Does the Russian Economy Matter?
It certainly matters to the people living in Russia. And it matters to the countries that have imposed financial sanctions on Russia.
The purpose of financial sanctions is to inflict financial pain. Enough pain to bring the Russian economy to a dead stop.
The theory is that by cutting off access to the global capital markets , Russia will become a financial island.
With a failing economy Russia may not have the resources to continue the war with Ukraine.
Sounds pretty good in theory but so far it isn’t working.
Is the Russian economy so big and powerful we can’t live without it?
The Russian economy measured by Gross Domestic Product (GDP) ranks 11th in terms of economic size.
The US has a GDP of about $20 trillion, followed by China at $13 trillion.
The GDP of Russia is about $1.5 trillion. Measly in comparison. No doubt over time the financial sanctions will push Russian GDP lower.
What are the largest economies in the world? According to the International Monetary Fund, these are the highest-ranking countries in the world in nominal GDP:
- United States (GDP: 20.49 trillion)
- China (GDP: 13.4 trillion)
- Japan: (GDP: 4.97 trillion)
- Germany: (GDP: 4.00 trillion)
- United Kingdom: (GDP: 2.83 trillion)
- France: (GDP: 2.78 trillion)
- India: (GDP: 2.72 trillion)
- Italy: (GDP: 2.07 trillion)
- Brazil: (GDP: 1.87 trillion)
- Canada: (GDP: 1.71 trillion)
Russia’s largest exports (how Russia makes money) are Crude Petroleum, Refined Petroleum, Petroleum Gas and Coal Briquettes. The largest importer of petroleum products is China.
Following China, the United Kingdom and the Netherlands are the second and third largest importers of petroleum products from Russia.
So what happens when a block of countries decide that they will no longer import from Russia? Or do business with Russia?
What happens when Russia is banned from using international payment systems? Or cannot access their gold reserves to bolster the ruble?
Financially the US and other countries are saying “We don’t need you Russia and we want your economy to collapse, unless of course you stop the war on Ukraine.”
Things are never simple. The problem with the financial sanctions is that “we” don’t really have any idea what Russia is going to do.
Maybe financial sanctions make sense to us, but maybe Putin doesn’t care. If he believes he is in a position of strength, then fine, let the economy crumble because hey, it won’t be the first time.
In March 2014 – 8 years ago – Russia attacked Ukraine and annexed (as in took back) Crimea. Crimea to this day is still considered part of Ukraine.
Below is a brief commentary on the economic impact of the annexation. You could easily imagine what happened 8 years ago is happening today.
“Russia
Falling oil prices, soaring inflation, international sanctions due to conflict with Ukraine, and skittish foreign investors continue to pummel the Russian economy. The ruble is falling. Inflation rose 15% in January. The World Bank’s December 2014 baseline projection, its most recent, was that Russia’s real GDP would contract by 0.7% in 2015. Not surprisingly, the Composite Leading Indicators has taken a nosedive.
A dependence on oil exports, barriers to foreign direct investment, and continued state control remain stumbling blocks. Soaring inflation, as well as President Vladimir Putin’s ban on food from sanctioning countries, means Russians may spend half their income on food this year. The February murder of Putin critic Boris Nemtsov and the bestseller status of Red Notice: A True Story of High Finance, Murder, and One Man’s Fight for Justice, about a hedge fund manager’s battles with Putin’s government, mean capital outflows are unlikely to reverse.
Ukraine
Russia’s March 2014 annexation of the industrial Crimean peninsula sent Ukraine into a full-blown financial crisis. The IMF projected a 6.5% contraction in GDP for 2014, but the country’s top central banker told reporters that the actual decline was probably worse. Its currency, the hryvnia, was the worst performing in the world in 2014, with declines so precipitous that the central bank temporarily banned currency trading in February 2015, before quickly reversing itself. In March 2015, the central bank raised its benchmark interest rate to 30% in an effort to control hyper-inflation,
Reserve losses, deposit withdrawals, currency depreciation, and loan deterioration continue to add to economic stress. The IMF, which projected that 2015 inflation would climb to 14%, committed to a $17.5 billion loan package to Ukraine on February 12, 2015.”
In the words of Yogi Berra “It’s Déjà vu All Over Again.”
This time, the US along with 30 other countries are not going to let Putin get away with his war on Ukraine.
The only glitch is that economic sanctions take time to implement. Ukraine may not have much time.
Does the Russian economy matter? It won’t matter much if it is truly decimated.
Resources used for this article:
Russia (RUS) Exports, Imports, and Trade Partners | OEC – The Observatory of Economic Complexity
Countries Near Economic Collapse (investopedia.com)
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