China’s artificial-intelligence engineer shortage

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China has vowed to boost the development of its artificial intelligence sector but it is facing a shortage of software engineers in the country. 

The latest illustration: Microsoft Research Asia (MSRA) has recently launched a “Vancouver Plan” to relocate a number of top AI specialists from Beijing to its new laboratory in Vancouver, the Financial Times reported on Saturday, citing some people familiar with the plan. The report said the plan was launched due to heightened political tensions between the US and China. 

Chinese state media and some commentators say the relocation of MSRA specialists shows that a global AI race is heating up – a trend that will push China to nurture more AI experts.

After all, no one thinks there are enough of them – and that’s the basic handicap slowing Chinese progress. Elon Musk says China is only 12-month behind the US in artificial intelligence but other experts are more pessimistic.

Touchy subject

Following the publication of the original FT story, Microsoft told the newspaper that it has nothing called a “Vancouver Plan” but is establishing a new lab in Vancouver, which will be staffed with people from other MSR labs around the world, including China. It added that the reported number of Chinese employees who will move to Canada – the original sources had said 20-40 – was not accurate, but it did not provide a corrected number.

A SeaBus crosses Burrard Inlet between Vancouver and the neighboring city of North Vancouver. Photo: Wikipedia

Founded in 1998, MSRA conducts research in areas central to Microsoft’s long-term strategy and future computing vision, including natural user interface, AI, cloud and edge computing, big data and knowledge mining, computer science fundamentals, intelligent multimedia and computational science. 

Concern that MSRA’s sharing approach might be insufficiently protective of US intellectual property goes back several years. In April 2019, MSRA was accused by a US-based think tank of working with the National University of Defense Technology (NUDR), a Chinese military-run university, on AI research that could be used for surveillance and censorship in Xinjiang.

‘Great strides’

The Global Times is taking an optimistic approach to news of the MSRA move. “Claiming that the relocation of some researchers from a single lab ‘threatens’ China’s talent training is pure exaggeration,” the newspaper says in a commentary published Monday. “China has made great strides in expanding its high-tech talent pool in recent years and the country has unique advantages with its massive market and growing high-tech sector to both train local talent and attract those from overseas.” 

Global Times says China does not have inherent advantages in attracting global talent but the United States’s containment strategy has stimulated China’s talent cultivation for independent technological innovation, as well as government investment in high-tech fields. 

“Some people think Microsoft is worried about the world’s escalating geopolitical conflicts while some others think the company does not want its top AI specialists to join its competitors in China,” a Hebei-based columnist writes in an article published Sunday. “No matter what, the decision to relocate its staff shows that Microsoft is lacking self-confidence.” 

He says that three years ago, the company took the initiative to dismiss the rumor that it would leave the Chinese markets. With its staff relocation plan, Microsoft is now no different from the US government, which wants to suppress China’s AI development, he says.

“The proposed staff relocation may weaken Microsoft’s support for China’s technology sector, but it may also prompt Chinese companies to increase the cultivation and investment of local talents,” a Shandong-based writer says in an article published Saturday. 

Microsoft logo. Photo: Asia Times files, AFP / Antoine Wdo / Hans Lucas

However, he adds that the MSRA was once a model of Sino-US high-tech research cooperation and has played a positive role in promoting the development of China’s technology industry. He says the MSRA’s latest move reflects a reduction in that kind of bilateral cooperation. 

Brain drain

Back in 2019, a research report published by MarcoPolo, a think tank of the Paulson Institute in Chicago, pointed out that China faced a brain drain problem as most of its AI talents were choosing to stay in the US after completing their studies. 

The report said 10 of the top 113 AI specialists selected for oral presentations at NeurIPS 2018, an annual AI conference, were Chinese-born while all of them were affiliated with US institutions or are about to join them.  

It said 58% of Chinese upper-tier researchers attended graduate school in the US, with 35% attending graduate school in China and 7% in other countries, such as Australia and the United Kingdom. It said 78% of the Chinese AI researchers who completed graduate studies in the US were currently at US institutions, with only 21% at Chinese institutions. 

Renrui Human Resources Technology, a Hong Kong-listed recruitment agency, said in a research report published in April this year that China will face a shortage of 5.5 million AI engineers in 2025, compared with 4.3 million in 2022. The report said that in 2025 it will be possible to fill only one out of 2.6 AI-related job positions.

“China always highlights its AI development but I think the country is seriously lacking mathematicians,” Shi Yuzhu, chairman and founder of the Giant Network Group, said in a speech in Wuxi on Monday. “The shortage of computational mathematicians will continue to be a bottleneck for the future development of China’s AI sector.”

Shi said in recent years, his company has used AI technologies to develop most of its online games and to monitor players’ responses.

He added he had donated 50 million yuan (US$7 million) to his alma mater, Zhejiang University, five years ago and encouraged it to groom more AI talent.

Technology gap  

Last month, Tesla’s founder Elon Musk told CNBC that China is lagging about 12 months behind the US in terms of AI development. He said it’s hard to say whether and when China can narrow the gap.

Elon Musk in Shanghai in November 2021. Photo: Xinhua

A Chinese IT columnist surnamed Wang writes in an article that the US has strengthened its leading status in the AI sector over the past two years, especially after the Microsoft-backed OpenAI launched ChatGPT last November. 

Wang says US firms have huge funds to build and train their AI programs. He says the English-speaking world also enjoys an advantage as it has accumulated a large database of English documents over the past century.

Qiu Xipeng, head of the Fudan University’s research team that is developing a ChatGPT-like model called MOSS, said on May 31 that OpenAI’s GPT-4 is far more advanced than Chinese chatbots, which cannot catch up within months. 

Zhang Zhen, founder of Beijing Whaty Technology, said any breakthroughs in AI chatbots must be done by algorithms and have nothing to do with computing power.

Zhang said other firms can catch up with GPT-3.5 within a year only if they can hire OpenAI’s core software engineers.

On May 5, the Chinese Communist Party (CCP)’s Central Financial and Economic Affairs Commission, in a meeting, chaired by party secretary Xi Jinping, called for boosting the AI sector. 

The Beijing municipal government issued a document on May 19 and two more on May 30 to support AI firms. Other cities such as Shanghai, Shenzhen and Chengdu also unveiled their supportive measures.

Read: Nvidia to turn Taiwan into a world-class AI hub

Follow Jeff Pao on Twitter at @jeffpao3

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Asia’s economic heft keeps Russia’s economy afloat

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Thirty-seven countries have imposed economic sanctions on Russia since its invasion of Ukraine in February 2022. The breadth of this campaign has few precedents in recent history. 

The sanctions covering finance, energy, technology, travel, shipping, avionics and commodities are aimed at one of the 10 largest world economies.

Yet the economic pressure on Moscow is by no means as hermetic as previous anti-war sanctions campaigns, such as the UN sanctions against Iraq after Saddam Hussein’s 1990 invasion of Kuwait.

One year after their imposition, several things are clear. Sanctions have damaged the Russian economy and its future growth prospects. But they have neither caused its collapse nor helped to end the war in Ukraine.

There’s been a lot of focus on how US dollar dominance facilitates Western financial sanctions. But the mixed results of the economic campaign against Russia demonstrate that a powerful countervailing trend has gone largely unnoticed: the rise of Asian commercial power as a facilitator of trade diversion that blunts Western sanctions.

Modern economic sanctions were created in the early twentieth century at a time of undisputed European mastery of the world economy, a mantle subsequently passed to the United States. This Western economic dominance lay behind the expansion of sanctions during the Cold War period. But the global economic center of gravity has since moved towards the East.

In 2021 Asian economies constituted 39% of global nominal GDP, making them the single largest continental bloc. Asian exports constituted 36% of global exports, while the five largest Asian economies together — China and Hong Kong, Japan, South Korea, Singapore and India — accounted for a quarter of all global imports. 

Asia today constitutes three-quarters, and China and India fully half, of global year-on-year GDP growth.

The 2022 sanctions campaign against Russia has exposed the strategic consequences of this shift. Sanctions against Moscow were intended, as one US National Security Council official put it, as a form of economic “shock and awe.” Yet after a brief financial crisis, Russia rerouted much of its trade towards Asian economies and weathered the initial sanctions onslaught.

Asian economies have acted as alternative destinations for Russian exports as well as new sources of imports. Trade links with China, India, Turkey, Gulf states and Central Asian countries have buoyed the Russian economy. Bilateral trade between Russia and China grew 29% in 2022 and 39% in the first quarter of 2023. 

An oil pump-jack at an oil and gas field in the Krasnodar region of Russia. Vitaly Timkiv / Sputnik

It may reach US$237 billion by the end of 2023 — a sum larger than China’s total bilateral trade with economies such as Australia, Germany or Vietnam. In 2022, Russian trade with the United Arab Emirates rose by 68% while trade with Turkey increased by 87%. Russo–Indian trade surged by 205% to US$40 billion.

Export diversion has been a lifesaver for Russian energy sales, which constitute a large share of its trade. In January 2022 European countries imported 1.3 million Russian barrels per day while Asian customers purchased 1.2 million. By January 2023 Russian sales to Europe had dropped below 100,000 barrels per day but exports to Asia had surged to 2.8 million.

Asian demand has more than substituted for the loss of oil exports to Europe. India has become the single largest purchaser of Russian seaborne crude, buying more than 1.4 million barrels per day since the beginning of 2023. 

Chinese importers are not far behind, buying between 800,000–1.2 million barrels per day in 2022. In one year, India, China, Turkey and the Gulf states have entirely replaced European demand for Russian oil exports.

Asian exporters have also filled part of the gap left by Western suppliers of advanced manufacturing and high-tech equipment. Chinese firms now account for 40% of new car sales and 70% of smartphone sales in Russia. 

The withdrawal of Western foreign direct investment has severely impacted the domestic car industry. Russia has shifted to importing used European and Japanese cars through third countries, with new cars mainly coming from China.

China and Hong Kong have become key suppliers of microchips, which Russia began to stockpile before the war. In 2022, Russian companies shifted to importing more advanced chips, with the value of semiconductor and electronic circuit imports rising by 36% between January and September compared to 2021. 

It remains to be seen how effective these import channels will be in the long run. But in the short run, Western export controls on technology have not created a chip famine in Russia.

Russia’s trading partners in the Eurasian Economic Union have also played a role in bypassing technology export restrictions. Central Asian economies are active as conduits of parallel imports and transit trade. 

The European Bank for Reconstruction and Development concluded that while Russian trade with the United States, United Kingdom and European Union has dropped significantly, “EU [and] UK exports to Armenia, Kazakhstan and Kyrgyzstan… increased markedly in a pattern consistent with [the] rerouting of trade to Russia.”

This rerouting effect through Central Asia is noticeable in imports of machines and chemical products. By October 2022 year-on-year increase in exports to Russia from China, Belarus, Turkey, Kazakhstan, Kyrgyzstan and Armenia nearly equaled the fall in European, US and UK exports to Russia.

A pipeline from Russia across North Korea to South Korea is still a long way off. Photo: iStock
The direction of Russian gas pipelines is shifting from west to east. Photo: iStock

By acting as ersatz suppliers to the Russian economy, as substantial new customers for its commodity sales, and as price-setters for Russian oil exports on global markets, Asian economies have considerably reduced the impact of Western sanctions. 

While the sanctions have lowered Russia’s growth potential, its economy has been sustained by a major trade realignment. The participation of Japan, South Korea, Taiwan and Singapore in financial and technology sanctions has had little effect, partly because commercial ties between these East Asian states and Russia continue in manufacturing and energy trade. 

Asia’s sanctions-blunting commercial power, therefore, rests primarily with China and India and several Middle Eastern and Central Asian economies. These geo-economic realities seem bound to complicate the future Western use of sanctions.

Nicholas Mulder is Assistant Professor of History and Milstein Faculty Fellow at Cornell University. He is the author of The Economic Weapon: The Rise of Sanctions as a Tool of Modern War (2022).

This article was originally published by East Asia Forum and is republished under a Creative Commons license.

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The false and failed logic of Western sanctions

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In February 2022, a war began between Russia and Ukraine. On paper, the odds were lopsided. Russia had the second most powerful military in the world, while Ukraine ranked between Vietnam and Thailand.

Many analysts expected a short, brutal war and Russian annexation. What we got was a long, bloody war, with the sides much more evenly matched.

It is not out of the realm of possibility that Ukraine will end up reclaiming control over not just the Donbas but perhaps even Crimea.

The United States and its allies in Europe and Asia leaned heavily on non-military forms of pressure. They instituted one of the most comprehensive packages of economic sanctions in history.

These included freezing Russian assets — such as the foreign exchange reserves held by the Russian central bank in foreign central banks — and the expulsion of Russian banks from the SWIFT interbank payment network. 

Major restrictions on goods and services trade were also imposed. The sanctions, obviously, did not stop the war, but they have evened the odds.

The days when a middle-income power like Russia could hope to be self-sufficient in military production are long gone, particularly given the technological requirements for modern weaponry. Western sanctions crippled Russia’s ability to replenish its arsenal. This has made a real difference for Ukraine. 

It is now likely that Russia will have to limit operations to conserve ammunitions that it cannot replace at the rate it needs. The medium-term impact of the sanctions regime on technology-intensive sectors like aviation is also starting to tell.

The long-run consequences of Russia being unplugged from the global exchange of technology can be seen in the estimates of potential GDP growth.

A country of its income level — per capita income is roughly on a par with China — ought to be able to manage respectable rates in the mid–single digits. Instead, Russia has a gloomy future of 1% growth, while its population is both aging and shrinking.

The turmoil in global commodity markets, as Russian gas has been withheld, revealed that disconnecting a large country from the world economy comes with serious consequences.

A sober analysis would show that these consequences could be contemplated in the event of armed conflict — a Chinese invasion of Taiwan for example — but should not become a regular tool of statecraft.

A simulated invasion of Taiwan. Both the US and China would incur heavy losses in a conflict. Image: Facebook

Unfortunately, that is precisely what policymakers are now putting into practice. Export controls are often considered an entirely separate phenomenon from sanctions, but economically speaking they are very similar.

Controls on “sensitive” products — like extreme ultraviolet lithography machines necessary to produce semiconductor chips — have been put in place to prevent “Western” technology from reaching China. 

Washington, not content to impose its own bans, is strong-arming its allies into complying with a far-reaching set of restrictions. Beijing’s response is to speed up plans to develop a relatively autonomous semiconductor industry.

It is sometimes argued that it might be possible to devise a regularized system of sanctions to deter perceived as bad behavior that would not necessarily need to be put in place: a financial nuclear deterrent. But a resurrected Cold War logic of mutually assured destruction does not translate neatly to the logic of economic sanctions.

If a would-be antagonist of the United States is aware of the likely actions that Washington might take in the event of a conflict — like seizing its financial reserves held overseas — the antagonist nation will do everything to avoid facing these penalties prior to the outbreak of conflict. Some costs are unavoidable, but many can be minimized with preparation.

A world in which sanctions are routinely expected is one in which sanctions will become ineffective.

If sanctions and export controls become a banal tool of interstate competition, they will not only lose their potency; they will damage the global order they are supposed to protect.

The Biden administration suggests its new approach that combines aggressive industrial policy at home with strong economically coercive measures abroad will, in the words of the US National Security Advisor Jake Sullivan, “build a fairer, more durable global economic order.”

While it is legitimate to contemplate the use of sanctions in a scenario in which China turns to military means to resolve the Taiwan question, the export controls imposed by the West have little deterrent value.

The region with the most to lose from this scenario is Asia, which lies at the heart of a global economy built on the free movement of goods and capital, following economic rather than political logic.

Some countries might gain from the relocation of foreign investment away from China towards more politically friendly territory. But an economic order that is ruled by geopolitics will make the region, which depends on a production model characterized by complex international value chains, poorer.

Photo: Reuters/Jason Lee
Washington is scrutinizing more and more Chinese investments in the US economy. Photo: Agencies

The great and under-appreciated achievement of Bretton Woods was to divorce security concerns from economic ones. Japan was incorporated into the global economy through a system of clear rules that were in the mutual interests of both Japan, as a rising economic power, and the established powers of Europe and the United States.

The endeavor to incorporate Japan into the rules-based order was so successful that it is easy to forget that it was not inevitable.

The challenge of finding a durable modus vivendi between China and the United States is admittedly of another order of magnitude. But the catastrophe of the interwar years is a reminder of what happens when a rules-based order breaks down.

No set of institutional rules can prevent a country from behaving irrationally, as Russia did. But the economic order can be organized around principles that maximize the benefits of peaceful engagement.

Resurrecting and strengthening that order is the most important task facing Asia and the world.

Tom Westland is a Postdoctoral Researcher at Wageningen University and a Non-Resident Fellow at the East Asian Bureau of Economic Research.

This article was originally published by East Asia Forum and is republished under a Creative Commons license.

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Local tech CEO shows how Ukraine can beat foreign rivals

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Boosteroid founder and CEO Ivan Shvaichenko is a prime example of how Ukrainian private companies play a pivotal role in the nation’s David-versus-Goliath battle against Russia’s far superior military force and whose inherent dynamism allows them to leapfrog  conglomerates like Alphabet, Amazon and Microsoft in innovation and applied technology.

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Boosteroid founder and CEO Ivan Shvaichenko speaks to Capitol Intelligence/CI Ukraine along with company general counsel Vladyslav Kosmin in Kiev and Kharkiv, Ukraine]

In a little more than seven years, Kharkiv native Shvaichenko, 40, built his Kiev-based Boosteroid cloud game-hosting company into the third-largest in the world after XCloud and Japan’s Sony PlayStation Cloud Gaming, with operations throughout the United States, Canada and Europe.

The 85 employees of Boosteroid – like everyone in Kiev and Kharkiv – come into work every morning notwithstanding nightly air-raid sirens and voice warnings of incoming Russian ballistic missiles and drones. The streets of Kiev and Kharkiv are as busy and vibrant as before the war, the only difference being that the locals are as grumpy as young parents with colic infants.

Boosteroid’s success most recently culminated in signing a 10-year partnership agreement with Microsoft pushed through by no less than its president and vice-chairman, Brad Smith.

On top of its market share in North America and the European Union, Boosteroid is in the process of opening in the Central Asian markets of Kazakhstan, Uzbekistan and Azerbaijan; Africa’s most populated nation Nigeria; and the growing consumer market of mineral-rich Indonesia.

In fact, Shvaichenko’s stated goal is to bring Boosteroid, now with a market value of between US$500 million and $1 billion based on fair market value, to Nasdaq.

“It’s not if but when,” Shvaichenko said regarding a US Nasdaq listing of his company that he describes as the Netflix of gaming.

Even with daily missile attacks, Shvaichenko and his legal team headed by Vladyslav Kosmin and Artem Skoryi were instrumental in persuading EU Competition Commissioner Margrethe Vestager to green-light Microsoft’s $70 billion acquisition of Activision Blizzard that US Trade Commission chairwoman Lina Khan underhandedly colluded with the UK Competition Market Authority’s Sarah Cardell to block on monopoly grounds.

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Amazon owner Jeff Bezos speaks to Capitol Intelligence using CI Glass at the National Press Club. Washington, DC. Sept. 17, 2014

Microsoft is certain to appeal the FTC and CMA decisions, including on constitutional grounds, in US federal court and in the high court of the UK.

“We were in contact over 21 times with the EU Competition on the Microsoft/Activision deal, explaining why the merger would help increase competition and not hinder it,” Kosmin said.

In fact, Japan’s PlayStation spared no expense in lobbying the FTC and CMA to block the merger between Microsoft’s Xbox unit and Call of Duty maker Activision even though the combined Xbox and Activision would be half the size of PlayStation.

Khan, the UK-born chairwoman of the FTC, is allied with anti-business, far-left “progressive” Democrats led by US Senator Elizabeth Warren as opposed to the more bipartisan and mainstream chairwoman of the US Senate Judiciary Subcommittee for Antitrust, Senator Amy Klobuchar.

Another example of a dynamic Ukrainian company is Kiev-based Nova Poshta, a combination of eBay, Amazon and Alibaba that has become a critical lifeline for Ukrainian companies and citizens sending and receiving goods around Ukraine and to Europe, the United States and Asia after the Russian war closed off all air cargo operations and hampered traditional mail.

Nova Poshta beats out all its competitors like Memphis, Tennessee-based FDX Corporation, Seattle-based United Parcel Service, and Deutsche Post–owned DHL in customer satisfaction and has rejected multiple takeover bids from above-mentioned rivals and e-commerce giants.

Colonel Alexander O, a logistics commander for Armed Forces Ukraine (AFU), said the military and the private sector had been forced to work in parallel to overcome unprecedented obstacles thrown up by the war.

For the military logistics, Ukraine is not only teaching the Pentagon how to supply and feed an army using decentralized logistics but showing Amazon owner Jeff Bezos how to use drones to deliver critical supplies to frontline fighters.

What also made the Ukrainian army so effective against their Russian enemy was its ability to adapt innovation and technology at a pace not seen since World War II.

Colonel Alexander O said he was very interested in adapting hyper-ledger distributed technology (blockchain) developed by market leader Digital Asset Holdings and used by companies such as Dutch shipping giant Maersk.

“Right now, we use paper for orders because the Russians cannot hack it, but secure communication via blockchain would be ideal,” he said.

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Ukraine Deputy Prime Minister and Minister of Digital Transformation and Innovation Mykhailo Fedorov filmed by Capitol Intelligence/CI Ukraine using CI Glass at the presentation of the Diia e-government platform in Washington DC on May 23, 2023

Ukraine’s deputy prime minister in change of innovation and digitalization, Mykhailo Fedorov, recently traveled to Washington to demonstrate how his country has developed the world’s leading e-government system with its Diia platform.

It provides 360-degree citizen services for everything from real-time health records to passports and driver licenses, fine and tax payments, and even allows citizens to report enemy movements.

The Diia platform was developed by Ukrainian-based programmers led by Igor Dubinsky using open-source software and the goal of meeting or exceeding the leading e-government platforms of Estonia and Lithuania.

Peter Premk, a consultant to Slovenian Finance Minister Klemen Bostjancic, said he is proposing that his country ad0pt Diia’s e-health system.

Fedorov, who many tout as a future president of Ukraine after Volodymyr Zelensky, was entirely unaware that his Ted Talk–like presentation of the groundbreaking Diia platform to a standing-room-only crowd of government officials and corporate lobbyists added fuel to the acrimonious battle of influence between US International Development Finance Corporation (DFC) CEO Scott Nathan and US Agency for International Development (USAID) administrator Samantha Power on who will lead non-military support for Ukraine and the $400 billion to $500 billion needed to rebuild the country.

In fact, the battle between aid and investment is currently being waged within the US DFC by the agency’s chief of staff and former State Department official, Jane Rhee, who wants the agency to be more of “social impact” development organization rather than carry out its congressionally mandated mission as the lender of last resort for private companies in geopolitically important countries such as Ukraine.

Shvaichenko has also been able to unite opposing political forces such as Regional Chairwoman Tatyana Yegorova-Lutsenko and Mayor Ihor Terekhov in his native Kharkiv to work together to bring US corporate investment to Ukraine’s industrial heartland.

Yegorova-Lutsenko, who is the top elected official in the Kharkiv region, said she will include the participation of major Ohio-based businesses such as Cincinnati-based Procter & Gamble, Akron-based Goodyear Tires, and Columbus-based American Electrical Power in a soon to be finalized partnership agreement between Kharkiv Region and the State of Ohio negotiated directly with Governor Mike DeWine.

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harkiv region (oblast) chairwoman Tatyana Yegorova-Lutsenko speaks with Capitol Intelligence/CI Ukraine using CI Glass on her talks with Ohio governor Mike DeWine to forge partnership agreement between the region of Kharkiv and the State of Ohio

The partnership will also twin Ohio State University with Kharkiv University and follows on an earlier Sister City agreement between the Kharkiv and Cincinnati.

The soft-spoken mayor of Kharkiv, Terekhov, said it is local and regional authorities that must take the lead in promoting and facilitating foreign investors and not the central government in Kiev.

“I will do everything to help companies establish themselves in Kharkiv and all we expect in return are new tax revenues,” he said.

Not only has Shvaichenko nudged Yegorova-Lutsenko and Terekhov on to the same page regarding foreign investment in Kharkiv but also to agree to rename a street to mark the birthplace of Zbigniew Brzezinski, former US president Jimmy Carter’s national security adviser and Cold War architect instrumental in bringing down the Soviet Union.

Shvaichenko said no one should be surprised that Ukrainian companies can operate and even grow market share, because war makes everyone focus “on results and not process.”

Peter K Semler is the chief executive editor and founder of Capitol Intelligence. Previously, he was the Washington, DC, bureau chief for Mergermarket (Dealreporter/Debtwire) of the Financial Times and headed political and economic coverage of the US House of Representatives and Senate.

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Russia slowly shifting toward a total war economy

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As Russia’s progress in Ukraine has stalled, with enormous losses in material and people, the frustrated head of the Wagner mercenary force Yevgeny Prigozhin has called for Russia to shift to a total war economy:

The Kremlin must declare a new wave of mobilization to call up more fighters and declare martial law and force ‘everyone possible’ into the country’s ammunition production efforts. We must stop building new roads and infrastructure facilities and work only for the war.

His words echo similar sentiments expressed by the head of Russia’s state broadcaster RT, Margarita Simonyan – an influential supporter of the Russian president, Vladimir Putin – who said recently:

Our guys are risking their lives and blood every day. We’re sitting here at home. If our industry is not keeping up, let’s all get a grip! Ask anyone. Aren’t we all ready to come help for two hours after work?

Already facing Western sanctions since its annexation of Crimea and occupation of territory in Ukraine’s eastern provinces in 2014, Russia has had to adapt to life under an increasingly harsh series of economic punishments.

And, while Putin had apparently planned for a relatively short “special military operation”, this conflict has become a protracted and expensive war of attrition.

The Economist has estimated Russian military spending at 5 trillion rubles (US$60.5 billion) a year, or 3% of its GDP, a figure the magazine describes as “a puny amount” compared to its spending in the second world war. Other estimates are higher – the German Council on Foreign Relations (GDAP) estimates US$90 billion, or more like 5% of GDP.

But the international sanctions have hit the economy hard. They have affected access to international markets and the ability to access foreign currency and products. And the rate at which the Russian military is getting through equipment and ammunition is putting a strain on the country’s defense industry.

So the Kremlin faces a choice: massively increasing its war efforts to achieve a decisive breakthrough, or continuing its war of attrition. The latter would aim to outlast Ukraine in the hope that international support may waver in the face of a global cost of living crisis.

Equipment shortages

Russia has lost substantial amounts of arms and ammunition.

In March 2023, UK armed forces minister James Heappey estimated that Russia had lost 1,900 main battle tanks, 3,300 other armored combat vehicles, 73 crewed, fixed-wing aircraft, several hundred uncrewed aerial vehicles (UAVs) of all types, 78 helicopters, 550 tube artillery systems, 190 rocket artillery systems and eight naval vessels.

Wanted: more modern tanks. Photo: Russian Defense Ministry Press Service via AP

Russia has to contend with several important military-industrial challenges. For one, its high-technology precision-guided weapons require access to foreign technology.

This is now unavailable – or restricted to sanctions-busting deals which can only supply a fraction of what is needed. Most of the high-tech electronic components used by the Russian military are manufactured by US companies.

So it has to substitute these with lower-grade domestic components, which is probably why the Russian military is using its high-tech weaponry sparingly. But the artillery shells on which it has been relying are running short.

US think tank the Center for Security and International Studies has reported US intelligence estimates that since February 2022, export controls have degraded Russia’s ability to replace more than 6,000 pieces of military equipment.

Sanctions have also forced key defense industrial facilities to halt production and caused shortages of critical components for tanks and aircraft, among other materiel.

Make do, mend – and spend

There are clear signs of increasing efforts to address the shortages.

According to a report in the Economist, Dmitri Medvedev, deputy chairman of Russia’s security council, has recently announced plans for the production of 1,500 modern tanks in 2023. Russian news agency Tass reported recently Medvedev also plans to oversee a ramping up of mass production of drones.

The government is reported to be providing substantial loans to arms manufacturers and even issuing orders to banks to do the same. Official statistics indicate that the production of “finished metal goods” in January and February was 20% higher compared to the previous year.

The GDAP reported in February: “As of January 2023, several Russian arms plants were working in three shifts, six or seven days a week, and offering competitive salaries. Hence, they can increase production of those weapon systems that Russia is still able to manufacture despite the sanctions.”

So it appears the Kremlin is playing a delicate balancing act of redirecting significant resources to the military and related industries while trying to minimize the disruption of the general economy, which would risk losing the support of large sections of the population.

There appears to be little shortage of consumer goods in Russia, but shoppers say quality has deteriorated. Photo: EPA-EFE via The Conversation / Maxim Shipenkov

The International Monetary Fund has projected Russia’s economy to grow by 0.7% this year (which would trump the UK’s projected growth of 0.4%). This will largely be underpinned by export revenues for hydrocarbons as well as arms sales to various client countries happy to ignore Western sanctions.

Meanwhile diversifying import sources has kept stores stocked. However, Russian public opinion pollster Romir has reported that while most people aren’t worried about the absence of sanctioned goods, about half complained that the quality of substituted goods had deteriorated.

So ordinary Russians – those who haven’t lost loved ones on the battlefield or to exile – remain relatively sanguine about everyday life. But a longer, more intense conflict, requiring a shift to a total war economy, could be a different matter altogether.

Christoph Bluth is Professor of International Relations and Security, University of Bradford

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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Why are Digital Exports important for the Digital Economy?

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Entrepreneurial approach adopted by MDEC to building out global networks
Provide founders a support system that understands challenges they face

Malaysia Digital Economy Corporation (MDEC), an agency operating under the Ministry of Communications and Digital, stands at the forefront of Malaysia’s digital economy development. Its paramount mission is to empower businesses and propel…Continue Reading