Dr. Richard Connolly joined me on the Acquisition Talk podcast to discuss a wide range of issues, including Russia’s GPV modernization programs, the effect of sanctions, whether Russia can produce hypersonics in large numbers, dependence on oil, access to commercial technology, and even acquisition reform in the United Kingdom. Dr. Connolly is the director of the Center for Russian, European, and Eurasian Studies (CREES) at Birmingham University, and he is an Associate Fellow at Chatham House.
The discussion features an argument Dr. Connolly made about how to convert Russian military spending from rubles to dollars. The standard methodology uses the Market Exchange Rate (MER), which puts Russia’s economy on the same level as Spain’s, and their military spending comes out to around $61 billion. That may give the misleading impression that Russia’s military capability is perhaps less than one-tenth that of the United States, which spends over $700 billion. Dr. Connolly convincingly argues that the Purchasing Power Parity is a better measure, in which case Russia’s perceived military spending increases to $160 billion.
The MER reflects the supply and demand for rubles in US dollars to balance trade. The problem is that traded goods are not reflective of prices Russia’s military planners face. For example, food, housing, haircuts, and worker salaries are not reflected in the MER. Even after adjusting for the MER, consumer prices are less than half as much as they are in the United States — meaning Russia’s military planners can afford more.
The PPP provides a more apples-to-apples comparison for the quantity of real resources made available to military planners. Preliminary results from Dr. Connolly’s efforts to construct a PPP for military inputs show that it is close to the same value as the PPP for consumer goods. Dr. Connolly concludes that the PPP is roughly right whereas the MER is precisely wrong. The same is likely true of other low-income countries like China and Iran.
Podcast annotations
Dr. Connolly provided a good example of how sanctions impacted Russia’s defense industry:
… other areas that are important to military procurement are machine tools, which enable serial production of small components so you can produce weapon systems on a large scale. This is a real weakness of the Russian defense industry. Prior to 2014, any machine tool that the Russians used — any high precision machine tool — would come from Germany or Japan. It is precisely those machines now that are denied to them by the sanctions.
Because Russia is struggling to create domestic sources for its machine tools, Dr. Connolly doesn’t see it feasible for the country to produce in any substantial number the new and advanced types of systems:
I question — and I don’t have access to classified information I can only go off what I read in the open-source literature — I question whether the Russians have the up-to-date machine tools to engage in that large scale, high tech, production. If you do have a large labor-intensive defense industry with older machine tools, that lends itself to producing [modernized models of older systems]…
I think that applies to things like hypersonic weapons. We see officials talking up the apparent missile gap in their favor at the moment. My own guess, and again I don’t have access to certain information, but from everything I know about the Russian defense industry, it would surprise me a lot if they’re able to produce large numbers of hypersonic weapons, for instance.
A couple things to mention. First, I think the United States also needs a program to invest in enabling technologies like machine tools, lab equipment, test chambers, and so forth. Such capital equipment used to be an overhead expense for defense contractors — meaning you had to have existing defense work to expense the capital — and are increasingly being charged as direct line items to contracts. This arrangement locks in existing suppliers and keeps out potential entrants.
If the government created something like a working capital fund for complex tooling and other equipment, then more companies could get into development work — pay for access on a shared basis — and then build real prospects to invest in the capital themselves. Another benefit is providing government workers some experience to build, maintain, and use such equipment, which would increase their organizational capacity to contract wisely with suppliers without reference to burdensome cost and business data.
Second, Russia could overcome the effect of sanctions on machine tools by outsourcing quantity production to China. Russia could be something like the senior design engineers and China the senior production engineers. But certainly China benefits most from such an arrangement, considering they will get access to Russian intellectual property — replicated at zero cost — while Russia will not get a hold of China’s physical capital — which is stuck in China. Even if Russia got the specs to foreign machine tools, they may not have the supporting economic structures to build them reliably at this point.
Fall of the Soviet Union
Here’s another good part. I asked Dr. Connolly whether he believed the story that Reagan’s military buildup in the 1980s accelerated the collapse of the Soviet Union in its attempt to keep up. “I don’t buy into that narrative at all. I think it’s a much smaller part of a more extraordinary series of events.” He continues:
Another big problem is that the Soviet Union became a major oil exporter in the 1970s and it became very hooked to the oil needle. The inefficiency in the Soviet economy really started happening in the 1960s, but by the 1970s as the Soviet Union started exporting more oil, massive oil revenues came in which they never enjoyed before. They could buy food, civilian consumer goods, and they’re able to do a lot with the oil earnings.
The 70s was great for the Soviet Union, with the conflict in the Middle East oil prices were high and the Soviet Union — despite the fact it was becoming less productive domestically — it looked like it never had it so good.
And so the subsequent oil price crash shocked an already declining economy. Perastroika was the attempt to deal with the broader economic problems, and would likely have happened regardless of United States military spending. I think that’s broadly correct. The Soviet Union had nothing to fear of a Western invasion, considering they still had ample nuclear capability. The real pressure had to be internal — probably a combination of economic, political, and social.
Thanks, Dr. Richard Connolly!
I’d like to thank Dr. Connolly for joining me on the Acquisition Talk podcast. Read his War on the Rocks article on Russia’s military expenditure, based on a longer paper written for CNA. Watch his great CSIS interview on Russia. Check out his books, Russia’s Response to Sanctions, Post-Soviet Affairs, and The Economic Sources of Social Order Development in Post-Socialist Eastern Europe. See more of his publications here, including an excellent procurement update on the GPV 2027 program, Russia’s New State Armaments Program.
And here is the link to a documentary about Russian tank production. It’s a ten part series, and not only shows a good deal about tank production, but also has very intimate scenes from the daily lives of its workers. Dr. Connolly mentioned that it would surprise us how labor intensive and outdated Russian production is — but I’ve heard much of the same from the US Army Lima Tank Plant, though I haven’t walked the line myself.
Leave a Reply