The Russian Economy Is on the Verge of Collapse

by | Mar 11, 2022 | Politics & Corruption, Quick Facts

Ordinary Russians face the prospect of higher prices and crimped foreign travel as western sanctions have sent the ruble plummeting, leading people to line up at banks and ATMs on Feb. 25 in a country that has seen more than one currency disaster in the post-Soviet era. (AP Photo/Dmitri Lovetsky)

The Russian Economy Is on the Verge of Collapse

by | Mar 11, 2022 | Politics & Corruption, Quick Facts

Ordinary Russians face the prospect of higher prices and crimped foreign travel as western sanctions have sent the ruble plummeting, leading people to line up at banks and ATMs on Feb. 25 in a country that has seen more than one currency disaster in the post-Soviet era. (AP Photo/Dmitri Lovetsky)
Russian stocks on the U.K. market have fallen by 98 per cent, wiping out US$572 billion of wealth, while the Russian stock exchange remains suspended. The Russian currency has fallen to 155 rubles per dollar, less than a penny.

To justify invading Ukraine, Vladimir Putin has painted Russia as a hegemonic power re-asserting its rightful claim to imperial greatness. Yet even before the invasion, Russia’s economic capabilities were hardly capable of sustaining an empire.

Now, with foreign sanctions presiding over a plummeting Russian ruble, Russia’s economic standing has fallen further still. If measured at today’s exchange rates, Russia’s economy would be the 22nd largest in the world, with a gross domestic product (GDP) not much larger than the state of Ohio’s.

With foreign sanctions presiding over a plummeting Russian ruble, Russia’s economic standing continues to fall. Author provided

That’s a far cry from the past, when Russia was a true world power. According to data assembled by the late economic historian Angus Maddison, it was the fifth largest economy in the world in 1913, behind the United States, China, Germany and Britain. By 1957, when the U.S.S.R. outpaced the United States to launch the first satellite into space, the Soviet economy was the world’s second largest after America’s.

Putin’s Quest for Greatness

Putin was elected president following the chaotic disintegration of the Soviet Union and the 1998 financial crisis in which Russia defaulted on its debt and abandoned its fixed exchange rate.

At the time, Russia’s market-value GDP had bottomed out at US$210 billion, making it the world’s 24th largest economy, behind Austria. (All contemporary GDP figures are from the October 2021 World Economic Outlook published by the International Monetary Fund.)

Putin established an informal social contract with the Russian people based on his ability to deliver strong economic growth. Under Putin’s rule, and buoyed by a commodity price supercycle that would stretch well into the 21st century, Russia’s GDP in market exchange rates rose tenfold, returning Russia to global relevance and providing purchasing power to its middle class.

However, Russia researchers argued that as Russia’s economy began to flag, from a peak in 2013, Putin sought new legitimacy to govern through foreign policy actions to re-establish Russia’s status as a “great power.” These efforts were epitomized by the Crimean annexation of 2014.

Russia’s invasion of Ukraine, against the backdrop of Russia’s market-rate GDP losing a third of its value between 2013 and 2020, represents a doubling down of Putin’s strategy to seek legitimacy from “great power status,” rather than economic performance.

Yet the West’s unrelenting financial and economic sanctions have only accelerated Russia’s economic downfall.

Russian stocks traded on the U.K. market have fallen by 98 per cent, wiping out US$572 billion of wealth, while stocks on Russian exchanges remain suspended.

The Russian currency has fallen to 155 rubles per dollar — a drop of more than 50 per cent from 75 rubles per U.S. dollar before the invasion. If not for recent captial controls and the rising prices of commodities — brought about by the sanctions themselves — that make up the majority of Russia’s exports, it would fall even further.

Domino Effect

A country’s market-rate GDP is its GDP converted to a global currency like the U.S. dollar. While there are other ways to measure GDP, when it comes to global trade and investment — and economic power — the market rate is what matters.

Russia’s market-rate GDP in 2021 was US$1.65 trillion, enough to make it the world’s 11th largest economy, behind South Korea. If we crudely convert Russia’s 2021 estimated GDP by March 7, 2022, currency rates, rather than the average exchange rate used last year, and place it against the 2021 market-rate GDP table, the rankings change and Russia slides to 22nd place, falling between Taiwan and Poland.

This drop is likely an underestimate. While a falling ruble lowers Russia’s exchange rate of its GDP to U.S. dollars, its weakening economy lowers its ruble GDP directly. And Russia’s isolation will erode its economic competitiveness, widening the economic gap further in the medium term.

Ukrainians confronted with the oncoming Russian army were wise to Putin’s chimeric strategy. “Don’t you have problems in your country to solve? Are you all rich there, as in the Emirates?” one elderly man heckled Russian soldiers.

Putin’s Next Move

Robert F. Kennedy famously observed that GDP failed to account for many things that we care about — like health and education. The fall in Russia’s market-rate GDP cannot begin to describe the human tragedy playing out in both Ukraine and Russia.

But what these figures do make clear is that Putin’s claim to legitimacy through economic performance is all but destroyed. With “great power status” tied closely to economic power, Putin’s back-door source of legitimacy from stirring up nationalist pride now seems closed as well.

Putin may have led Russia from one “Times of Troubles,” but he has delivered it to another one. That’s cold comfort to the Ukrainians, and indeed to the rest of the world, who are wondering Putin’s next move.The Conversation

Republished with permission from The Conversation by Eric Werker, William Saywell Professor of International Business, Simon Fraser University

The Conversation

The Conversation

The Conversation is a nonprofit, independent news organization dedicated to unlocking the knowledge of experts for the public good. We publish trustworthy and informative articles written by academic experts for the general public and edited by our team of journalists.

Comments

Follow Us

Related Articles

Feb 06 2023

Harvesting the Green: Billions in Federal Farm Subsidies Flow to a Select Group of Producers

The federal government paid more than $478 billion from 2015 to 2021 in farm subsidies for crop insurance, disasters, conservation payments. And the top 1% collected...
Feb 05 2023

The Chinese Spy Balloon: Expert Facts vs. Political Hyperbole

Spy balloons are not new. Monitoring an adversary from a balloon dates back to 1794, when the French used a hot air balloon to track Austrian and Dutch troops.
Feb 03 2023

Private Medicare Advantage Plans That Stole Money From Medicare Are Being Allowed to Keep It

In a dizzying display of twisted “logic,” the Centers for Medicare and Medicaid Services are not requiring repayments of funds stolen through rampant...
Feb 01 2023

Ethics Concerns at the Supreme Court: Roberts’ Wife Is the Latest Flap

The wife of Chief Justice John Roberts, like insurrectionist Ginni Thomas, apparently has been utilizing her position of being “married to the Court” for...
Scott Jenkins, sheriff of Culpeper County, Va., is one of a large number of so-called ‘constitutional sheriffs’ in the U.S. Eva Hambach/AFP via Getty Images
Jan 31 2023

Barrier to Gun Control: The Delusional Authority of Constitutional Sheriffs

The Constitutional Sheriffs and Peace Officers Association has spent more than a decade actively recruiting and training sheriffs to believe that their office is more...
Jan 30 2023

More George Santos: His Top Donors Don’t Seem to Exist

The burners under the pot of questions and investigations surrounding the lies and possible crimes of George Santos appear to have been turned up full blast.
Jan 29 2023

GOP House Goes Big on Hiring Big Oil Lobbyists for Staff Positions

It’s no surprise that Big Oil is infiltrating the halls of Congress after spending millions to elect some of the most extreme legislators in American...
Jan 25 2023

Election Denial Has Been a Lucrative Business for Kari Lake

Kari Lake raised over $2.5 million after her election loss, but less than 10% of her post-election spending went to lawyers.
Jan 24 2023

New Brett Kavanaugh Documentary Hopes to Spark a Full Investigation

A surprise documentary about Brett Kavanaugh reveals disturbing new evidence of misconduct by Kavanaugh and his associates surrounding the right-wing justice’s...
Catherine Engelbrecht, center, founder of True the Vote, and Gregg Phillips, right, at a news conference in Las Vegas Credit: Bridget Bennett/Reuters
Jan 24 2023

Election Deniers True the Vote Sought Funds for an Abandoned Hospital Project in Ukraine

True the Vote, a group that spread discredited election conspiracy theories, “abandoned” The Freedom Hospital in April 2022, according to its lawyers. Yet board member...
Subscribe for Updates!

Subscribe for Updates!

Join our mailing list to receive the latest news and updates from our team.

You have Successfully Subscribed!

Pin It on Pinterest

Share This