Sunday, April 4, 2021

The Russian economy – ‘small’, ‘impotent’, ‘insignificant’: true or false? — Arcturus Le


The Vineyard of the Saker
The Russian economy – ‘small’, ‘impotent’, ‘insignificant’: true or false?
Arcturus Le


Ahmed Fares said...

I've posted this before but in light of the recent events as regards the Ukraine, and given that this post is about Purchasing Power Parity, I'll post this again:

The best example of this problem is a recent announcement by the Stockholm International Peace and Research Institute that Russian military spending has fallen to the sixth highest in the world in 2018, at $61.4 billion. Rest assured, or perhaps discomforted: Russian defense spending is several times higher than $61.4 billion, and the Russian defense budget remains the third largest in the world, dwarfing the military expenditures of most European states combined. In reality Russia’s effective military expenditure, based on purchasing power parity (Moscow buys from Russian defense manufacturers in rubles), is more in the range of $150-180 billion per year, with a much higher percentage dedicated to procurement, research and development than Western defense budgets.

Although there are challenges with comparing economies based on purchasing power parity, it would do good to keep in mind that Russia is actually the sixth-largest economy in the world and not long ago was the largest economy in Europe based on purchasing power parity (PPP) — ahead of Germany. Purchasing power comparisons come with their own shortcomings, especially when understanding global financial flows, import/export, and the like, but it helps paint a much more accurate picture than comparing economies by converting their gross domestic product into dollars based on the current exchange rate. If ruble valuation suddenly dropped by 50 percent against the dollar, which it did in 2014, does that mean the Russian economy suddenly contracted by half in one year? No, it doesn’t. Then why is this a useful way of looking at the world and understanding the relative balance of economic power or military expenditure?

There is no value in conceptualizing Russian defense spending in U.S. dollars based on the prevailing exchange rate, since Russia does not buy its weapons or major components from the West. Yet, this is how SIPRI arrives at its $61.4 billion figure, which places Russia safely behind France, even though Moscow fields a military that’s almost 900,000 strong, with a conventional and nuclear arsenal capable of taking on the United States. PPP is not without limitations, but it is heavily advantaged when comparing defense spending as opposed to consumer spending, where countries may import a broad range of goods. As a consequence it is not only the most accurate way to compare defense spending in countries using different currencies, but should arguably be the only method of doing so.

source: Russian defense spending is much larger, and more sustainable than it seems

Peter Pan said...

Russian economy is Texas-sized. However, they got more oil & nukes than Texas.

Matt Franko said...

Oil is going away...

lastgreek said...

surface area of the moon is 38 million sq. km.

surface area of Russia is 17 million sq. km.

Russians are "long" everything :)

(I remember once Mike Norman asking why the hell would the Russians bother buying gold when, because of their geography, they are long gold. Good point.)

Tom Hickey said...

why the hell would the Russians bother buying gold when, because of their geography, they are long gold

When the central bank of Russia buys Russian-mined gold, it adds rubles to the Russian economy without affecting the fiscal position. Same with China, which is also a gold producer.

Russia has been increasing its gold stock and reducing its stock of US dollars as part of de-dollarization, along with creating alternative payments channels that avoid institutions that the US and allies control.

If the US goads Russia into war in Ukraine, then maximum pressure will follow, likely including disconnection from Swift. But Europe gets about 30% of its oil from Russia and about 40% of its gas. If the US tanks the ruble, Russia is unlikely to supply Europe at the cheaper price, if at all. China will be happy to take it all.

Geopolitics, geostrategy and the world economy are interrelated in the world system and the more so as globalization progresses.

lastgreek said...

The Russian government is buying Russian gold, their own gold?

Tom Hickey said...

Yes. Central banks can buy gold and sell gold directly. It is regarded as monetary operation. The Central Banks of Russia orders it from commercial banks who purchase it from the miners and in turn sell it to the cb. The banks credit the miners accounts on their books and the cb credits the banks accounts on its books. Done deal. It's fiscal through a monetary operation rather than a fiscal one, like the cb paying interest. The Treasury account is not involved. This injects currency into the economy without affecting the fiscal position.

Matt Franko said...

" like the cb paying interest. "

Not really.. the CB has to get the income from the bonds they hold and then use those USD revenues to pay the IOR... returns the remaining portfolio interest back to Treasury Account periodically... Fed maintains a Residual of about $8B + or -

Russia CB just issues Reserves to pay for the gold... weighing the banks down with more non-risk assets... Fed does not issue Reserves to pay the IOR....