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.
Russia most sanctioned country in the world and the West and US getting hit harder and far worse than Russia. Sanctions failed, utterly.
Good post.
So Obama, the guy in the professors lounge making snarky smart assed comments, was wrong when he said it’s just a “gas station with a nation”?
Russian propaganda, yet again. We all know that Russia is in Deep Shiite, since the Daily Mail told us so.
I agree here that much of what Americans and Europeans call their GDP is fluff. Our service sector is very fluff ridden. In the US, we have a 100 million dollar lawsuit that one side wins. This 100 million is counted in our GDP? I know that the labor and billing by the two opposing sides of lawyers teams will be.
The PPP argument is an interesting one.
How much of the USA’s GDP is based on financialization and financial products trading? Bloated Government at all levels? Services that are not critical to any basic part of the economy?
So you like the message in today’s fortune cookie?
People can look at the same set of facts and come up with completely different conclusions. We’re being lied to. It just depends on by whom.
“wishful thinking” is the foundation of this administration’s policies...
Trying the sanction a country-no matter which, with the natural resources that country has is like trying to piss against a hurricane force wind to put out a fire.
Nobody knows what is underneath the ground in that country. Its what? 11 time zones wide? All that territory and I would bet a whole lot of it unexplored.
Politicians are proof at how ignorant and worthless dumb they are.
They usually do fail.
Good solid economic analysis most likely by someone who is NOT paid to say the Russian economy is weak.
Russia most sanctioned country in the world and the West and US getting hit harder and far worse than Russia. Sanctions failed, utterly.
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Sanctions have never prevented war. Think Japan , what happened when we sanctioned them? Dec 7th,…Punitive sanctions cause war. As long as the Ukie war cheerleaders keep crying out for war, war, war, there will be no Peace.
Do keep in mind Russia is totally self sufficient, they have what the West needs.
When do people wake up and realize EVERYTHING vegetable head Joe supports, mandates or instates is designed to cripple America. Keep it up war cheerleaders, backing Joe’s Ukie war is backing a very dark horse…reality is raising its head. America ( and the West) dives deeper into unpayable debt, ( just look up the debt to GDP ratios), while Vlad keeps raking in the cash. Hint: they have no intentions of ever paying that debt, the consequences will cripple the West. By design? Or just shear stupidity?
So why is the West so intent on committing suicide?
You lost me at “French economist”
Transfer payments are not counted as part of GDP, the market value of all final goods and services produced within a county during a specific time. You are correct the labor services etc by the law firms involved is counted.
Russia is a country the size of a continent, with enormous oil resources, enormous resources in general, backed up to a continent also packed with enormous resources.
And they had years of sanctions to prepare them. I’m actually surprised at what damage sanctions have done, at how much they continued to be dependent on outside technology. But in the end sanctions only forced them to build an economy that is fairly independent of the outside world. McDonalds closes, food prices go up 20%, but people still eat. They can’t get parts for some of the fancy electronic googaws, but they can still do it old-school and it gets done.
Thats why, prior to the war, when Biden threated more sanctions if Russia invaded, I said that was the equivalent to a green light.
Piling more sanctions onto Russia does very little. They are necessary, but no one should imagine that sanctions alone will do anything much more than force Russia to redirect its supply chains away from Europe and America. An annoyance but not unsolvable. It forces Russia to sell some of its oil at a discount, but at a hundred dollars a barrel, they can sell at a discount and the discount is more than the pre-war prices. So not much of a problem.
Russia is in better shape than the EU.
Simple truth, my view anyhow: Cause the West and US filled with delusional idiots.
They were already beat down so much, they are really only losing the butter on their bread
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