European arms imports nearly double, US and French exports rise, and Russian exports fall sharply

(Stockholm, 11 March 2024) States in Europe almost doubled their imports of major arms (+94 per cent) between 2014–18 and 2019–23. Far larger volumes of arms flowed to Asia and Oceania and the Middle East in 2019–23, where nine of the 10 largest arms importers are. The United States increased its arms exports by 17 per cent between 2014–18 and 2019–23, while Russia’s arms exports halved. Russia was for the first time the third largest arms exporter, falling just behind France. The global volume of international arms transfers fell slightly by 3.3 per cent between 2014–18 and 2019–23, according to new data on international arms transfers published today by the Stockholm International Peace Research Institute (SIPRI), available at www.sipri.org.

“Video by Professor JK Galbraith, on the gifts that western sanctions have provided to Russia.”

It was an interesting, and well informed take on the effect of sanctions.

But...

It was about an article that he wrote early in 2023, about the initial effects of sanctions.

During the first year of this invasion (2022), Russian revenues surged, as oil, and especially natural gas prices surged. Gas was still flowing through NordStream. Mandatory restrictions on Russian oil and gas had largely not yet been put in effect. That party is long since over, as total Russian oil and gas revenues are now down nearly 2/3rds from 2021 (before this invasion).

The natural gas market to Europe (80% of Russian natural gas exports in 2021), is going away for good, as new infrastructure has already been completed to import more than enough new LNG to replace all that used to come from Russia, long term contracts (10-20 years) have been signed with new suppliers, and NordStream is flooded and rusting away on the sea bed.

That gas cannot physically be delivered to other customers, because the physical infrastructure does not exist to do so. Even the next new pipeline long planned for China (Power of Siberia 2, which was planned to start flowing in 2030, with a small fraction of Europe’s former volume) is now on hold, because Chinese funding has been withheld.

Pre-2022 invasion, refined petroleum products exports (Gasoline, Diesel, Kerosene, Jet fuel etc.) used to produce more total revenue for Russia than crude oil exports (which have a much lower profit margin per unit). At the very end of the period Professor Galbraith analyzed (December 2022), sanctions against Russian refined products began to be put in place (not fully until March of 2023).

Russia had built huge surplus refining capacity over many decades. It was a major employer and a major component of Government revenues. That industry is now in crisis, with the Russian Government having had to ban exports of gasoline completely. More than a third of Russian refining capacity has become redundant over the last year due to reduced throughput, and a major demolition program of drone strikes since January 2024 has begun against those facilities, as far from Ukraine as St. Petersburg (1,000 km).

For the most part, actual sanctions against Russian oil and gas, as opposed to voluntary reductions, were not imposed until after the timeframe considered in Prof. Galbraiths’ article, and during his study period, Russia had enjoyed an exceptional one time windfall from a temporary price surge.

Even during that period of surging revenue, war costs induced a “wartime” budget deficit on the Russian Government. Costs have risen significantly since then, and profits from oil and gas, in total, are now down about 2/3rds from 2021 (before this war), vs. the increase during the study period. Russia’s Government revenue in 2021 was more dependent on oil and gas revenue, than was Saudi Arabia’s.

Russia has made up for the wide gap by taxing oil and gas industries to the point of de facto nationalization, liquidating assets in their National Wealth Fund and gold reserves, cutting social spending like health care and education, and printing rubles at a more expansionary pace than we printed dollars during COVID. More widespread tax hikes across the economy are reportedly planned for after the election this Sunday.

The official interest rate in Russia is 16%. The ruble has become nearly a dead currency outside of Russia, and the Chinese Yuan now accounts for about half of loans in Russia, up from less than 4% before the current invasion. Chinese auto companies now dominate the auto market in Russia, with the four top selling models being Chinese (from none of the top five in 2021). Russia is not going from a Western colonized economy to an independent Russian economy, but rather to a Chinese colonized economy.

Russia has instituted programs modeled on the Communist Chinese, for stimulating their property sector, to pump up their macro GDP numbers in the near term, causing Chinese-like dislocations to develop in the Russian real estate market. The percentage of mortgages that are underwater (outstanding loan is higher than the current market value), where the owner is paying 80% or more of their income to meet payments, has skyrocketed.

Yes, there was a short term initial windfall, in the transfer of ownership of many business facilities in Russia from Global multi-national corporations, to new Russian owners. But rather than best of breed world beaters, those facilities will now be operated by those mafiosi with the best ties to Putin’s gang. The resulting corruption and inefficiency will be a drag on financial performance and quality.

“Ukraine’s attacks on Russia refineries is backfiring as a strategy to cripple Russia.”

I don’t see that at all.

A million barrels per day of throughput was taken off line in two nights. Key critical infrastructure was destroyed. The distillation tower in Russia’s largest refinery was burning like an inferno, 12 hours after the strike.

The guy in the video that you linked, waved away the impact, saying that Russia could ship crude to China, and re-import the refined products. That is ridiculously slow and expensive. The reality is that Russia will be logistically stressed just to replace local supplies of refined products from the nearest intact Russian refinery.

Because of its loss of export market share for refined product, Russia has significant slack refining capacity overall, but pipelines to move the bulk of the product cannot be moved when critical nodes are taken offline.

A Chinese fire drill of trucks, trains and ships being thrown together to redistribute products that used to flow through a fixed pipeline network is not free, and has limits on how much load can be redistributed.

Russia instituted a six month ban on gasoline exports, as a result of less destructive recent attacks on refineries, than happened over those two nights this week.

Russia has been forced to suddenly reallocate its Air Defense systems from its combat forces in Ukraine, to its refineries - but there are not enough such systems in existence to protect all the critical nodes in Russia’s oil infrastructure, and Russian Military assets will likely soon suffer additional losses as a result of their loss of protection.

Another consideration, is that refineries are built with a certain grade of crude oil in mind.

For example several refineries along the Gulf Coast were built to process the very heavy sour (high sulfur) crude from Venezuela. They produce a lot of asphalt and roofing tiles, but they are not well suited for processing very light and sweet crude oils, like Saudi, or what we get from fracking in America.

Yields, and thereby profit margins, will vary, processing different crudes at different refineries. Many can’t or won’t process certain grades.

Russia’s main export oil is their Urals grade. It is a mix of heavy sour oil of the Urals and the Volga region with light oil of Western Siberia. That mixing requires and extensive (and vulnerable) infrastructure, across vast distances (many time zones). The great distances are a major factor in why the Power of Siberia 2 natural gas pipeline has not been funded - more than a thousand miles of it would have to transit wilderness, where there are not even any roads.

Not all the refinery capacity, or the crude oil can be interchanged, making for more concentrated/specialized points of vulnerability than otherwise.

Refineries are not built often. After the fall of the Soviet Union more than 30 years ago, most Russian refinery construction was conducted by the International Oil Majors, with a lot of the expertise and manufacturing capacity for many key components residing outside of Russia.

Since the collapse of the Soviet system, there has been a dramatic reduction in the scale of Russian technical education. The depth of their bench for engineering expertise is nothing like it was during the late Soviet Union. That trend has accelerated sharply during the current invasion, as education and health care have been the biggest bill payers in the Russian budget trying to cover the wartime deficits.

Restoring damaged refineries is likely going to be a non-trivial challenge for Russia, and there is no way that they could possibly keep up with the huge scale and rapid pace of refinery damage, if current trends continue. Just since this thread was started a few days ago, three more refineries have been successfully struck and set on fire - Novokuibyshevsk, Syzran and Perviy Zavod (a Military facility).

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