Tag Archives: Complexity

The Russian Military Import Substitution Program: Still Struggling

The independence of the Russian defense industry on foreign components has been on the table for years. There have been many talks about import substitution, vast sums of money were spent, but the situation hasn’t considerably changed. Since Crimea’s annexation, this issue became even more relevant. First, because of the economic sanctions. Second, because of the interdependence between the Russian and the Ukrainian military-industrial complexes.

Another problem has been the relationship between the Armed Forces and the Russian Military-Industrial Complex, which is still problematic, although it was even worse until 2014. On the one hand, the military often complain that the industrial sector is unable to fulfill the procurement demands and that the Armed Forces’ needs aren’t matched. Quality is considerably low. On the other hand, the industrial sector complains that the Armed Forces don’t know what to procure, including the technical specifications and requirements. In other words, the industrial sector complains that the Armed Forces don’t know what they want. There’s poor planning.

Nevertheless, from 2008 the result was that the industrial lobby was able to impose its specifications and norms on the Armed Forces. In 2012, the then Minister of Defense Anatoly Serdyukov even blackmailed the Military-Industrial Complex saying that “if you don’t provide us with what we want, we’ll buy foreign on-the-shelf full-scale systems. This was one of the most critical factors for Serdyukov being substituted by Shoigu, who has been less confrontational. It didn’t work as expected, because of MoD officials lobbying the interests of the industrial sector.

The relationship deteriorated on such a scale that in December 2014, Putin decided to renew the Military-Industrial Commission (in Russian “VPK” like the newspaper). Its role has been to be a coordination platform between the MoD and the industry to promoting consensus and compromising. And since 2016 to promote import substitution and stimulate technological development.

In 2016 it was disclosed that some 800 weapons systems’ production depends on foreign components from NATO and EU countries, and the Security Council returned to the discussions about import substitution. Although it has been happening for decades, it never really happened despite the luges amounts of money invested. This time, the VPK asked the domestic industry to replace 127 items. One year later, in 2017, they managed seven. There isn’t more recent information.

The volume of civilian dual-use systems is supposed to increase by 30% in 2025 and by 50% in 2030. The logic is to follow the same model as the United States since the 1950s, the one of the military-industrial complex and military Keynesianism. There’s a good story about this. A real one. When the Americans had to go to space, they faced a problem. How to write with a fountain pen without gravity? They developed a pen for that, which gave the technical base for the modern pens we use today. And the Soviet Union? They used a pencil.

And this is the biggest problem. Most of the technology Russia has is still from Soviet times. There is no serious financing for Research and Development Programs. The Russians are also convinced that the best is to exploit possible spillovers with the oil and gas sector, but the industry lacks economic complexity. Although such spillovers might be good at the sectoral level, they won’t promote economic development. Nor reduce the dependence on Western technologies.

Another serious problem for the Russian military industry has been the war with Ukraine. Before Crimea and Eastern Ukraine, some sixty Ukrainian companies produced ship engines, and aircrafts and their components for the Russian military. It included nuclear weapons’ key components like the R-36M missile system and the Voyevoda RS-20 missile (which in NATO is known as the SS-18 Satan). It was developed in the 1980s in the Dnepropetrovsk Design Bureau “Yuzhny” and produced in the same place by “Yuzhmash.”

The Russian MoD has announced plans to dispose it, but at the same time, there is information that their service life is being extended. The obvious conclusion is that the Russians still don’t have a replacement for these systems yet. The deployment of the Sarmat (Satan 2) missiles is expected for no sooner than 2021. Another example is the TOPOL-M, which was developed in the Kyiv Arsenal Plant. There are rumors they will be completely withdrawn from service in 2021 to be replaced with Russian-made Yars and Yars-M missile systems.

The production plans of ships also had to be adjusted because there are no modern Russian ships engines. At the beginning of the modernization program, the MoD counted on the Ukrainian Zorya-Mashproekt’s gas turbine engines. Some ships were designed to use these engines, including the Project 11356 “Patrol Guards,” the Project 22350 “Frigates” and Project 21956 “Multi-Purpose Destroyers.” In September of 2019, the Russian government announced that the United Engine Corporation, the NPO Saturn (Rybinsk, Yaroslavl region), and the OJSC Klimov from Saint Petersburg would replace the Ukrainian engines. There isn’t a precise timing for the commissioning of the new ships.

Some import substitution has been happening in helicopters engines. The Kazan Helicopters and the JSC Kamov, which produce the Mi and the KA series, have been using engines produced by the Zaporizhzhya Motor Sich company from Ukraine. Now they are receiving the Rostech VK-2500 engine, which is more expensive and still needs a complete foreign base. Unmanned aerial vehicles are advancing more. The Forpost-R system was being produced under an Israeli license. Russian companies were able to replace all components. Another drone, the S-70 “Okhotnik” for reconnaissance and strike, was fully developed in Russia and is allegedly able to interact with the 5th generation Su-57 fighter.

Finally, the GLONASS satellites. Until 2014, the share of foreign components was 70%, mostly from the United States. Today it is approximately 40%. The Glonass-K2 satellite, with only domestic components, was expected to be ready by 2021, but there is no recent information about the program.

Import substitution was very effective in promoting South Korea’s economic development. It could work in Russia, but there is a significant barrier posed by the lack of new technologies. Before, it was possible to develop independently. The technology was free. Today, there are patents and intellectual property. One component might use multiple technologies of different owners. It is not possible to develop new technologies isolated from the rest of the world, especially when R&D is underfinanced, and the last significant technological developments were in the 1980s. One alternative is a partnership with China, which has been developing Western level technologies in some spheres, but many times ignored the international rules of property rights.

Can Russia do it? Probably not. Development based on natural resources isn’t sustainable, as discussed by the great Adam Smith already in 1786. Norway might be the exception, but it has a very complex economy. Russia’s development is to be characterized by a situation of the development of underdevelopment. In technological terms, it’ll always be catching up, unless huge, but really huge sums of money are invested in R&D, and new brains are attracted to the country. A herculean task, that, probably, won’t happen. As warfare is increasingly dependent on new technologies, with time, Russia’s operational capabilities will become outdated, forcing the Armed Forces to rely on the nuclear arsenal for deterrence and asymmetric methods for combat.

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China and the USA: a New Cold War?

In January 2020, China and the United States signed a trade agreement called Phase One. The agreement provides for an increase in Chinese purchases of American products and services over the next two years by approximately $ 200 billion, including USD 32 billion in agricultural products, USD 52.4 billion in the energy sector, and USD 78 billion in manufactured products. Since then, China has not changed its abusive trade practices and, until mid-March, President Trump has repeatedly praised Chinese President Xi Jinping for his leadership during China’s COVID-19 crisis. He even cited the professional work of the Chinese while expressing his immense respect and friendship with President Xi Jinping.

Although there was hope that the two countries were entering a new phase, the coronavirus crisis has resulted in an acute deterioration in their relations, the greatest in recent decades. The pandemic could have resulted in an opportunity to develop deeper cooperation, including joint actions to stem the epidemic, develop a vaccine or medicine, and reduce the impact of the global economic depression.

However, the two countries have started a rhetorical war over who is to blame for the pandemic. The Chinese government has been presenting the narrative that American soldiers took the virus to Wuhan during the World Military Games in October 2019. At the same time, President Trump has repeatedly claimed that the United States has evidence of COVID-19 being developed in a Chinese laboratory in the same city. To date, neither country has provided any evidence substantiating their narratives. Also, it is a consensus among the scientific community that the virus developed in nature.

In recent weeks, competition between the two countries has been going to the ideological arena. The Chinese government has been using its propaganda machine to presenting itself as a success in managing the pandemic and as a reliable and responsible world leader who is supplying the world with medical products in urgent need. The Chinese media has also denigrated the Western governance model, especially the American one, accentuating the end of Western supremacy in the last thirty years. See my video on this subject by clicking here. China has also developed a video ridiculing the American response to the pandemic (below). Other factors negatively influencing the relations between the two countries are tensions in the South China Sea, the issue of Taiwan and Hong Kong, and China’s commercial and technological practices.

The relations between the two countries are expected to worsen as the result of two problems: one structural and the other political. The structural problem stems from 40 years of neoliberal policies, which resulted in the American economy’s structural transformation. During that period, part of the American and the Western manufacturing sector was relocated to China. This resulted in two problems. On the one hand, there was the belief that the service sector would absorb the labor force turned unnecessary by the productive sector. This didn’t happen. Many workers went through a process of precarious work or “uberization.”

At the same time, China has been going through an intense economic and social transformation, which has resulted in the development of a more complex economy. Before China had a subordinate insertion in the productive global chains. By developing economic complexity, it started directly competing with American and European companies. The most significant example at the moment is Huawei and the 5G cellular network. Despite economic rhetoric saying that competition is always good, the United States has been trying to limit Chinese competition in complex sectors. An example is actions that restrict access to electronic components of American technology, such as the chips of Huawei cell phones.

The political problem is the result of these structural problems. During the first campaign, one of Trump’s main points was the promise to bring back the manufactures that had been relocated to China. However, the process of industrial localization follows economic and not political logic. And this process fell far short of expectations.

COVID-19 offers an opportunity to change the economic logic in the name of the security of production chains and strategic stocks in times of emergency. However, even if there is a transformation in global production chains, it is impossible to return to the economic structure of 40 years ago. To offset higher labor costs, job creation in a hypothetical manufacturing boom in the United States will be low due to the high technological level of production lines. Thus, the problem is not solved.

In this way, Trump’s attacks on China serve three purposes. First, to decrease support for populist democrats. Second, to divert people’s attention from the failure of the American government to combat the pandemic. Third, to have an external enemy as a political campaign element. Polls show that 31% of American voters regard China as an enemy, while 23% consider it as neither an enemy nor an ally. Democratic candidate Joe Biden accused Trump of being too condescending to China in a recent campaign commercial, promising to be tougher. Considering that China has been adopting increasingly assertive diplomacy, it is to be expected that Sino-American relations are far from calming down.

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COVID-19 and Neoliberalism: Some Quick Thoughts

One of Neoliberalism’s key features is the supremacy of the financial system over the rest. Something to be considerate is the amount of money spent by the government in the last 40 years to save it from the crisis it created itself. The COVID-19 crisis has the potential to create a depression even worst than the 1930s if the governments don’t act. This is fuel to populists to destroy democracy. In 2008, the size of the casino part of the financial system was 10 times, yes, 10 times the size of the real economy. Politicians and central bankers have been saying there’s no money. The UK bailout for two or three banks in 2008-9 was roughly the equivalent to FIFTY times Latvia’s GDP. Fifty economic years. In other words, there’s money. Besides, in the last fifteen years it seems that increasing the monetary base by creating money hasn’t resulted in inflation. The problem is how the financial system is dependent on government’s money. It’s a type of perverse financial keynesianism which diverts money from education, health, science, culture, pensions, defense and results in deep wealth concentration and inequality. Worst, many times it impedes countries to develop their economy since it competes with the real sector for government resources. What’ll happen in the future depends of how the governments will react to the crisis. If it’ll do the same as in 2008-9, directing the money to the financial system we’re doomed. It is necessary to spend vast sums of money to provide minimum incoming for people, direct financing, no banks, for business to keep them alive, to invest in education, science, arts, culture, health, defense (to avoid conflict). Most importantly, it’s necessary to rethink the economy and its structures. In Latvia’s case, this could be a wonderful chance for developing more complex economic sectors. We’re small enough to redirect our economy towards high technology sectors. A simple example is to produce respirators. For us, it would be a big business. Maybe even a permanent one after the crisis. More important, it would give the opportunity to start developing clusters in certain areas of high complexity, resulting in a synergy that would push the economy up. Right now being small is a great opportunity. We shouldn’t ignore it.Facebooktwitterpinterestlinkedinmail