Trying to Finance a First Class Military with a Third Class Economy

Russia's Economy is Shrinking in $USD Terms

Russia’s Economy is Shrinking in $USD Terms

In USD terms, Russia’s economy is smaller than Italy’s, smaller than Canada’s, smaller than Australia’s, smaller than California’s. None of those nations (or states in the case of California) attempts to build and maintain a world-bullying sized military, but it seems that Putin is determined to at least pretend to do it. How will the little big man set about this task?

Borrow Money from China

Russia has entered deficit spending territory to support its military rebuild, and must find creative ways to finance its deficits. Nominal deficits of $20 billion to $25 billion a year does not sound like a lot to American ears, but for Russia’s post-Crimea economy it is a lot.

… loans from China to Russia totaled $18 billion in 2015, making China the largest source of external financing that year, according to the Russian Central Bank. But even that is still a far cry from $261 billion that Russia was able to attract from the European Union and the United States in 2013, up until the Ukraine crisis.

Sell Precious Russian Assets to China

In earlier privatisation cycles, Russia was smart enough to sell to distant westerners, who wrongly assumed that rule of law would work the same in Russia as in the civilised world. The naive westerners were wrong, and suffered for it in the subsequent nationalisation (theft) cycle.

… the seemingly endless cycle in Russia between nationalization and privatization, adds to investors’ worries about being blindsided… The government needs money to cover a portion of Russia’s projected deficit this year of 2.4 trillion rubles ($36 billion), up from 1.95 trillion rubles ($31 billion) last year. And the privatization push is one of the few ways for the government to raise money. NYT

But selling to China is an entirely different enterprise than selling to naive westerners. China has no illusions about “rule of law,” or the honour and integrity of Russian companies or the Russian government. China will insist upon terms of sale that it can enforce — with blood if necessary.

… Rosneft and Beijing Enterprises Group Company Limited [BEGRP.UL] agreed the key terms of a potential sale of a 20 percent stake in Rosneft’s oil producing subsidiary, Verkhnechonskneftegaz, to a unit of Beijing Gas Group. ___ Reuters

Cut Critical Infrastructure Spending to the Bone

Crucial spending for education, health care, transportation, housing, and other critical infrastructure across Russia has been cut in deep and painful fashion.

… Because of Vladimir Putin’s health care “optimization” campaign – a euphemism for cutbacks – only 45,000 of 130,000 rural population centers in the Russian Federation have any medical services, and a combination of bad roads and poor transportation services means that many who don’t have them can’t go to where such services exist. __ WindowonEurasia2

Russia’s GDP in roubles declined roughly 4% last year and is on track to lose a further 2% this year. Russia is a relatively small nation in population and economic terms, and its working class populations in particular are disappearing at an alarming rate.

Wealthy Russians lost up to 75% of income in 2015

… If the outlook and performance of the [construction] industry is any indication, an investment-led spurt will be slow to materialize. Capital spending has already posted the longest stretch of declines since at least 1995, when Bloomberg started compiling the data. The Economy Ministry forecasts it will shrink as much 3.1 percent this year. __ Bloomberg

The only part of Russia’s economy that is truly doing well, is military related manufacturing. And we have seen that the military rebuild is being financed by deficit spending, by cutting vital infrastructure spending, by selling off vital national resources and technologies to China, and outright borrowing from China.

Brexit is not Making It Easier for Russia to Raise Money to Pay for its Brave New Military

Russia’s largest companies usually trade their shares on the London Stock Exchange.

“After Brexit, a series of companies will delist their stocks,” believes Nigmatullin.

Rosneft, Russia’s largest oil company, could be one such company. In 2016 the government decided to sell 19 percent of Rosneft shares. Buyers always focus on a company’s public value. Now, Rosneft could either postpone the sale or even abandon the stock exchange.

In an interview with Bloomberg, German Gref, head of Russia’s largest state-owned Sberbank, said the value of Russian companies could fall by 10 percent. Besides Rosneft, the government also intends to sell shares of the Alrosa diamond company, which also trades on the London Stock Exchange. __ Russia Behind the Headlines

There is a steep price to be paid for trying to be something you are not. Ordinary Russians are beginning to discover this to their pain. Putin seems not to care what his policies are doing to Russia and to Russians. In that regard, he is the same type of leader to Russia as Obama is to the US.

Most Russian supporters of Putin would rather stay drunk and boast of the eternal greatness of Russia, than to work-create-cooperate-build and make Russia truly great for the first time in history.


Ukraine’s mirror image problem — Of course it wasn’t Ukraine that invaded Russia. That is a distinction that should make a difference to anyone who prefers international law to warfare between nations.

In fact, several neighbors of Russia and China are being forced to ramp up defence expenditures well above comfort levels, although not to the autophagic levels that Russia is straining to reach. Putin has dictatorial powers that nations such as Japan, Philippines, Latvia, Poland, Finland, Taiwan, Indonesia, and India do not currently possess.

It is clear that Russia has pulled out all the stops, and China is well on its way to doing the same. These two would-be hegemons of all of Asia cannot both come out on top. But they can pull a lot of innocent bystanders down with them, when they fall.

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