September 25, 2022
Two economic lessons from the Russo-Ukrainian War
The Russo-Ukrainian conflict is now firmly in a new phase. The Russians lost the strategic element of the war long ago, but now they have managed to lose operationally and tactically. There are two important economic lessons to be learned from this war—one is about public spending on services, the other about free trade.
In its desire to befriend Western Europe, Ukraine agreed to participate with the NATO forces in Afghanistan. To do so, they needed training to reform their Soviet-style army into a modern, western army. Thus, in 2007, they began training a new style army.
The Soviet-style army, which Ukraine inherited, is wholly unsuited to the modern battlefield. These armies have virtually no sergeants, or non-commissioned officers. Junior leaders are not promoted from the ranks; that would be too politically dangerous. Instead, leaders are appointed from among a politically reliable officer corps. Technical competence takes a backseat to political reliability.
In contrast, western armies reward talented leadership, technical expertise and innovative problem solving by promoting soldiers to the ranks of non-commissioned officers. It is these people who train new soldiers and young officers. Ukraine’s government fully embraced this new army, and spent a decade and a half restructuring their forces.
When the Russian army invaded, they were met by small and medium-sized units that were fully equal of many NATO countries. While the expanding NATO alliance provided many new and lethal weapons to the Ukrainian forces, that was not the decisive factor in victory. It was the small unit leadership—sergeants and young officers—who made the difference. Had the Russians and Ukrainians swapped all their equipment with one another, Russia still would have lost.
The economic lesson is that if you wish to have an effective national defense, you need a modern western army. That is terribly expensive. It takes more than a million dollars and several years to train and equip a squad leader who commands ten soldiers. The most junior lieutenant costs a half a million dollars. A modern infantry company, with five officers, 25 sergeants and 90 men is easily a $75 million investment. Sustaining that force costs close to $30 million a year.
The full cost of fielding that force, particularly if it is deployed to battle, may be five times higher. Retirement and medical expenses for injured soldiers burden taxpayers for generations. It is worth noting that the last civil war pension recipient died in 2020. That was an extreme case, but the pension and healthcare expenses will continue for more than 75 years after a war ends.
Modern public services are costly because they typically rely upon significant human capital that has private sector options. Master sergeants and captains aren’t expensive because Congress is generous—they are expensive because the private sector pays well for their experience and talents.
This proposition extends to any government occupation with a private sector competition for talent. This means schools, parks, public safety, IRS case managers and all the other services government provides. This might seem like a trivial point, but a shocking number of elected officials seem unaware of it. The Russo-Ukrainian war provides a clear reason why it matters.
The second economic lesson of the war is about international trade. Many folks suppose that the point of international trade is to sell your products to foreigners. This, they believe, causes economic growth. That is badly mistaken. You trade in order to consume, not produce. A trade balance doesn’t cause economic growth. How could it; the global economy has doubled in the past 30 years; who are we trading with?
The sanctions placed against Russia are primarily on the importation of goods into Russia. We’ve placed only minimal restrictions on what they can export. Russia’s economy is small, a bit more than 1.0 percent of the global economy. They import nearly all necessities, except for petroleum, which they have in abundance.
The European Union restricts exports to Russia on military goods, particularly semi-conductors and computers, aviation and space related technologies, and navigation equipment. Without these items, the Russians cannot replace precision guided munitions, or repair weapons targeting systems, navigation devices, and many communications systems.
Imports of transportation parts and equipment have also been restricted. This means replacing parts for combat equipment like trucks, tanks or armored personnel carriers will be increasingly difficult. It is a reasonable guess that the Russian tanks captured by Ukraine are now receiving better maintenance and repair than the ones still in Russian hands.
These restrictions also affect factory production and put a strain on internal logistics. The Russian civil air fleet is probably operating well outside the manufacturers’ safety recommendations, and factories cannot even keep up with basic production needs. There are pictures of Russian troops in Ukraine equipped with the M1891 Moisin-Nagant rifles and steel helmets used in World War II. Sanctions on Russia have been broad enough to damage almost every part of their ability to wage war.
The war and sanctions have affected the Russian economy and people. Russia is in a downturn that is already far worse than the Great Recession. But this overstates the health of the economy. With exports minimally affected and imports restricted, Russia has been able to temporarily bolster key economic indicators by pushing cash into stocks and other securities.
That temporary fix is coming to an end, and their own central bank has warned of a deepening recession through the end of 2022. If the war ended today, and the sanctions lifted, it would still take the better part of a decade to fully recover. These sanctions do injure civilians. A deep recession is making life harder for Russian citizens, though the continued importation of food and medical equipment will limit the damage that broad sanctions cause.
Observers of the Russo-Ukrainian war can learn other valuable lessons. Most of these aren’t new, like a dictator invading a free, sovereign nation rarely ends well. However, the plain and obvious economic lessons are just too important to ignore. The two with the most salience for Americans are that, firstly, sustained, high-quality public services are costly, but maybe not as costly as not having them. Second, we trade in order to consume goods, not to sell them. This stunningly obvious point is perhaps the most misunderstood economic fact of our time.
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