November 28, 2020: The Russian economy has taken a beating because of low oil prices and Western economic sanctions imposed after Russia invaded Ukraine in 2014. The Russian advance in Ukraine has been stalled since 2015, after Crimea and parts of eastern Ukraine had been seized. Growing support from the West helped Ukraine inflict a catastrophic defeat on the Russian military. Not in terms of casualties or equipment losses, but by contributing to crippling Russian defense industries and Russian plans to modernize their forces and replace a lot of Cold War era weapons still in use.

Russia estimates that the loss of access to Western technology and Ukrainian components cost their military over $25 billion so far. That was the cost of replacing or doing without new components that used Western or Ukrainian tech. Locally made replacements were usually not as effective as what the Ukrainians were providing until 2014. These problems are generally unmentioned side effects of the ongoing Ukraine crisis. The damage done to Russian weapons production because of their dependence on Ukraine was far greater than the Russians realized. Although only 4.4 percent of Russian imports were from Ukraine, many of those imports are key components that proved to be crucial for the Russian armaments industry and the current for the Russian modernization program.

These industrial links date back to Soviet times and many remained active after the USRR collapsed in 1991. In many areas, Russian arms producers, and users are highly dependent on Ukrainian industry and most of these items could not be quickly or cheaply replaced by quickly activated Russian suppliers. This is mainly due to insufficient production capacity of Russian industries. The most severe shortages occur in key areas. Prominent examples include IBCMs, air-to-air missiles, aviation and engines for warships.

Then there are the Ukrainian made guidance systems used in Russian air-to-air missiles. This includes the infrared (heat seeking) guidance systems for short-range R-73 and medium-range R-27T. These missiles are the main armament for MiG-29, Su-27, Su-30 and Su-35 fighters.

One of the most important Ukrainian aviation suppliers is Motor Sich, which produces many of the new engines (and modernizes old ones) for the Mi-8/17 transport helicopters and Ka-50/52, Mi-28 and Mi24/35 attack helicopters. Despite considerable effort, Russian industry has not been able to produce the same quality and quantity of helicopter engines for planned aircraft production over the next three years. Without Ukrainian engines, Russia will be unable to produce the number of new helicopters for their own forces and export orders. They will also be unable to refurbish older engines to keep existing helicopters operational.

A lot of Russian combat vehicles are using Ukrainian components for fire control, laser warning and other complex electronic and optical systems. Even if the Russian industry has alternative sources, getting them up to speed takes time. Meanwhile, Ukraine widened its lead over Russia in many areas, especially fire control and guided missiles. Worse yet for Russia, Ukraine is making sales at the expense of Russian competition.

By 2017 Russia was also facing problems with population decline, corruption, an increasingly inefficient police state and an exodus of its best educated and most entrepreneurial citizens. Russia was no longer a great power and, as much as Russians would talk about regaining their superpower economic status, that is not going to happen. To put it into perspective, consider how smaller (especially in terms of population) countries like Australia managed to pass Russia in GDP. Russia still has six times as many people as Australia but Australia has far less corruption and a much more efficient government and economy. The Australian population is growing and its GDP in 2016 was the same as that of Russia at $1.3 trillion. The Australian GDP was growing at least twice as fast Russia’s.

The Russian economic situation looks a bit better when you use "purchasing power parity" (PPP). This is a concept that recognizes, and calculates the different costs, for the same things, in each country. Most people know this by the more familiar term, "cost of living adjustment." It's more expensive to live in Moscow than in some of the more remote parts of Russia. Australia is largely urban and the population far better educated and paid. With more unemployment and lower pay it's much less expensive to recruit, equip and maintain armed forces in Russia than it is in Australia. But in international terms (ignoring PPP and just counting everything in dollars, which is the standard for international trade and especially for the oil market) Australia has already passed Russia in GDP and continues to increase its lead.

International economists at the World Bank and IMF (International Monetary Fund) see Russian GDP continuing to fall as long as low oil prices and sanctions remain as they are. In 2013 Russian GDP per capita (person) was $16,000 compared to $7,000 for China. By 2020 both nations will have about the same GDP per capita of about $12,000. These trends are expected to continue for the next few years and Chinese GDP per capita will continue to grow faster than Russia’s.

The average Russian is well aware of the falling living standards since 2013 and that fuels growing unrest against the government. For many Russians, relative affluence is a recent development. This began after 1999, when 37 percent of Russians were living below the poverty line (less than $2,000 a year per capita). A new government, led by Vladimir Putin, put the economy first and by 2014 only 2.4 percent of Russians were living in poverty. In 2015 that went up to 2.7 percent and stayed there for two years and then declined a bit to 2.3 percent. Most of the economic losses were being suffered by the new middle class who had been doing quite well until 2014. Many of these middle-class families are sliding towards poverty.

The lower standards of living are felt in the military, where the program to improve housing and other facilities for troops and their families was disrupted just as it really got going. For officers and troops, the losses are even more keenly felt. Much older equipment is still in use and new combat vehicles, ships and aircraft are often flawed and crippled by unreliable components. After a day of dealing with that you go back to your decrepit barracks or shabby family housing. These are not happy times in Russia.