Posted on 08/07/2022 10:09:11 AM PDT by 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.
Good points.
My last paragraph began: "America still possesses vast, excess mineral and agricultural wealth, much like Russia does. But we screwed up badly by off-shoring the bulk our manufacturing base."
America and Russia are similarly blessed with vast natural resources and can feed and fuel ourselves with zero imports. We have more than twice as many mouths to feed, but we both have excess to export. The difference is that we have made ourselves dependent on others to manufacture our goods for us, while Russia can still make most of what it needs. Now our sanctions are driving Russian fuel and grain to China and India, who can make whatever else Russia wants. We're on opposite sides of the world and we don't have to be enemies.
Russia could end the EU with an aggressive campaign to relocate more Middle Eastern "refugees" into the EU. Make them live up to their lies.
I see your point, but Russia does not want many Arabs close to its borders.
“””Russia does not want many Arabs close to its borders”””
With western science, weapons, armies, and navies.
Immigrants become voters, generals, and presidents.
Can you name a computer, processor, or other sophisticated IC that is manufactured in Russia? How many do they export per year?
Russia does not want many Arabs close to its borders
I’ve already posted agreement with that.
I’m glad you agree that Russia doesn’t want a bunch of Arabs close to its borders.
“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.”
No, it doesn’t.
When someone asked President Lincoln “If we call a tail a leg, how many legs does a calf have?” He answered, “Four. Calling a tail a leg, does not make it a leg.”
Ignoring Services, ignores real income, real jobs, real tax revenue, and real contributions to economic efficiency and productivity. That is just a tortured spin job. Russia’s economy and finances are burning in for a crash.
The reality is that Russia is hugely dependent on oil and gas - half its total GDP, significantly more than even Saudi Arabia (which is about 1/3). It is overwhelmingly a Petro State.
Besides that, they have profitable mining, agriculture (mainly just grain) and Military Arms exports. Outside of that, the only thing that was decently competitive, productive and had growth potential was IT (Services), which is now in near complete collapse, from companies and talent leaving in a stampede.
Agriculture is the sector that is least effected by the war. Russian Defense Industrial Production supply chains were heavily integrated with the Ukraine. Russia has literally been demolishing many of its suppliers of materials and components with their artillery and missiles.
The oil, gas, petrochemicals (like fertilizer) and grain that Russia does produce in significant quantities are all commodities - easily substituted from any other producer. It is just a matter of capacity and transportation.
Although they are major producers (like 7% of the world’s oil production), they don’t control, or even dominate any of those markets. Their market power over the price of those commodities is only in the short to mid term.
Oil prices are now back down below where they were when Russia invaded the Ukraine, and Russia’s total export volumes are declining, as other producers increase production, and take Russia’s former market share, at an historic pace.
Outside of commodities, the rest of the Russian economy is effectively collapsing. Auto manufacturing down 97%, for example. They are getting by for the moment by printing money much faster than the West did during COVID (total money supply up over 50% in five months), and bailing out the preferred businesses of Putin’s Mafia friends and family.
It’s going to be epic - worse than it was after the collapse of the Soviet Union.
Putin did that!
A lot of Russian economic data (like the chart you posted) stopped being openly reported after May. Now they are classified as State secrets.
The serious implosion is underway - unemployment, bankruptcies (Business and personal), inflation, Government deficits.
The sugar high of a few moth oil price spike has passed, and oil prices are now back down where they were before the invasion - but Russian oil and especially gas volumes are decreasing, and are on track to decrease much further in the coming months.
Oil and gas sanctions did not begin to be put in place until June - before that it was voluntary.
Come December 5th, when the EU has halted its import of Russian oil by tanker (90% of its former oil imports from Russia), the G7 are preparing secondary sanctions on other customers of Russian oil, who don’t adhere to the price cap.
A hard landing is in the works for the Russian economy. Worse than the 90’s, after the Soviet Union collapsed.
“Russia’s Putin has been very much advancing their preparations for any sanctions for several years now.”
They amassed $600 billion in foreign reserves, including their National Wealth Fund, which pays pensions (like social security checks in the USA).
About $300 billion of that has been frozen by Western Governments, and about another $200 billion of it has already been spent during the first five months of the war. Expenses are growing and revenues are declining, so it looks unlikely that the remaining foreign reserves will last till Christmas.
The Russian Government has already defaulted on foreign debt for the first time since 1917, so they are effectively cut off from International credit.
They will be left living hand to mouth for any imports, basically only able to buy from the rest of the world as much as they are are currently making on oil, gas and grain exports, which are being choked hard by sanctions.
Domestically, they are already printing more money at an unsustainable rate. About a 1/3 of all rubles in existence were created in the last five months. Knock your socks off inflation in Russia next year is already baked into the cake, and ruble printing seems to be accelerating.
I understand that Russians LNG can’t be sold profitably to anyone other than Europe. It would have to be liquidfied to ship to China or India and Russia doesn’t have that capability.
The pipeline to Europe is their only means of shipping that gas.
“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.”
That initial war shock price spike has passed. That calculation is out of date.
Oil prices are back down to what they were before the invasion, and oil export volumes (now classified as a State secret) are continually gradually declining. Oil volumes to India and China are now down for the second month, as Russia tries to offer less steep discounts (they had been selling for $30 per barrel below market price in April) Natural gas volumes are way down, and Russia does not get the current high spot price on most of what they sell, which is on existing contracts through fixed pipelines.
Total Russian oil and gas revenue seems to have peaked at some point in May, and are on track to continue declining significantly through the end of this year, based on what is already in place.
Thanx!
So he's been preparing for this for some time. Russia's going to hurt some, along with the rest of the world for the shutdown of commerce/trade in many places over covid and sanctions always hurt all countries when Russia gets hammered with them.
Russia will feel it but you can be assured so does every other nation.....however Russia has been preparing for it.
“He’ll America buys oil daily from Russia”
Importing Russian oil, Liquified Natural Gas (LNG), or coal to the USA was banned on March 8th, 2022.
85% of Russia’s gas exports last year went to the EU (including Turkey) - overwhelmingly via fixed pipelines.
Turkey is likely going to keep running their Turkstream pipeline from Russia, but most of the rest (well over half of last year’s gas export volume) will have no physical way to get to market, as Europeans replace it.
“he’s (Putin) been preparing for this for some time. Russia’s going to hurt some”
Both true.
It sure seems that Putin did not anticipate the scale of the Western response - otherwise he would have protected the foreign reserves.
They seem genuinely unprepared for Europe to actually ditch them as an energy supplier, which is a somewhat existential economic threat to Russia.
Also, they clearly were not prepared for the scale of the Military fight they are in, with the degree of Western support they are encountering. The troops heading toward Kiev on the first day of the war literally were bringing their dress uniforms along with them, for a parade afterward.
Finland and Sweden joining NATO after 3/4’s of a century?
Germany suddenly paying the 2% of GDP for their Military budget, effective this year?
Taking more Russian casualties already than the Soviet Union did in a decade in Afghanistan?
Clearly Putin’s preparations were far below what reality is now demanding.
Once again, I'll cite from my own post: "Now our sanctions are driving Russian fuel and grain to China and India, who can make whatever else Russia wants."
In the case of computers, chips and processors used in Russian weapon systems, China will supply them. Any doubt about China's intentions is being erased by our present interference in Taiwan.
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