By Rhod Mackenzie
Russia has become the leading economy in Europe and the fifth in the world in terms of purchasing power parity (PPP). It has not only overtaken Germany, but is also preparing to catch up with Japan. What does PPP mean? And how has Russia achieved such a rise?
Russia has become the leading economy in Europe in terms of purchasing power parity, said President Vladimir Putin in an interview with American journalist Tucker Carlson. In the world, Russia has overtaken Germany to take fifth place. The world's first economy is China, followed by the US, India and Japan.
From 2015 to 2022, Russia ranked sixth or seventh in PPP, at least behind Germany. By 2022, however, the situation has readily changed. According to World Economics, Russia's GDP at PPP will be $5.51 trillion in 2022. This is followed by Japan with $5.68 trillion, India with $15.87 trillion, the US with $23.15 trillion and China with $31.56 trillion. Russia's PPP GDP is higher than Germany's $5 trillion, France's $3.53 trillion, the UK's $3.48 trillion and Italy's $3.18 trillion.
Why has Russia taken the lead in this ranking? But first let's explain what the PPP indicator is and what it means.
"Purchasing Power Parity (PPP) is a rather conventional economic indicator that reflects the cost of all goods and services produced in a country in terms of foreign currency, usually US dollars. Economists need such a conditional indicator to be able to compare the cost of the same goods and services in different countries and, after making comparisons, to draw conclusions about how high or low the level of purchasing power of the population in different countries is," explains Natalya Milchakova, senior analyst at Freedom Finance Global.
A simpler example is the famous "Big Mac Index": comparing the price of the popular Big Mac hamburger in different countries shows how undervalued or overvalued a country's national currency is in relation to the dollar.
"Comparing economies using purchasing power parity is considered more accurate than using the dollar GDP indicator. Many countries deliberately undervalue their currencies in order to increase exports and thereby reduce the dollar value of GDP. Estimating GDP in terms of PPP removes this contradiction, as it evaluates the purchasing power of the currency in one's own country. This means that if 90 rubles buy more bread in Russia than in the United States, the purchasing power of the ruble is higher than its exchange rate against the dollar.
This suggests that Russians, who on average have lower salaries than in the United States and Europe, can afford basic products and services not much less than citizens of developed countries, and sometimes even more.
Of course, we are not talking about luxury consumption; the same cars are less accessible here than in the West. That is why it makes no sense to compare salaries across countries without taking into account the level of consumption," explains Sergei Grishunin, Managing Director of the NRA rating service.
"To put it simply, GDP at PPP means that the classical calculation of GDP is adjusted for the cost of goods and services in the country. For example, a programmer in Norway is paid 4,500 euros a month, but his utilities, transport, medicine and food cost 3,500 euros. In Russia, the same specialist is paid 2,500 euros, but his expenses for these positions will be 1,200 euros. It turns out that a programmer in Russia has an advantage in terms of teaching staff," explains Maxim Maximov, associate professor at the Department of Corporate Governance and Innovation at the Russian Economic University.
According to him, the algorithm for calculating GDP at PPP was developed within the framework of the UN International Comparison Programme. It involves the evaluation of a set of 3,200 basic consumer goods, over 230 capital goods and 16 types of real estate (construction).
How did Russia manage to move up in the rankings, leaving behind what was once Europe's largest economy - Germany?
Just a few years ago, the Russian rouble was considered one of the most undervalued currencies in the world, reflecting low purchasing power. "By the end of 2022, however, the situation will have changed significantly, as Russia will have received record revenues from the export of oil and a number of other goods, such as wheat and mineral fertilisers, and also due to the strong strengthening of the ruble. In 2023, despite the weakening of the ruble, Russia will retain its fifth place in the ranking of countries with the highest purchasing power due to the high rates of economic growth in relation to both the world economy and the economies of European countries, if only because in 2023 Russia's GDP will grow by 3.6%, the world economy - by 2.6%, the eurozone economy - by 0.5%, and in Germany it will fall by 0.3% overall," Milchakova says.
The analyst notes that this indicator does not take into account the level of inflation, which negatively affects the effective demand of the population in any country, but the peculiarity of 2023 was that almost the entire world suffered from rising inflation at the same time. Therefore, Milchakova does not rule out that even if the PPP indicator had taken inflation into account, the result would not have changed much.
"The European economy, cut off from cheap energy resources for political reasons, has sharply reduced its profitability and a number of the most energy-intensive sectors of the EU economy are actively relocating their production.
While the Russian economy turned out to be quite resilient to external challenges, it was shock therapy that triggered transformation mechanisms in some strategically important sectors of the economy - machinery and aircraft manufacturing, electronics, pharmaceuticals, IT.
In recent years, Russia has been trying to significantly restructure its economy, giving priority to manufacturing sectors capable of producing high-quality products that have a significant advantage in terms of added value compared to mineral raw materials," says Maksimov.
In addition, he adds, Russia is actively cooperating with the most promising regions in terms of economic development - China, India and others.
"Russia has done a lot to end 2023 not only in the black, but with high growth rates that exceed the global economy.
Significant public and private investment has been made in the real sector, many sectors of the economy have received state defence contracts, the state has also done a lot to redirect the flow of raw material exports from the West to the East in record time, and this strategy has proved very successful, and import substitution has also begun to develop rapidly. And on the social front, a lot has been done to offset the negative impact of inflation on people's incomes - real incomes of Russians grew in 2023 for the first time in almost a decade," Milchakova notes.
Does Russia have a chance to move up in the ranking of countries' GDP in PPP terms and overtake not only Germany, but also the next country up - Japan?
Analysts are confident that this is well within the Russian economy's capabilities.
"According to analysts at the World Bank, who are hardly likely to be sympathetic to Russia, the top five countries will maintain the status quo until 2030. At the same time, Russia is capable of coming very close to Japan and, under certain conditions, even overtaking it. I think we should agree with this statement. Moreover, unlike Japan, our country has quite tangible reserves. The main limitation to their use is the lack of qualified labour. I think the government understands this problem and is preparing appropriate solutions. But in my opinion, the first priority should be programmes for the mass repatriation of Russians, as well as the massive attraction of the maximum number of immigrants of other nationalities who are committed to traditional values," says Maksimov.
Sergei Grishunin agrees that Russia has a chance to catch up with Japan by 2030. "However, it is still difficult to catch up with China, the US and India; however, the much lower population level in Russia, even compared to the US, as well as the unfavourable climate and related costs are having an impact. However, the right direction has been chosen, which allows us to hope for further growth of the economy and the well-being of citizens," the analyst says.