By Ben Aris
The late US Senator John McCain once called Russia a “gas station masquerading as a country” and the fact that Russia’s nominal GDP is about the same as Italy’s has long been used to dismiss it as unimportant.
However, economists have long argued that considering only Russia’s nominal GDP of around $2 trillion is to underestimate its economic strength. Arguably, the belittling of Russia over the last decade has led Western leaders to badly miscalculate how vulnerable the Kremlin is to sanctions.
Looking at GDP in PPP (purchasing power parity) terms removes price level differences and allows a better comparison, especially of living standards, between countries.
In these terms Russia has just overtaken Germany to become the fifth wealthiest economy in the world and the largest in Europe, worth $5.3 trillion.
The PPP valuation of the economy works because the ruble equivalent of $1 can buy a lot more than $1 can buy in the US, something the Economist captured with its famous Big Mac Index: currently a Big Mac costs $5.15 in the US and the Russian equivalent (McDonalds was taken over by a Russian analogue last year and has since become the fast food market leader) cost $2.44 in July.
Sanctions on Russia were designed to impoverish Russia and make it impossible to perpetrate its war in Ukraine, but as the rest of Europe slides into recession, the Russian economy has proved to be remarkably robust after a sharp initial downturn. The IMF upgraded its economic outlook for this year again to 0.7% growth in April, while the official forecast is for something closer to 2%. Likewise, oil sanctions imposed on December 5 and February 5 were supposed to cut the Kremlin off from its main source of income, but as bne IntelliNews reported, budget revenues surged in June as oil exports completed their switch from Europe to Asia, and Russia Inc. is back in profit.
“Sanctions were supposed to crush the Russian economy. Instead, it's now bigger than Germany's (and when you cut out services, and focus only on industry and manufacturing, which is what counts in war, probably bigger than that.) The cost to Europe? Deindustrialisation, inflation," D M Collingwood, the editor of BritanniQ, said in a tweet.
However, some academics say even the PPP assessment underestimates the power of Russia’s economy. In the last decades Western economies have seen services rapidly grow in importance, but Russia’s economy remains heavily weighted towards the manufacturing and industrial end of the spectrum. In a war, having a large industrial base is a big advantage, as the rate a country can produce arms is a key factor in the fight. In these terms Russia is even bigger than Germany, itself no mean industrial country, according to research by Jacques Sapir.
“Simple GDP statistics have arguably lulled the West into a false sense of security. By GDP, Western economies appear dominant and their capacity to impose sanctions decisive. But the West’s reliance on service sectors – and the relative weakness of directly productive sectors like manufacturing, mining, and agriculture – introduces critical vulnerabilities in goods production and supply chains. In times of peace and unimpeded trade, such vulnerabilities may seem insignificant. In periods of deglobalisation, geopolitical competition and state-versus-state conflict, however, these weaknesses can have profound impacts, while basic productive sectors take on greater importance,” Sapir said.
GDP measures wealth, but it fails to capture the real value of the buying power of the currency in the way the Big Mac index does. But both these measures fail to capture the productive capacities of a country from its industry. Put more simply: the Big Mac index tells you how many burgers you can buy with a ruble but it says nothing about how many burgers a day Russia can make and how that compares with the US burger-making capacity.
Looking at just nominal GDP, then Russia’s share of the global economy was 1.9% in 2019, against US’ 24.4% and China’s 16.4%, according to the International Monetary Fund (IMF).
In PPP terms Russia does better with a 3.1% share of adjusted global GDP, with the US falling into second place with 15% against China’s 17.3% as the world leader.
“The exchange rate method [nominal GDP] significantly underestimates the size of the Chinese and Russian economies,” says Sapir. “Using the exchange rate method, the size of the Russian economy is half that of Germany’s and around 130 percent of Spain’s. China, while growing more rapidly, is around two-thirds of the US economy in 2019. With the PPP method, however, the profile of the Russian and Chinese economies changes drastically. The Russian economy almost becomes the equal of the German economy, while the Chinese economy reached parity with the US economy in 2016 and has since taken a slight lead.”
The importance of the productive sector
Productive capacity skews the picture even further towards Russia and China. The service sectors have grown more rapidly than goods production and form an increasing share of Western economies, which during the globalisation drive of the last two decades exported an increasing number of their productive work to emerging markets, and China in particular. That has become relevant in the last three years as first the global pandemic and then the clash with Russia has started to undo the globalisation in an increasingly fractured world. Nearshoring has taken over as the driver of emerging market investment that looks for cheaper labour, but also shorter supply chains.
“During wartime, services lose their importance relative to agriculture, industry and construction. It then becomes necessary to calculate the share of the goods-producing sectors across different economies in order to have an accurate understanding of how they really compare,” says Sapir.
Russia is situated between China, where services represent only 49% of GDP, and countries like the United States, France and Italy, where services represent at least 75% of GDP. Germany is in an intermediate position, with 69% of its GDP coming from services. Russia’s position can be explained by the size of its industrial and agricultural sectors – a makeup that affects its real weight.
Looking at the share of productive industry in Russia’s economy compared to Germany and France – both nominally bigger than Russia – and Germany is only 90% of Russia’s size in terms of productive industry, while France is a mere 44% of Russia’s industrial power. China is even further ahead, with Germany equivalent to only 11% of China’s productive industry, and even the US is only 34% of China’s productive power.
“Russia and China’s GDP are significantly larger when we consider only directly productive activities. China’s economy becomes nine times stronger than Germany’s and three times as strong as that of the United States. The Russian economy also ends up outranking the German economy and clocks in at more than twice as strong as the French economy. This completely changes our vision of these economies – far from the claims that Russia ranks at the same level as Spain or that China still lags far behind the United States,” Sapir argues.
Innovation index
However, the analysis can’t end with just having a lot of big factories. The quality of what they make also plays an important role. And on this score Russia falls down, as it remains heavily dependent on Western technology, as bne IntelliNews reported in a deep dive into Russia’s precision tools sector, the Kremlin’s soft sanctions underbelly.
Innovation can be measured imperfectly by counting the number of patents filed each year, or by the cutting-edge technology content of the goods produced.
Russia used to have world-class scientific research, especially strong in the hard sciences, but it collapsed after the fall of the Soviet Union and as bne IntelliNews reported, it has missed out on two revolutions in technology since then. It has little chance of catching up in the next few generations. China, however, as the table shows, has invested heavily in technology and has already surpassed the West in several important areas, renewable technology and manufacturing being key among them.
“With this indicator, China still comes out on top by a wide margin, but Russia falls back to sixth position. More broadly, the combined number of patents from China and Russia is almost double that of the United States, Japan, South Korea, Germany, France and the UK combined, giving us an idea of the balance of power on this front,” says Sapir.
Key commodities
The final factor to consider is to assess a country’s role in the export of key inputs. Russia has a cornucopia of raw materials and dominates the export of many critical products needed by industry. In this respect, Russia far outstrips China, which is bereft of major raw material resources, although it has become a world leader in the processing of exotic materials such as rare earths that are key in any number of industries.
Russia is amongst the world’s biggest producers of oil, gas, grain, timber and a wide variety of metals that are hard to source elsewhere, such as titanium. It is also a major producer of uranium, but like China, it has also become the leading refiner of uranium to make U235, the nuclear fuel. Both Kazakhstan and Uzbekistan are major sources of uranium, but neither of them has any refining capacity and rely on Russia.
Russia’s ability to affect oil prices by limiting production, and to throttle things like aviation and EV development by restricting the export of titanium or copper, gives it enormous market power. Its importance to the global nuclear fuel market means that the West has so far shied away from imposing sanctions on Russia’s nuclear business.
“In 2019, Russia was the world’s second-largest producer of platinum, cobalt and vanadium, the third-largest producer of gold and nickel, the fourth-largest producer of silver and phosphates, the fifth-largest producer of iron ore, and the sixth-largest producer of uranium and lead. The main product of Russian agriculture is cereals; Russia is the world’s largest exporter of wheat and the largest producer of barley, buckwheat, oats and rye, as well as the second-largest producer of sunflower seeds,” says Sapir. “Of course, Russia is the world’s largest exporter of gas (and has the world’s largest reserves) and the second-largest exporter of crude oil. This gives Russia, beyond its industrial capacities, a central position in the raw materials trade, a position that explains its alliance with China. Any interruption or sharp reduction in trade with Russia is likely to cause major disruptions in commodity markets.”
This article originally apeared at
https://intellinews.com/russia-overtakes-germany-to-become-fifth-biggest-economy-in-the-world-in-gdp-on-a-ppp-basis-286944/?source=russia