Why The Russian Economy Isn’t Collapsing

russia-briefing.com ^ | August 3, 2022 | Posted byRussia Briefing

[dennisw]

Western leaders undervalued the size and global reach of the Russian economy Headlines concerning the collapse of the Russian economy under sanctions have been many and varied, although more recently observations have been made that sanctions imposed by the West aren’t working to the extent intended.

Writing this from Moscow, I can observe that supermarkets are full, there are no shortages, and gasoline is US$3.1 a gallon. That compares with Washington at US$4.99, London at US$8.16, Berlin at US$6.73 and Rome at US$7.31.

Why has the effect of sanctions upon Russia been so widely misunderstood? It’s a complicated question yet comes with a simple answer: politicians aren’t economists.

The French economist Jacques Sapir has recently explained the mistakes politicians have made when assessing Russia, with the United States constantly stating the Russian economy as being insignificant when compared to the US and being about the same size of Italy’s. That is a miscalculation.

According to Sapir, the reason for this disparity is exchange rates. If you simply convert Russia’s GDP from rubles to dollars for comparison, it would be seen as an economy as large as Italy’s. However, such comparisons are meaningless without adjusting for purchasing power parities, (PPP) which account for productivity and living standards, and thus per capita welfare and resource use. In fact, PPP is the preferred measure of most international institutions, from the IMF to the OECD.

So what happens when the PPP methodology is used to compare the actual size of the Russian economy?

Doing so reveals a much larger and significant beast – it becomes clear that Russia’s economy is rather more similar to the German economy at about US$4.4 trillion versus Germany’s US$4.6 trillion.

This means that the West’s politicians has grossly under estimated Russia’s economy as being a small, somewhat sickly European economy to being close to the largest in Europe and one of the largest in the world.

Concerning Russia, Sapir also asks: “What is the share of the services sector compared to the share of the products and industry sector?” In his view, today’s services sector is grossly overvalued compared with the industrial sector and commodities such as oil, gas, copper, and agricultural commodities, all of which Russia possesses in massive amounts.

If we reduce the importance of services as a proportion of the global economy, Sapir says, “Russia’s economy is much bigger than Germany’s, and accounts for up to 5-6% of the world economic output.”

That puts Russia on a par with Japan rather than Italy.

This makes intuitive sense. When times are tough, it is common knowledge that it is more valuable to provide people with the things they need, such as food and energy, rather than intangibles such as entertainment or financial services.

When a company like Netflix trades at a price-to-earnings ratio three times higher than Nestle, the world’s largest food company, that is more likely a reflection of frothy markets than actual reality. Netflix is a great service company, but as long as some 800 million people in the world are undernourished, Nestle still offers more value. And Netflix shares and earnings have indeed begun to slide post covid as consumers concentrate on the essentials. (Netflix also recently exited the Russian market).

There are lessons to be learned from this – the current situation in Ukraine helps to clarify values on what have been regarded as “archaic” aspects of the modern economy, such as industry and commodities, but whose prices have soared this year; compared with overvalued services and “technology” whose value has recently diminished, such as Netflix and Facebook.

There is more. The size and importance of the Russian economy has been further distorted by ignoring global trade flows, which Sapir estimates Russia’s portion “may account for 15%”.

For example, while Russia is not the world’s largest oil producer, it has been the largest oil exporter, surpassing even Saudi Arabia. The same is true of many other basic products, such as wheat, the world’s most important food crop, of which Russia controls about 19.5% of global exports, as well as nickel (20.4%), semi-finished iron (18.8%), platinum (16.6%) and frozen fish (11.2%).

This means that Russia has such an important position in the production of so many basic commodities, that along with several other countries, is in fact a key part of the globalized supply chain.

The United States has largely failed to acknowledge this and persuaded the European Union to follow the same thinking over sanctions while grossly underestimating both the size of the Russian economy and the role Russia has in global trade. The US has had success in imposing “maximum sanctions” on countries like Iran and Venezuela but trying to cut Russia off from world markets has resulted in and will continue to bring about a huge restructuring of the global economy that may take several years to absorb.

In fact, by controlling large sections of the oil, gas, food and other global commodities, the sanctions pain bought to bear upon Russia by the United States and its Allies has shifted to the originators of these – and their own populations.

[caww]

Russia’s Putin has been very much advancing their preparations for any sanctions for several years now. From developing farms and cattle ranches to idustrial plants etc to create their own supplies.

I’ve watched a few of their videos by those who have opened ranches and developed their agricultural areas. Pretty impressive what they’ve done in southern Russia.

[Maine Mariner]

It is somewhat more difficult to mesure Russian GDP but I think you are correct. More long term, Russian needs to deal with a declining population that is also aging.

That issue is even more important with China since it one child policy (now scrapped), led to a question economic development economists have asked; does China get rich before it gets old?

[FarCenter]

>>The PPP argument is an interesting one.

On the basis of PPP, China is number 1 by a fair margin.

The order is China, US, India, Japan, Germany, Russia, Indonesia, UK, Brazil, France, Turkey, Italy, Mexico, South Korea, Canada, ...

[FarCenter]

https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)

Note also that GDP is a measure of consumption. It is not a measure of tangible assets, accumulated capital, or other measures of actual wealth.

[Grampa Dave]

EU = More Really Good timing with their idiots in charge!

Travis McGee, Thanks for posting the great economic reality for the ETU, Euro Trashy Union versus Russia. Also, a reality lesson versus Harvard/Yale B$ and our MMS B$ers.

Oktoberfest may be AXED due to Putin gas crisis, and Bavarian breweries told to stop making BEER as it's revealed Germans must pay £1,000-a-year 'gas surcharge' ON TOP of bills and Hanover turns off hot water!

UK Daily Mail ^ | July 29, 2022 | Chris Pleasance

Posted on 7/29/2022, 9:01:31 AM by C19fan

Germany could be forced to scrap Oktoberfest celebrations and its famous Christmas markets as officials desperately search for ways to save energy after Russia began throttling gas supplies to Europe.

Hanover, yesterday became the first major city on the continent to announce it will turn off all hot water in public buildings to conserve energy, while Berlin has begun dimming streetlights and Augsburg has turned off public water fountains.

Although Europe is scrambling to get energy from elsewhere, any difficulties this winter could be a harbinger of worse to come if Russian gas supplies are completely severed and stay off through 2023, said France’s minister overseeing energy, Agnès Pannier-Runacher.

“If gas deliveries are cut by the end of the year, that will mean we’ll have a full year without Russian gas, so the following winter could be even harder,” Pannier-Runacher told French senators.

[marron]

I remember not long back that they were inviting South Africans to relocate to Russia, and they were making exploratory trips to check it out. I don’t know how far it went, maybe you do.

[laplata]

Well said. You get it.

[Navy Patriot]

Very interesting, informative and valuable.

[dennisw]

“Transfer payments are not counted as part of GDP.........”

It was stupid for me to even think they might be. The US is so full of lawsuits and legal proceedings, that this is a very fluffy sector, that nations such as Russia and Japan do not have much of in their GDP. Compared to the USA.

[DannyTN]

Why it matters: The big question about Russia sanctions is whether they have teeth, if they exclude Russian oil and gas. While official Russian statistics suggest the economy is using its oil and gas revenues to withstand the effects of sanctions, Sonnenfeld's paper says that the official Russian statistics are lies.

What they found: The paper's results include sobering facts about the Russian economy. Z

• "Russian imports have largely collapsed," the paper says — creating massive supply shortages and denying the country crucial parts and technologies.
• "Russian domestic production has come to a complete standstill."
• Foreign companies that have left Russia account for 40% of Russian GDP, the author wrote, almost none of which is going to come back any time soon.
• The conclusion: "Looking ahead, there is no path out of economic oblivion for Russia as long as the allied countries remain unified in maintaining and increasing sanctions pressure."

  https://www.axios.com/2022/07/26/russia-sanctions-economic-impact

[Honorary Serb]

The anti-Russian sanctions backfire and hurt America and Western Europe!!!! And aid for Ukraine hurts us too!!!!

The sanctions MUST be lifted!!!! And Ukraine must get NO MORE military aid, and must NEGOTIATE with Russia!!!!

[Maine Mariner]

I enjoy studying economic history and economic development

[DannyTN]

https://thedeepdive.ca/sanctions-on-russia-are-working-yale-paper/

[caww]

One of the ranches is owned by some guy from Sweeden or Germany. Quite the spread and empoyees many Russians there - he developed a communication system so they learn pretty quickly what he requires of their work. Pays a fair wage and the workers enjoy working for the man.

[laplata]

That explains your good grasp on the situation.

I’d be scared to ask you where we’ll be in a year.

[Navy Patriot]

Good to see you back, FR need more Serbian representation.

[Grampa Dave]

Q2: Are the sanctions weakening Moscow’s ability to fund its war effort?

A2: While the sanctions froze most of Russia’s overseas assets, Russia continues to receive revenues from its energy exports. Oil and gas revenues accounted for 47 percent of Russian federal revenues from January to May of this year, even though Russian oil production fell in April. Oil and gas revenues, however, increased by 80 percent. Russia is still earning roughly $1 billion per day in export revenues from oil and gas, about half of which flows directly into Moscow’s coffers. For comparison, Russian fiscal data suggests that Moscow spent $325 million per day on military expenditures in April, the latest data available.

https://csis-website-prod.s3.amazonaws.com/s3fs-public/220622_DiPippo_Graphic_2.jpg?9SdHSChslLaQVXdn3WVtfOvIYH91xsMy

https://www.csis.org/analysis/strangling-bear-sanctions-russia-after-four-months

[Owen]

Everyone has a rant and a lecture, and usually they derive from something they read somewhere they thought was either amusing or powerful.

Facts don’t have to be amusing or powerful.

1) All the comments above and the article itself, largely are based on the concept of money. Quotes are in Rubles or Dollars or Euros or whatever. The value of that money is decided by the imagination of counterparties. Think about that. Money has no meaning. It’s all imaginary.

2) We can stop the conversation right there if we want, but it’s better to dig deeper and expose how it all means little or nothing. Specifically, US money comes from the Federal Reserve’s decisions, which are essentially whimsical. No one elects them. A Fed governor can serve for over 10 years after Senate confirmation and the 12 presidents of the 12 regional Fed banks are selected ONLY by each bank’s private boards of directors. Research this. See how little control government has over the Fed. Note this is often similar or the same with all countries of the world. “Independent” Central Bank has evolved to be sacred. For no reason.

3) With that as preface, of course Russia is under no economic pressure. They have their own Central Bank that can create rubles whimsically. The big difference with the US? Oil export vs oil import. Russia’s debt is about 30% of GDP. US debt is 125%, and that number is before the recent 2 quarters of GDP decline. For decades Russia has exported something with actual value — joules — in form of oil and gas. The US exports bytes on a data stream that put movie pictures on a screen, and because of importing and paying for oil, those exported bytes do not offset the cost of oil import.

The End

[frithguild]

Russia had a flat tax rate of 13% until recently - now the top rate is 15%. Russia now has a very powerful industrial and commodities based economy. Which, of course, is a coincidence.

[Maine Mariner]

Some years ago I would have said, I am not sure but our country is capable of recoverying and bouncing back.
However, with the “COVID Panic,” open borders, and at the height of the panic paying people $900 a week not to work.

Now I would say I am not sure and I am not certain we can recovery and bounce back, especially with $30 Trillion dollars in debt.