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Tuesday, May 23, 2006

Bare Facts: Russian GDP Stripped Naked

The New York Times reports that Russia's stock exchange plunged nine percent on Monday in panic selling that affected developing markets around the world, raising concerns about Russia's economy and speculation about the exact causes. With Monday's losses, estimated by The Moscow Times at $62.6 billion, Russia's stock market has dropped 25 percent in the last two weeks. The decline has mirrored those in other countries, including India and Korea. Several newspapers cited analysts and economists expressing worries about Russia's ability to attract foreign investments. Echoing a sense of shock expressed by most newspapers, Gazeta said that economists expected a drop but that no one thought "it would be so profound and so painful." In its headline, the newspaper called the drop "Almost a Black Monday." The exchange actually halted work for an hour, in what Kommersant called "headspinning news." The newspaper said that the exchange's recovery "could last for several months."

Given this disastrous new development, La Russophobe feels it is appropriate to review Russia's overall economic position, since it sheds much light on why wise investors may feel rather skittish about Russia's prospects.

As La Russophobe has previously reported, in 2004 Russia's oil production of 9.2 million barrels per day was worth $667.4 million per day, or $243.6 billion per year, at current prices.

In 2004, Russia's GDP was $581.4 billion. It's been showing about 7% annual GDP growth, which means that its current GDP is about $665 billion.

Of that $665 billion, about $244 billion (roughly 37%) is directly accounted for from the production value of crude oil. This means that Russia's non-direct-oil GDP is about $421 billion, which places it 17th in the world, well behind tiny Netherlands in 16th place. Adding Russia's oil revenues only moves it into 16th place, just ahead of Netherlands and well behind 15th-place Australia.

Russia has 143 million people. This means that its per capita non-direct-oil GPD per person about $2,945 per person. That figure places it 88th in the world ranking of per capita GDP, just ahead of Namibia and just behind Tunesia. If we add in Russia's oil revenues, the per capita figure rises to $4,650 and Russia rank rises to 70th in the world, just behind Uruguay and just ahead of St. Lucia.

Only by applying the fictional "purchasing power parity" formulation does Russia do any better, and even then the figures at best double, still ridiculous for such a large country. And PPP is an entirely bogus fiction. A simple example of a measure of absolute PPP is the Big Mac index popularised by The Economist, which looks at the prices of a Big Mac burger in McDonald's restaurants in different countries. If a Big Mac costs USD 4 in the US and GBP 3 in Britain, the PPP exchange rate would be £3 for $4. In the same way, if a Big Mac or any basket of goods costs $4 in the US, the PPP exchange rate is always GBP£3 for $4.

But PPP takes no consideration of the fact that a Big Mac sold in Russia can be adulterated by any number of toxic contaminants, from radiation to hazardous industrial chemicals to salmonella, particularly in dairy components. It completely ignores the fact that the average Russian lives a far shorter life than the average American, not only because of contiminated and unhealthy food but also because of vastly inferior medical services when health problems arise. It also ignores that a McDonald's menu is much narrower in Russia than in the United States, and ignores the fact that Russia doesn't have Burger King or Wendy's (to say nothing of pizza delivery). It ignores the fact that is is much more difficult to get quality ingredients such as beef and iceberg lettuce, and it ignores Russia's famous insensibility to customer service, which can make many Russian restaurants more like torture chambers than Disneylands. In other words, PPP is a really weird, possibly drug-induced, pipe dream.

When we strip away the oil factor and the PPP factor from Russia's economic data, we are left with a third world country. Zaire with Permafrost, as Jeffrey Taylor called it in the May 2001 issue of Atlantic magazine. Actually, given the oil, "Nigeria with Permafrost" would perhaps be a better analogy. Except that, unlike most third-world countries, this particular one is attempting to build ICBMs, maintain a gigantic army and participate in space exploration.

Meanwhile, as Anders Aslund reports in the Moscow Times, things are going from bad to worse. Aslund states: "According to the European Bank for Reconstruction and Development, the share of gross domestic product created by private companies fell from 70 to 65 percent last year." This is not because private companies got less productive; to the contrary, Aslund points out they are doing rather well, relatively speaking. Rather, it's because the Kremlin has launched a spree of nationalization, coming on the heels of its takeover of the media, and every time the Kremlin gobbles something, efficiency plummets. The most spectacular recent renationalization was YUKOS. Aslund notes: "Meanwhile, a new draft law has named 39 strategic industries that the Kremlin wants to dominate, and renationalization proceeds on course."

And the MT's Konstantine Sonin reports that "President" Putin "announced that he had already been pondering the problem of choosing a successor in 2008 for some six years, since shortly after he took office. He also said he could not simply leave his post with a click of the heels and a hearty "Here's the reins, see you around!" Sensing the changes in the president's tone -- before this Putin had always simply said he would depart on schedule -- Voronezh Governor Vladimir Kulakov leaped to the forefront with a proposal to amend the Constitution." Simultaneously, Putin launched an attack on Belarussian "President" Lukashenko, depriving him of subsidized gas in a possible attempt to soften him up for a merger that would allow Putin indefinite rule over the new entity. That's to say nothing of the easiest option, simply remaining in power. Does anyone belive we'd see Russians rise in an Orange Revolution against the proud KGB spy of whose utterly failed policies 70% of Russians allegedly approve?

The MT's Alexander Goltz adds more misery and woe: "In Moscow, protesters broke into an exhibition at the Library of Foreign Literature with cries of 'NATO is worse than the Gestapo!' 'Kill NATO! Death to NATO!' and 'NATO is Russia's enemy!' The funny thing is that those protesting against NATO were expressing the views of Russia's leaders. When President Vladimir Putin addressed the Federation Council, he compared the West to a wolf that "eats and doesn't listen to anyone. And, it would seem, doesn't plan to start listening." Three years ago, the pamphlet "Urgent Tasks for the Development of the Armed Forces of the Russian Federation" stated that NATO was implementing a strategy so aggressive that it could only be stopped by nuclear strategy. This was written despite NATO's adherence to the doctrine of the mutual defense of member states, which means that Russia cannot be attacked. At present, NATO has rapid reaction forces that number only 20,000 to 30,000 troops."

In other words, Russia has freely chosen the path of self-destruction.

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