems agree that Market is not in hurry to increase production let alone capacities. Previous post I also put even US producers will not increase their capacities (as much as Biden want to), let alone OPEC and big producers like Russia or Kazakhstan. This is the oil producers market era now, not oil buyers era as before. This is oil producers pay back time, and they will get as much as margin possible.

Green Energy (sometimes I do wonder if this is really green throughout), will come as alternatives in time. It will increase the portion (on overall energy makes in future), which means no big incentives for Hydrocarbons producers to invests more on increasing capacities. More likely they will invest only to maintaining present capacities. It is afterall economics 101, why you want to put more investment, if your "Politicians " taking on the quest to getting rid of your products in future ?

What happens for collective west (especially euro zone) with they are shifting the market, doesn't mean Russia will lose their margin. Because the capacities is finite with no relative big investments in Hydrocarbons. The producers did not want to increase the production capacities much, as present situation favorable for them.

Thus Euro zone will have to pay more from other producers on getting their Hydrocarbons from relative cheaper Russia, Russian will have to take less margin selling to Asian, but in overall still healthy margin. Again because the energy demand still increasing (after Covid even with potential economics slowdowns in 23-24), and supply is finite.

What's it means for Russian economy ? It will slow down (as like Euro Zone), but not catastrophic falling as much as Collective West Politicians dream. Means like it or not, Putin still can finance his war in Ukraine for sometimes to come.

For Euro Zone ? They will have continue saddled with higher energy prices, which potentially reduces their capacities for new green energy investments (on the time table) they want. This will again play to the Hydrocarbons producers market.

China Sets The Tone In Oil Markets At Year's End | OilPrice.com

News about the reopening of the Chinese economy and a surging number of COVID cases a few days later has dominated the headlines this week

oilprice.com

Put this as reverence on potential condition for next year (at first quarter). Honestly I do see more and more China (and in smaller scale India) will come as winner on this West-Russia situation.

 

[ngatimozart]

An interesting article from DW on how Russian politicians have destroyed the Russian business model. How Putin's war destroyed Russia's business model – DW – 12/28/2022. It argues that because Russia has Tsar Peter the Great regarded itself as being European, it has gravitated towards Europe and built its export and import economy around Europe. However with Putin's invasion of Ukraine that's come to a shuddering halt because of EU sanctions. In the short to medium term Russia will have trouble replacing European linkages in its economy and eventually when it does, will it be able to reap the same returns. The EU was after all its wealthiest market and even if it replaced it with the PRC and India, whilst the PRC has developed a burgeoning middle class with some wealth, the PRC is itself undergoing economic crises that have dramatically reduced the spending abilities of that middle class. China Economic Update – December 2022. WRT India, it is a wealthy nation, but the wealth is very unequally distributed with it concentrated in a very small cohort; an overly large cohort at the opposite end of the axis well below the poverty line; and in between a small middle class. So the wealth distribution diagram has two quite noticeable extremes. Challenges on the road to India becoming a developed nation by 2047.

However, as always there are opposing views and this one written by a Canadian points out some differences that are not generally found in western media How the Russian economy is defying and withstanding western sanctions. Another article Why sanctions against Russia aren't working — yet, discusses the actual impacts upon the Russian economy in the short term, where sanctions have worked, where they aren't working and failures within the sanctions regime. At present the Russian economy is performing quite well thank you - well on the surface anyway. However, there are problems, such as the value of the rouble, and the author discusses them to.

 

[Ananda]

the short to medium term Russia will have trouble replacing European linkages in its economy and eventually when it does, will it be able to reap the same returns.

I quote this, as this is the main problem Russian economics in future going to face due to this war. The decoupling with Collective West especially Euro Zone will reduce Russian economics growths potential. For one thing it will barred Euro zone and Russian businesses interaction.

This in time can be potentially offset by each other by getting new markets. Russian tilted more to the east, and Euro Zone find other commodities supplies from somewhere else (albeit with potentially more costs). However Russia will need to find more adjustments, in replacing Euro market, then Euro on loosing Russian.

It will costs both market, but potentially relatively more costs to Russian in longer term. However it is not the same as Russian economy in ruin, as many Western Politicians hope for. The costs on losing Euro market for Russian is going to reduce Russian economics potential, but not the same on saying loosing Western market means Russian ruins (as many in western media call for at beginning of this war).

 

[seaspear]

These articles suggest that sanctions are starting to effect the Russian economy and even how Russia was prepared for the sanctions
Here's how sanctions are impacting the Russian economy | World Economic Forum (weforum.org)
Russia's economy is still working but sanctions are starting to have an effect | Health News Florida (usf.edu)
New sanctions start to bite in Russia as Moscow admits deficit impact (cnbc.com)

 

[Morgo]

A few points below on this topic. Happy to discuss further.

Put this in here, as seems there's thinking that Oil/Hydrocarbon embargoes of Collective West to Russia will significantly reduce Russian margin and (many Politicians in West delusionally hope) reducing the prices. Delusional since it is not Politicians that dictates market (as much as Politicians especially in Washington and Brussels hope), but in reality market forces work their own way. In fact Politicians sometimes make it market reacting negatively.

Price caps don't work, especially not with fungible goods like oil and nat gas. The biggest issue is that Russia can just sell it's products to China, India and others who are merrily ignoring the caps and embargoes. Until the West decides to sanction those buying Russian exports (which I can't see them doing) the cap is meaningless.

Previous post I also put even US producers will not increase their capacities (as much as Biden want to),

The US is currently in the middle of an enormous gas glut thanks to fracking. Producers are exporting as much as they possibly can to Europe but the LNG infrastructure can't keep up. If the internal politics of inflation get too much for the US and they decide to keep all of their hydrocarbons at home (which they did pre 2015) then prices in the rest of the world would shoot up significantly.

What's it means for Russian economy ? It will slow down (as like Euro Zone), but not catastrophic falling as much as Collective West Politicians dream. Means like it or not, Putin still can finance his war in Ukraine for sometimes to come.

I don't believe this, nor the "statistics" coming out of Russia, for one second.

I can only presume that there is an enormous credit crunch and financial crisis going on within Russia at the moment, but it is difficult to say definitively as there is limited credible economic data coming out of Russia. Once the veil drops I think the extent of the carnage is going to be staggering. To be sure - the economic impact on Russia is not going to be as much as it has been on Ukraine, but is is going to be devastating nonetheless. Generational damage.

But your point remains that this won't stop them fighting, if Putin reestablishes a quasi-command economy, which is exactly what it seems like he is doing to keep the war effort going. And a determined despot in control of his population can keep going for a very very long time even after the writing is on the wall.

In the short to medium term Russia will have trouble replacing European linkages in its economy and eventually when it does, will it be able to reap the same returns.

I would guess it's going to be at least a decade before the relationship normalises, by which time (if you believe the hype) demand for hydrocarbons from Europe will be moderating significantly. But Russia should do well in the long term with its other abundant mineral reserves, and Russia should also be a significant long term beneficiary of climate change as warming increases the size of its arable land.

 

[Ananda]

don't believe this, nor the "statistics" coming out of Russia, for one second.

I can only presume that there is an enormous credit crunch and financial crisis going on within Russia at the moment, but it is difficult to say definitively as there is limited credible economic data coming out of Russia. Once the veil drops I think the extent of the carnage is going to be staggering. To be sure - the economic impact on Russia is not going to be as much as it has been on Ukraine, but is is going to be devastating nonetheless. Generational damage.

This is what going to be seens later on. As I mentioned on previous post, Russian economy are loosing growth potential with this decoupling. However it is not the same saying they are going to be in ruin, as Western Politicians hope.

There will be significant adjustments Russian economy need to be taken. However how far it will take will not going to be means definite as big as crisis as Western hopes. Russian consumption since 2014 already increasing going inward. There's going to be disputes from outside the Russia, especially from the West on how much Russian economy already more self reliance on domestics, then from the external market (especially Western ones).

I have put in this threads, sometimes ago, all this back on how far Russian adjustments on Domestic and shifting market to the east (from west) will do. As for Ruble, well it is basically already less treaded currency before that. If they are using it mostly only to trade domestically and with non Western trade partners, then Western market valuation on Ruble doesn't make much impact anyways.

Currency valuation is also depends on whose going to trade with you. The more isolated you are from certain market, then the less capabilities of that market to influence your economy including your currency. At this moment Russian and West continues decoupling, and this is means they are isolating to each other.

Russian going to take big costs no doubt about that. However what I don't agree the presumption that the costs due to Western sanctions and decoupling means Russian will have ruins economy. This is much more to be seen, and so far the situations still shown their economy still not in ruin.

Many in West so far saying they are not believing Russian data on their economics. Which is understandable and have points. However for me also not make sense just to put every economic data that come from Russia as lies. In the end if they (Russian) economy really in ruin, it will shown later on. However if they manage to domesticated their economics and shifting their loss trade with West somewhat to the East, it will also can shown later on.

Russian businesses is controlled by much of states and some oligarchs. Much of the population not in the sense Western Middle Class standard. Thus there will be not much credit circulation on most of population. Credits mostly going to circulate within SOE and Oligarchs. Thus as long as domestication of consumption work well, most of their population cash flows still work. While the commodities and Hydrocarbons margins can still financing trades with East partners.

This type of economics will get problem if those Oligarchs ship off money from Economy. Thus as long as Putin still manage to keep most Oligarchs money within his administration control, then they still manage more or less. Ironically Putin seems got help from Biden and Collective West leadership. With West targeting their money, those Oligarchs knows their money can only be safe with Putin or in overseas market that are friendly with Putin regimes.

 

[Ananda]

If the internal politics of inflation get too much for the US and they decide to keep all of their hydrocarbons at home (which they did pre 2015) then prices in the rest of the world would shoot up significantly

Agree, and that's what I meant with current Hydrocarbon carbon market is Suppliers market. This is why market saying that era of cheap Hydrocarbons already over. No big investments in capacities will come, thus the supply is finite for sometimes in future. This make big producers like Russian will still have big say on the market, and capping their margin is delusional political hopes by some Collective Western officials.

Will West want to sanctions those who buy Russian Hydrocarbons? It will back fired fast to collective west.

 

[seaspear]

With regard to the oil price market and the caps imposed on Russia the minister has admitted there has been an effect, countries like India and China may take advantage of the cap for cheap Russian oil
Russian Oil Price Cap Hits Kremlin's Export Revenue, May Widen Deficit (businessinsider.com)
Russia bans oil exports for countries using price cap: Why Moscow made move, who will be affected? (firstpost.com)