Kamil Galeev Profile picture
Mar 9, 2022 65 tweets 19 min read Twitter logo Read on Twitter
Let's discuss Russian economy. Many underestimate its dependency upon technological import. Russia's so deeply integrated into Western technological chains that severing these ties will lead to its collapse. Sanctions are already effective and can be made even more efficient🧵 Image
Some argue "Russia doesn't produce anything". Not quite. Although industrial goods plas little role in its export, it produces a lot for internal market. This is a 1ГПКС mining machine produced by a Копейский машзавод - monopolist on mining machines for potassium and coal mines Image
Owner of this factory isn't a mafia boss. He's an engineer who worked for 20 years designing mining machines, has 41 patents, etc. BUT. What equipment do they use to produce these machines? An industrial machine MORI SEIKI VL-553 II - made by a German branch of a Japanese company Image
This shows how deeply Russia is integrated into the Western technological chains. What Russia produces is produced on Western industrial machines, with Western technologies, Western software and with Western details. That ofc includes military industry which uses this all, too
Consider Diana Kaledina, CEO of Baltic Industrial Company which makes industrial machines for military plants. She says Russia doesn't produce bearings, ball screws, drives, CNC systems, spindles. So she has to import it all, although as a military supplier she isn't supposed to Image
Ofc government pressures producers to be self-reliant and independent upon import. However, import-substitution (импортзамещение) is 95% PR. Producers and mid-ranked officials pretend to do "import-substitution" because Putin tells so. For this fake work they get real awards Image
Consider Svetlana Orlova, governor of Vladimir. In 2017 she presented new tractor designed and produced by a local factory under her wise leadership. A CEO wouldn't shut up about how much she inspired them all and guided to this great accomplishment in import substitution Image
"Our governor can guide, can inspire, can command. Several of our main branches of production are organised by her direct orders. One of her last commands is to make our own tractor. It is a huge work of scientists, engineers technicians for the last two years" said CEO Lebedev Image
President Putin ordered to launch import-substitution. Governor Orlova obeyed and commanded a local factory to create a Russian tractor. CEO obeyed and engineers designed a new amazing machine АНТ 4135F. That's how Russian vertical of power works Image
And yet, Russian tractor АНТ 4135F isn't Russian. It's a Czech tractor Zetor Forterra 135. I wanna clarify, it is not a copy of a Czech tractor. It literally *is* a Czech tractor. Russian plant buys tractor kits in Czech Republic, assembles them and pretends they're home produced Image
Here you see governor Orlova in Brno, Czech Republic. What is she doing there? Well, she's buying kits for her home-produced tractors. In 2017 she bough 100 kits from Zetor Tractor company, in 2018 - 450. That's how she's import-substituting. Putin must be proud Image
Of course, it was all investigated. Of course, dishonest CEO of Russian factory was arrested. Fortunately, they found out that the governor was innocent & didn't know about CEO's shady schemes. So she continued her hard work developing a new home-produced tractor - Vladimirets Image
Fortunately her patriotism and hard work were well-noticed by Putin and he promoted her. Now she's an Auditor of the Accounts Chamber of the Russian Federation. She'll be checking the transparency of other branches of government and make sure they use government funds efficiently Image
That's how social mobility works in Russia. Bullshiters are actively promoted. Just pretend to work on import substitution, share stolen cash with influential people, and go up. Now *you* check financial transparency and prevent corruption. Your henchmen go to jail but who cares Image
Now you can ask. Russians are good in sciences and very good in math. Russian engineers were doing great in Soviet era & are successful abroad. How come Russia can't produce anything competitive on the world market? Apparently it's not a technical skill that is a limiting factor Image
Let's return to avocados, they give an answer to this question. Have you ever heard of blood avocados? They're called "blood" because almost all avocado production in Mexico is controlled by cartels. Thus when buying Mexican avocados you are directly funding the organised crime Image
Many misunderstand what "cartels" look like. They imagine ragged hobos with machetes. Nope. Cartels look like this. These are fighters of Jalisco cartel who are cheering the name of their gang boss - El Mencho. They look like an army. Because they are

Mancur Olson conceptualised state as a gang. On its early stages it's a roving bandit: criminal group that kills, burns and pillages not caring of negative externalias. But when it settles down, it becomes a less destructive stationary bandit. That paves a way for civilisation Image
Many consider Olson's theory as merely an analytical tool. I disagree. It seems that many empires, like Romans or Ottomans in their very beginnings were quite literally bandit gangs. That's why we have so few records from their beginnings. They didn't care about records back them Image
Well, in this context it seems that a cartel like Jalisco is a protostate. In fact, it has many state attributes and might not be so different from medieval "states" which we retrospectively glorify. That's understandable. But why avocados? Why not chairs, not smartphone apps? Image
Mafia is quite simple. It can't administer something complicated without either destroying the production completely or evolving to something that wouldn't be a mafia anymore. If they entered machinery production for example, they would either go bankrupt or stop being a mafia Image
Imagine if they entered some complicated business and had to directly engage into a Schumpeterian Creative Destruction. Soon they would have to recruit nerds. Then promote them. And eventially the balance of power *within* mafia gang would irreversibly change in favour of nerds Image
I'd argue that processes critically important for an organisation's existence define its evolution. If sth is existentially important, those providing it will have more leverage. And former strongmen become irrelevant. That's how many mafias of old evolved into sth different
Ergo. Economic processes aren't neutral power-wise. That's a major factor of evolution of power structures. That would also explain why many in power would sabotage economic development. If it's too complex for them to administer, it will change power balance not in their favour Image
That's why cartels choose avocado. It's resource extraction providing tradable goods for export. Perfect forage base for a mafia. They get them through violence&threats. So they must project violent, unpredictable image. Thus US have to sanction cartels and ban avocado imports Image
That's why cartels do so much seemingly needless violence. It's not "irrational" as some idiots who never ran a proper cartel would presume. It's perfectly rational. Violent image is a means of production for these guys. If they don't look scary, who's gonna give them avocados? Image
Z-guys are not that different from Jalisco cartel. Putin's moves make more sense if you consider that Russia is run by a mafia. By a criminal group which extracts tradable export goods through violence or threats. Violent image is Kremlin's means of production and must be kept Image
Let's make a simple visualisation of dominance hierarchy within Russian economy. Oi &gas are the simplest lucrative industries. Thus they are dominated by Putin's friends - the most mafia-like interest group. Metallurgy is more complicated. So it's run by old 1990s oligarchs Image
Why old oil and gas tycoons were expropriated, while metallurgy oligarchs were spared and largely remained rich through the entire Putin's era? Because metallurgy is too complicated for Putin's friends to control it directly. They spared it, because they are too mafia to run it Image
The closer you are to the seat of power, the more mafia like and thus simpler you are. You are just unable to administer anything complex. That's why the highest-ranked and the simplest interest group took oil and gas - something they could rip off without destroying. immediately Image
1990s oligarchs are more complex but lower in dominance hierarchy. They took something that they could administer without ruining it immediately - the metallurgy. Ofc they're ruining it slowly. They're depleting old deposits without developing new ones. But it will take time Image
And only really complex stuff like competitive machinery is left for nerds like a nengineer Skurov - the owner of that mining machine producing factory I talked about. That's very important. Complex machinery is administered by guys who are very low in Russian dominance hierarchy Image
I'll make a small pause and continue
That's quite important for understanding the economic prospects of Russia. Complex industries, especially hardware industries are run by very weak interest groups. Higher-ups tolerate the nerds because someone should do it, but they'll milk those miserables dry
Consider the Uralkali - a major potassium fertiliser producer. Considering that it's an extractive business, who do you think controls it? One could assume it will be controlled by a very powerful (and simple) interest group, by a textbook mafia Image
Indeed. Its chairman it's Chemezov, a good Putin's pal since 1980s. In a country like Russia, any extractive business producing tradable export goods, like avocado or potassium, will be probably controlled by some sort of a cartel. And Putin's friends are very cartel-like Image
Unfortunately, the extractive business of Chemezov's cartel is critically dependent upon mining machines produced by a stupid nerd Sakurov. Chemezov doesn't know how to run a machinery plant so he has to tolerate existence of this deplorable engineer Image
After Russia annexed in Crimea in 2014, the ruble dropped immediately. Is it good or bad? Putin explained it's very good. Previously exporters sold their goods for 1 usd and got 32 rubles for it. And now they'll receive 45 rubles for the same goods. Our budget revenues increased! Image
Russian export structure is very simple. Russia doesn't really export much complex stuff. Meanwhile extractive businesses are overwhelmingly controlled by Putin's friends. So he naturally cares about exports (of natural resources) a lot. That's a forage base of his close circle Image
In this paradigm falling ruble wasn't a problem: exporters (of natural resources) enrich. The problem however, is that producers of anything complex work on Western machines with Western technologies and Western details. Ruble falling, their cost of production skyrockets Image
Consider the cost of Урал-20Р mining machine produced by Sakurov. In 2014 it increased by 23,1%, in 2015 — by 29,9%, and in 2016 by 72,2%. With the ruble falling and the sanctions imposed, machinery cost in Russia was rising very quickly. Cost of maintenance and repairs rose, too Image
There was another factor behind the rise in production costs. Ruble falling, exporting metals abroad was more lucrative. So metal prices on Russian market skyrocketed. See how prices on various kinds of rolled steel increased for just 4 months of 2016. Cost of fitting doubled Image
Ruble falling, costs of everything ncreased. Cost of oil, of metals, of machinery. But oil and even metal production are controlled by powerful interest groups. So they were allowed to enrich freely. The more dominant you are, the more extractive industry you appropriate Image
But the low in dominance hierarchy machinery producers started rising prices too. That was unacceptable. Very soon Chemezov organised a PR campaign against greedy Sakurov. That's just one article by a state-owned Rossiyskaya Gazeta. It's unaccessible but you can still google it Image
And yet, nachinery producers objectively couldn't keep the prices low with costs of everything rising. Technically Chemezov could use force to oust his supplier from his business. If it was extractive business, he would just do it. But it was too complex for him to administer Image
So what did Chemezov do? He decided to outsource machinery supply to Czech Republic. Putin's friend declared that repairing existing mining machines Урал-20Р in Russia is "too costly" and made a contract with Czech company T-machinery to repair them in Czech Republic Image
This version however, sounds very dubious. Sending Russia-produced machines to Czech Republic just to repair them and save the costs doesn't really sound convincing. Some speculated that the real reason was not "repairment" but outsourcing production abroad
The entire case with "repairment" makes more sense if Chemezov wanted Czechs to dismantle these machines, copy them and produce themselves. If Putin's pal sabotaged the entire import-substitution agenda, trying to transfer existing Russian technology abroad, it all comes together Image
You can hardly save money by sending Russian-produced for "repairment" to Czech company which didn't produce them and doesn't know how. But you probably can do it, if you just steal Russian technology and transfer it to the EU. Wit the economy of scale, you might get it cheaper Image
Besides, financial consideration, there is certainly a power-motivated one, too. If you allow your Russian machinery suppliers to enrich, that's problematic. The richer they get, the bigger the risk that the balance of power might be changed in their favour. Unacceptable
Allowing Czech companies to enrich is safe. Cash earned by Czechs most probably won't be invested in redistributing power within Russia. Meanwhile, the money acquired by a wrong interest group in Russia absolutely can. Thus growth of complex machinery in Russia presents a risk
Let's sum up what we discussed today. Economic activity which organisation relies upon is not neutral. It determines direction of its evolution. Thus economic progress (=development of complex economic activities) presents a clear danger to existing mafia-like interest groups
The more mafia-like you are, the simpler you are, the less able to administer complex economic activities. If you engage in them, power balance within your structure will change and former strongmen might become irrelevant. Mafia can remain mafia only feeding of something simple
Extractive businesses are relatively simple in a sense that they can be administered by mafia for very long and still produce value. Of course they're being destroyed too but in the long run, so nobody cares. Complex businesses will be destroyed immediately
That's why dominance hierarchy in Russia negatively correlates with economic complexity. The most dominant and simplest interest group, Putin's friends, appropriated oil and gas. That's just like cartel appropriating avocado
Less dominant group, 1990s oligarchs, were allowed to keep their metallurgy production. That's still quit extractive, but too complex for Putin's friends to administer. To be honest, it's too complex for oligarchs too, but they're smart enough to destroy this industry slowly
Meanwhile really complex industries such as competitive machinery production are mostly run by low in dominance nerds. Which means they won't be allowed to grow. If extractive businesses can rip them off, they will. If they can't, they'd better transfer their production to the EU
Outsourcing anything complex to the West is preferable not only because of the economy of scale - a company working for a EU market will probably make cheaper product than a country locked within the Russian one. It's beneficial because it allows not to pay to internal rivals
Domestic production is not neutral. If you 1) can't directly control complex industry 2) allow it to enrich, you feed a rival interest group which will become more powerful over time and then might demand the redistribution of power. That's unacceptable
This makes actual import substitution dangerous and outsourcing anything complex abroad - safe. Every dollar you spent on Czech machinery is a dollar not acquired by a rival interest group in Russia that might attempt to topple you in the future
This sociopolitical context makes any serious import substitution or self-reliance absolutely unrealistic in the short run. With the current power balance and the current institutions, Russia simply can't do it, because powerful cartel-like interest group will sabotage it
Could it change in the future? Yes. Nowadays regime is very, very frightened. It feels the existential threat. Which means that if it survives current conflict and allowed to regroup it could potentially evolve to something much more efficient. It's possible. It just takes time
Finally, from the mafia perspective, making seemingly irrational aggressive moves is totally rational. Mafia extracts resources through violence or threats. Impulsive and unpredictable image is a means of production and any decent mafia has to invest in maintaining it
I believe Putin's invasion of Ukraine is fundamentally rational decision. He used this trick several times and previously it always worked. He had every reason to believe it would work now too, as he didn't expect any serious resistance (neither did most military experts)
I don't think that Putin's decision was insane. I think it was a pragmatic move, based on wrong assumptions. Which is understandable: higher-ups often suffer from deficit of accurate information since subordinates just report them whatever higher-ups like to hear. End of 🧵

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More from @kamilkazani

May 27
New Industrial Power + New Industrial Power

is structurally different from:

New Industrial Power + Old Industrial Power

Russia and China are too similar in too many important respects. They share too many chokepoints (though to a different degree). They're kinda the same
If Russia was looking for alternatives to Western Europe, it would look at Japan - the old industrial power. If Japan was politically problematic (as it is), it would look at Taiwan and South Korea, new industrial powers on the very advanced stages of their learning process
Read 4 tweets
May 27
As I said previously, there is a difference between the:

a) argumentative space
b) real space

You can "reorganise and be self-sufficient" in the former, but not in the latter. In reality, the option of "self-sufficiency" just doesn't exist
The USSR was never "self-sufficient". The initial Stalinist industrialisation was planned and managed by Americans, and based on the import of American + to the lesser extent German equipment.

1920-1930s - US + Germany
WIth the start of the Cold War, America semi-excluded itself from the Soviet market. So it was monopolised by the Western Europe. E.g. in the 1970s Western Europe counted for like 90% of Soviet imports, Western Germany alone counting for 45%

1950-1970s - Germany + Rest of Europe
Read 6 tweets
May 22
Opposition Trap

On Twitter, you see not dumb people falling into the Grilling Trap

There are two problems with grilling

1. It gives you cheap dopamine -> very addictive

2. It destroys your brain

In this regard Grilling Trap is just a particular case of the Opposition Trap🧵
Grilling is a social game taking place in the argumentative space. Now the thing about the argumentative space is that it is not identical to the real space. A true zealot of course, believes that his own argumentative space is (more or less) identical to the real space

It's not
There is always a gap between what makes a good argument and what makes a good decision. It may be wider or narrower, depending on circumstances, but it always exists

Making a decision =/= justifying a decision

First is optimised for the real space, second for the argumentative
Read 16 tweets
May 9
Some context for the WWII

Soviet war machine was not created autarkically. It was built by the American businesses through the 1920 - early 1930s. Detroit-based Albert Kahn Associates company was a key organiser of the Soviet military industrial buildup

👇old but relevant🧵
The thing about Soviet military buildup is not that they imported stuff. That's pretty obvious. The thing is that they outsourced the planning. When we are discussing the Stalinist planned economy, we should keep in mind that the planning was done in the US Image
Albert Kahn Associates was the most important *planner* of Soviet industrialisation. They were not alone though. It was conducted by the joint efforts of the US industrialists

"On the way to automobilize the USSR": Henry Ford signing a contract to built a GAZ automative plant Image
Read 5 tweets
May 5
Why Russia is running out of shells?

Whereas the Wagner's shell hunger is real, ascribing it to the ill intentions of bureaucracy may be somewhat simplistic. It reflects the peculiar structure and the peculiar history of the Russian military manufacturing base

(not a 🧵) Image
What you should know of the Russian military industry:

1. After 1991 the output collapsed, often by few orders of magnitude
2. In Putin's era it bounced back, but not to the Cold War era levels
3. Both the collapse and the revival affected various types of weaponry unevenly
It would not be *too* much of a simplification to present the demand on the new weaponry in the following way:

Demand = State Defense Order + Exports

Now the thing is that in the 1990s the State Order was usually non-existent. If it was existent, it was often not paid for
Read 19 tweets
May 1
The managed system more often than not appears as a black box to its upper management. It is not transparent. I do not quite understand how it works. All I have are the output signals of the very uneven quality. And that is all I can base my judgement and my decisions upon🧵 Image
This explains much of the perceived "irrationality" of top decision makers:

a) The system isn't transparent. It produces signals of uneven quality
b) Choose the presumably higher quality signals *you are able to process*
c) Base your decisions upon them

Hence "irrationality" Image
Reality is incomprehensible in all of its complexity (and we tend to very much exaggerate how well we do comprehend it). It is covered by the fog of war. And perhaps nothing else illustrates it so vividly as, well, the war Image
Read 14 tweets

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