Russia could keep the war going by switching to a planned economy, Jamestown Foundation senior research fellow, and non-resident senior fellow at the Center for European Policy Analysis (CEPA) Pavel Luzin tells ERR in an interview. He finds the war in Ukraine to be one of storage facilities, with Russia pulling weapons out while not being able to replace them.
Russia's budget for this year has 35 trillion rubles on the revenue and 36 trillion rubles on the expenses side. Can we trust those figures?
We may trust these numbers, but we can be sure that this budget will be changed several times during the year. They just don't know this. And they will change the budget. And especially, of course, they will change it in terms of the national defense part of the budget and national security and law enforcement.
We saw this in 2022-2023 because the parameters of those budgets, they have been changed several times during 2022-2023. We don't know the final numbers. And the government doesn't know the final numbers. And Vladimir Putin doesn't know the final numbers.
What should we expect? A third of GDP is currently aimed at the war. Will we see its relative importance grow this year?
Yes, it's possible that it will increase even more than the current 10 trillion and 800 billion rubles. It depends not only on the battlefield situation but also the exchange rate of the ruble. Because the Russian military industrial complex still depends on imported components, imported equipment, machine tools, I mean.
So if there will be a further devaluation of the ruble, the government will need to recalculate the budget.
Where will the government find the money? Will it be taken from social services?
You know, I'm not a fan of this approach when, you know, people try to count the vast spending as a bookkeepers. We should look at previous experience. During the last two years, the Russian government, the Russian central bank, Bank of Russia, they just created trillions of new rubles from nowhere. The government can use anything, including hike taxes.
They will increase additional payments, so-called single payments from business, for instance, when the government calls the big corporations and says, guys, we need two trillion rubles. We don't care where you find them. The same is true on the regional level. When governors call local businesses and say, guys, I need money. You must give me money and I don't care where you get it.
But how long can the Russian government fund the war in this way?
Russia's ability to continue the war does not depend on money. It depends on political will and that of the people. If you remember ISIS. They fought for four years without having any money. They just had the will to fight.
And Russia may continue fighting even without money. For example, there is still the option of restoring the common administrative model in Russia, I mean planned economy. So it is still an option and the mobilization of the economy is possible. It will never yield positive results for the Russian people, for Russia, but for the Kremlin it may give the ability, additional ability, additional resources to continue the war. Do not underestimate this probability.
Again, money is not the biggest problem. Of course, it is a problem, but Russia can continue fighting without money.
I mean, you can just create so-called military communism from [Russia's] Bolshevist history, and they may expropriate properties, they may expropriate cars, they may expropriate, you know, sources, gold, money, currency, foreign currency from people.
They may force people to purchase governmental bonds, for instance. All these probabilities are dependent on the combat situation, the level of intensity of the war.
But the most important factor is the will to fight. And there is a will to fight because even if the Russian leadership crucially wants to get a break in the war, they are sending signals that guys, we need negotiations, we need a frozen conflict and so on and so on.
Their original purpose of the war, strategic purpose of the war, is still the same. And there are more than one. The first purpose is eliminating Ukrainian statehood. The second purpose is eliminating Ukrainian culture, genocide. The third purpose is eliminating transatlantic unity, eliminating NATO.
And the fourth purpose is destroying the global order, destroying the rule-based global order, with the hope to create some new order where the Russian elite will be capable to survive politically and economically. So these purposes are still in place despite any other rhetoric.
Do you believe signaling for a ceasefire serves as a sign of danger for the Baltics and other Eastern European EU members?
Of course. Currently, when the whole Russian army is engaged on Ukrainian soil, Russia cannot make a maneuver. It cannot redistribute some forces to the Baltic region. But in case of a ceasefire, in case of decreasing military and economic aid to Ukraine from the West, especially from the United States, Russia will have this maneuvering opportunity. And in case of a ceasefire, the threat, the military threat for the Baltic states will increase, not decrease.
Do you perceive such a possibility?
I don't know whether they would be willing to do it in case of a potential ceasefire. I also don't know whether or not it is technically possible to invade the Baltic states, because geography does matter.
But look at Iran currently. How they attack American troops in the Middle East, how they attack Israel in the Middle East, they do this indirectly. They do this through proxies.
And you know, even if Russia will not immediately invade Estonia, for example, in case of this ceasefire, in case of some restoration of military capabilities by Russia, they may use, I don't know, missiles, unknown missiles or unknown loitering munitions, unknown Shahed drones, which will come down, I don't know, in Tallinn or Narva or somewhere else, which will hit, let's say, a military base on Estonian soil.
Whether that will be enough for a casus belli we don't know. But Russia could use these instruments, this approach. Aggressive actions below the radar.
So currently, when the whole Russian army is busy on Ukrainian soil, the level of the military threat to Baltic states is lower than it will be in case of ceasefire in Ukraine or in case of lower intensity of the war in Ukraine. Don't forget that Russia is working to restore the Leningrad military district.
Coming back to the Russian economy, do you perceive any social impact? Are people developing a reluctance [to the war] or are they rather behind their leader and trying to make everyday life work?
It is a bigger problem, deeper problem. Most Russians are really tired of the war, but they're not going to recognize defeat. And they're not going to pay reparations to Ukraine or, I don't know, make payments for rebuilding destroyed Ukrainian cities. They're not going to pay the victims of Russian aggression. I mean, victims among the civil population, it's tens of thousands of people, tens of thousands of families, or maybe even hundreds of thousands of families.
And the Russian people are not going to recognize this, irrespective of their political orientation, even among the moderate liberals left in Russia.
For them it is better, you know, their dream, And they speak this publicly, their dream is a kind of Korean scenario in Ukraine.
They are not going to recognize defeat, despite the fact that in political and in economic terms, all this war is a total strategic defeat for Russia. Like people in Russia currently, or last year didn't mention Prigozhin's mutiny and the long-term consequences of this mutiny. They didn't mention it or pay it any attention. They also do not pay attention to hundreds of thousands of killed Russian soldiers, killed and wounded, captured etc.
And this level of escapism, despite the fact that this escapism does not allow the Kremlin to mobilize society in support of war, allows the Kremlin to continue the war because people just don't want to mention these facts and they don't want to recognize defeat. They are not psychologically ready for defeat. For them, continuing the war is a better option than defeat.
That's why I'm talking about the Russian society's will to continue fighting.
Do you see the economy overheating?
I don't know what you mean? It is a typical journalistic speculation, that the Russian economy is overheating. I don't know what it means and why Russian macroeconomists use the term.
I use real data. While it may not be entirely accurate, it's the official statistics in Russia.
I see a certain uptick in production and a decrease in terms of workforce. This moderate growth is based on past years' decline. Therefore, if we see notable growth in a factory, making tanks or armored personnel carriers, it means they used to have low output.
If you produce 200 tanks in 2017-2020, I mean 200 tanks a year during the period. And then you decrease the production rate to 100 in 2021, 2022, 100 tanks a year. And now you again restore your production rate to 200 tanks a year. You declare it like having doubled your production volume. But in reality, you do not increase your production capacity, you just go back to the previous production rate. It's a kind of bureaucratic trick, typical bureaucratic trick. You declare something like your achievement, but it is not your achievement.
The same is true towards, I don't know, Lancet loitering munitions produced in Izhevsk. Serious manufacturing, the serious production of loitering munitions was launched in 2019. It was zero before. Years of governmental investments, billions of rubles, invested in the facility. And then in 2023, you may declare, oh, we upped manufacturing several times. That is not an achievement. That was the original plan. So again, a low reference base effect.
And in those factories where we didn't see a low base effect, which work regularly, normally during all the years, like aircraft manufacturing, helicopter manufacturing, we don't see any increase at all. If Komsomolsk-Namur produced 12 Su-35 fighter jets a year, now it produces the same amount. We don't see any increase. If the Novosibirsk Aircraft Plant produced 12 Su-34 fighter-bombers a year, and then they decreased this amount to probably six a year in 2020-21 because of the end of the contract, and now they declare that they increased the production rate by 30 percent to 10 aircrafts a year. But it's still lower than 12.
This process is everywhere within the Russian military industrial complex and there is no overheating at all. Yes, they try to produce more, more arms, but they cannot do this. That's why they use Soviet-era storage. They are deconserving, cannibalizing artillery, main battle tanks, armored vehicles and so on.
They declare that they have increased the production rate of artillery shells only to buy shells from North Korea. Does it mean that they cannot increase the production rate of artillery shells significantly? Maybe in some aspects, in some specific types of artillery shells, they were able to increase. But it's a case of low reference base once more.
The most advanced rockets, Tornado S, it's a precision guided rocket, the counterweight to the American HIMARS.
If they produced from 150 to 250 rockets a year of this type, and now suddenly they were able, I don't know whether or not they were able in reality, but let's imagine they were able to increase the production rate to 400 or 500 of rockets a year. It changes nothing.
The same is true for, I don't know, the dumb rockets for the Grad MLRS. In 2017, Rostec supplied 10,700 of these rockets to the Russian Armed Forces. What is the significance of that? It's almost nothing. Now, even if they are able to produce 50,000 of these rockets a year, almost five times more. Yes, they may declare, we increase the manufacturing, the production rate five times, we are superheroes, but what difference do 50,000 Grad rockers make in a situation where they use thousands of them every day because of the intensity of the war? None whatsoever.
And they use Soviet-era rockets. They restore them, then they conduct maintenance work with the Soviet-era rockets, and they use them. Because they are not able to produce a lot of them, hundreds of thousands of them.
It is a war of storage facilities. Russia takes a lot of weapons from storage facilities and it cannot replace them. For instance, if Ukrainians destroy a BMP3 and Russia deconsolidates a BMP2 or BMP1 instead of this BMP3.
Or Su-25 assault aircraft. Russia uses the Soviet era Su-25s and Russia cannot produce them. There is no facility which can produce this type of aircraft. Because in Soviet era, these aircraft were produced in Tbilisi, Georgia. Now everything is eliminated. And if the Ukrainians shoot down another Su-25 and sometimes they shoot down two of them in one day, Russia cannot replace them.
How long will these reserves last?
That depends on the intensity of the conflict? If it intensifies, Russia will have less time, and if not, it will have more.
If, for instance, Ukrainians get long range cruise missiles or ballistic missiles from America or European partners and hit, I don't know, an airfield somewhere around Rostov-on-Don or around Voronezh or around Kursk and hit several Russian aircrafts at one time, Russia cannot replace these aircrafts. Russia doesn't have the opportunity to replace them in the foreseeable future. As they are still only producing 10-12 Su-34 bombers and 12 fighters annually. So it is all about the combat situation.
Ukraine also cannot afford to fight intensively without sufficient materials.
That's why Ukraine must be provided with enough weapons. There's no question in terms of whether we need to supply Ukraine. The West must do it, America must do it and NATO must do it.
It's a matter of NATO survival. It's a matter of the survival of transatlantic unity. It seems that it's not a matter of political will. In some way in the U.S. Congress, there are some crazy Trumpists who play their own political game and maybe they just don't know. They don't understand what is going on. They don't understand because they are not professionals in this field.
But in reality, the West must do its job as the Ukrainian armed forces are doing theirs.
And they [the Ukrainians] are doing their job very well. They have been doing amazing work since June 2023, for eight months now. They have eliminated a lot of Russian artillery which it cannot replace. Russia cannot replace the lost artillery because Russia cannot produce a lot of barrels for the howitzers. Russia cannibalized the Soviet era howitzers, removed barrels from them and put these barrels in the howitzers on the ground but Russia cannot produce them, Russia cannot produce enough barrels for main battle tanks.
Recently, Ukrainians captured a T-90M main battle tank, the most advanced Russian main battle tank. And there was a barrel which was produced in 1992. There was a stamp on the barrel – produced in 1992! I don't remember whether or not there was a label made in USSR because in 1992 it was the first year after the USSR, but nevertheless there was a stamp made in 1992. It's the most advanced Russian tank and it has a barrel which was produced 30, 31 years ago. That's how it works.
And the Ukrainians eliminated a lot of howitzers, eliminated a lot of MRLS, eliminated a lot of electronic warfare systems, eliminated a lot of air defense systems and the most important fact Ukrainians eliminated a lot of Russian officers and significant number of colonels, majors, captains and so on. And you cannot replace them fast. And the Ukrainians, they were able to keep their reserves.
Because Ukraine's purpose is not the liberation of territory. The main purpose is eliminating the Russian military threat, which will result in the territory being liberated. And they're doing their job well, even if I'm being a little optimistic.
That means Russia may be willing to fight as long as possible, but if the Russian armed forces are losing their organizational integrity, if they are losing their material base... The Russian armed forces may still be willing to fight like ISIS, in pickup trucks with machine guns and so on. But Russia's losses are irreversible. And one day Russia may lose its capacity to fight.
Like the Germans lost their capacity in 1918, when the German forces stayed in French territory but Germany capitulated. Because Germany wasn't able to continue fighting. Even if Germany kept its will to fight, they didn't have the resources.
Germany no longer had resources by then, but Russia still does
Which resources does it have? If Russia can produce only 50 to 60 barrels for howitzers a year and it loses hundreds of them a year. Russia cannot increase the production rates here. It's impossible because you can produce a single barrel for a single type of howitzers using a rotary forging machine. Russia has fewer than ten of these machines, imported from Austria. And they cannot import any more.
What about through Kazakhstan or other states?
It's impossible because every rotary forging machine is made for a specific factory. It's not something you can make ten of and then export to whoever wants it.
Russia replaced its lend-lease material from the U.S. with Austrian machinery following World War II.
So Russia is incapable of producing too many howitzer barrels. The same is true towards artillery shells. Okay, Russian mechanical plants, they can produce, I don't know, bodies for artillery shells, hundreds of thousands of them. But who will produce the gunpowder? Who will make explosives for them? The number of gunpowder factories of Russia is limited. These factories, they cannot increase their production rates significantly because they are also dependent on imported industrial equipment, imported chemical systems and so on, imported from Germany for instance.
And so that means, okay, Russia has the will to fight. Russia can print trillions of rubles, but it is not resources. The number of workers is decreasing. The number of engineers is decreasing. The production rate cannot be increased significantly. They achieved their peak production rate in 2016-2017. After that, the biggest challenge was to maintain this production rate, and some factories were not able to do this. Now they went back to the production rates of the mid 2010s.
There is no overheating. Keynesian economists are way off. That you print money, give it to your factories and the economy will work. It does not work like that. Because when you try to increase your production rates, you face cost plus inflation. And considering the fact that the Russian military industrial complex generates hundreds of billions of net losses every year. Even before 2022, it generated from two to 300 billion rubles of net losses every year. And since 2022, this amount of net losses has increased. And the most, not the most, but significant part of the national defense budget is spent on offsetting these losses. They are trying to compensate the losses of previous years.
Of course, and also losses of military industrial complex and losses of people because the government must pay money for every soldier killed. And many of these killed soldiers, they still need to be recognized as killed soldiers. And this year 2024, there will be payments for the losses of 2022 for those of 2023. Because if the body of the soldier is still somewhere on a Ukrainian field, they are counted as missing. And this body will be recognized as a dead body after one and a half years, according to the law.
It's very boring, very sophisticated procedural question. And maybe it's hard to explain for a broader audience. But Russia, this year, Russia will pay for losses of the previous two years. So soldiers killed in Bakhmut in, I don't know, November 2022 and whose bodies are still there somewhere in Bakhmut. They will be recognized as killed this year.
But no, the defense ministry doesn't want to recognize the losses immediately. They don't want to evacuate dead bodies from the battlefield. But nevertheless, they will need to pay. Of course, the relatives of these dead soldiers, they must make some effort. They must take steps for this recognition, because the Ministry of Defense is not interested in making these payments. But nevertheless, according to the law, these relatives will send several letters, several formal requests. And finally, the dead soldiers will be recognized as dead soldiers, as killed soldiers, and they will get payments. They will get payments after a delay. And that's why this year the national defense budget is so huge because they need to pay for previous losses.
Editor: Marcus Turovski