This article was originally published on The Conversation, an independent and nonprofit source of news, analysis and commentary from academic experts. Disclosure information is available on the original site.
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Author: Eric Werker, William Saywell Professor of International Business, Simon Fraser University
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.
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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.
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
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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.
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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.
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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 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) and multiplied by the exchange rate. 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.
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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.
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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.
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Eric Werker does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
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This article is republished from The Conversation under a Creative Commons license. Disclosure information is available on the original site. Read the original article: https://theconversation.com/the-russian-economy-is-headed-for-collap https://t
It’s been just over two years since the Bank of Canada began its aggressive tightening policy in March of 2022. With the Bank of Canada anticipated to soon pivot and start cutting the overnight rate, hopes and signs of an economic rebound are growing. In fact, in its April Monetary Policy Report, the bank lifted its real GDP growth forecast for 2024 to 1.5 per cent, from its prior estimate of 0.8 per cent, supported by a strong January GDP reading
Ahead of next week’s release of the February GDP data, The Globe and Mail spoke with Scotiabank’s chief economist Jean-François Perrault, who discussed his economic growth forecasts, perspectives on monetary policy, as well as key economic growth drivers and risks.
Does the U.S. Federal Reserve need to cut rates this year? When I look at the fundamentals, the economy is resilient, the labour market is strong, and inflation is still above their target.
We think U.S. inflation hovers around these levels this year and then gradually comes down next year, and that’s a little bit different than what we thought a few months ago when it looked like U.S. inflation was on a solid downward path. Now, the last few months it’s been the opposite issue, inflation has surprised on the upside.
As to whether or not the Fed actually does need to cut interest rates, you’ve got to think about monetary policy and the way monetary policy makers think about it, which is it takes a long time for their policies to impact activity. So, while we think the Fed cuts in the second half of this year, that’s really thinking about normalizing policy so that in 2025 and beyond inflation goes to where they need it to.
Our view assumes that U.S. growth doesn’t accelerate going forward and inflation doesn’t accelerate going forward. Now, if those things happen, if you get more surprises on the inflation side, you can easily rule out a rate cut in the U.S. this year and you might have to start thinking about rate increases.
What probability would you assign to rate increases?
Pretty low.
Your U.S. GDP growth forecast for this year is 2.4 per cent. However, in one of your notes you said you wouldn’t be surprised to see growth near 3 per cent.
The pace at which data are coming in and the revisions that we are seeing to the outlook, if we continue on this surprise pace, it doesn’t take that many surprises to bring you up closer to 3 per cent as opposed to 2.25, 2.5.
I think of it in this really simple way. One of the big shocks we have to the U.S., for instance, is retail sales, which are extremely strong and that’s the rate sensitive part of the economy. Household spending is one of the things the Fed would expect to see being weak when they’re having an impact on the economy. We’re seeing the opposite of that – a sharp pickup in retail sales. That suggests that there’s this risk going forward that growth is going to surprise to the upside again.
What’s your 2024 economic outlook for Canada?
We have been revising growth up progressively in Canada, not to the extent that we’re seeing in the U.S. We’ve got 1.5 per cent growth for Canada, in the U.S. you’re well over 2 per cent growth. But, the data are coming in stronger than expected.
On the flip side though, in Canada, is the inflation data have been coming in and surprising to the downside. There is this different inflation dynamic between Canada and the U.S. Canadian inflation is slowing, U.S. inflation is accelerating. So even though growth is being revised up in Canada, it does suggest that there is more likeliness to a rate cut in Canada than in the U.S. at this point or certainly more rate cuts in Canada this year than in the U.S.
You’re anticipating 75 basis points of cuts this year by the Bank of Canada. When do you have the first rate cut occurring?
Our official call is September. We’re starting to waffle between September and July because the inflation data are a little bit better than we thought. To us, it seems unrealistic at this point for the Bank of Canada to cut in June.
I’m sure you speak to many CEO’s of companies. If my assumption is correct, what are you hearing from business leaders regarding capital spending plans, labour plans surrounding hiring and firing, costs, and supply issues. What main themes or insights into economic activity are you hearing from business executives?
We talk to CEO’s and boards pretty regularly in most sectors.
We’re at a point in time when monetary policy hurts the most as it takes 18 to 24 months for monetary policy to have a full impact on the economy. This is around the time, in principle, the economy is the weakest, maybe it was last quarter, maybe this quarter. As a result, it’s normal for businesses to be a little more cautious.
On the labour side, it’s a little bit different. You’re still seeing companies complain about labour shortages, you’re still seeing significant wage gains being offered. You’re still seeing companies hoard workers. It’s unusual in the sense that typically when the central bank raises interest rates, you get a slowdown in economic activity that lowers employment growth, in fact, lowers employment levels and you get some downward pressure on wages. We haven’t really seen that.
But, there is a certain degree of optimism with respect to how the economy responds to lower interest rates because those are coming so that’s impacting how people approach decisions. Once interest rates start to come down, it’s pretty clear that we’re going to get a significant turnaround in the economy and that will carry business investment with it and higher consumer spending, which is in part why we think the government needs to be cautious because if you do that too soon, you create a growth problem, which from a Bank of Canada perspective is an issue, from a business perspective, of course, we all want.
How great of a risk do you see rising commodity prices filtering through the supply chain and lifting inflation?
It’s 100 per cent a risk. The fact that commodity prices are by and large performing well in an environment where monetary policy is still tight around the world, where growth is being suppressed by central banks, where China is in a pretty weak economic situation – that’s the type of environment you would normally see commodity prices being pulled down in. The fact that we haven’t seen it that much really makes you question as the global economy starts to rebound, say in the second part of this year as central banks start to cut rates, what kind of a commodity price response do you get then? For us, this is a really significant issue in terms of inflation control, you’ve got to keep this in mind.
When you consider we may be in an environment of higher for longer interest rates, do investors have to lower or moderate their earnings growth expectations?
I would say no. You’ve got to keep in mind why would interest rates not come down this year and figure out what that means for the economy. Say we end up with 3 per cent growth in the U.S. this year and the Fed doesn’t cut or the Fed has to raise further. Well, that’s occurring because growth is strengthening. That means earnings are probably rising. That means there’s more business to be done. So, if rates are higher for longer because the economy is strong, it’s a different thing than rates are higher for longer for no other reason than central banks are really aggressive in bringing things down.
What about in Canada where rates may be higher for longer, but that’s not because of a strong economy but because the Fed is holding rates steady.
For Canada, it’s a little bit more tricky because you have exactly that going on.
We’ve revised our growth forecast up, but not to the extent that we’re seeing in the U.S. So, it does suggest that there’s a little bit of a differential between how Canadian and U.S. stock markets would adapt to that. But you also got to keep in mind though that if you’re revising your U.S. growth forecast up, you’ve got to revise your Canadian growth forecast up as well, three quarters of exports go to the U.S. So, if we find ourselves with an unbelievably strong U.S. economy, we’re going to have a stronger economy. So, there will be an earnings lift that comes from that in Canada.
Where it gets a little bit tricky though is higher for longer interest rates then impacts multiples because discount rates change. You’ve got the impact of higher interest rates, which depresses stock market valuations to some extent.
There’s been a lot of surprises or turn of events. Not too long ago, we were talking about the risk of a recession. At the beginning of 2023, there were talks about rate cuts but instead, after a pause, there were two rate hikes mid-year. At the start of this year, people were talking about six rate cuts by the Bank of Canada starting potentially as early as March and now those expectations have been scaled back. What do you think may be the next surprise to investors?
We’ll see if it’s a surprise or not, but I think the thing to worry about over the next several months is the result of the U.S. election.We might get some growth surprises between now and then, maybe we get some inflation surprises, which will be meaningful in terms of the timing of monetary policy. The outcome of the U.S. election, for instance, if Trump wins and he does some of the things that he says he’s going to do on the tariff side then you end up in a potentially very different economic space this time next year, or two years from now, or whenever, if he wins and he does the things that he says he wants to do. That will overhang markets for a while until we get clarity on that in November.
In the short run, what we’ve observed and the reason we’ve been scaling back rate cuts in Canada and in the U.S. has largely been because growth has been more resilient than anticipated. If you find yourself in a world where growth isn’t slowing down as much as you thought it was, there’s no recession, then you have to rethink the pace at which you were going to unwind policy because the economy is turning out to be better than you thought, better able to handle those rate increases.
You led me into my next question. Trump has pledged to impose 60 per cent or higher tariffs on goods from China, which would ignite inflation. How do you see this impacting the economy?
It’s broader than that. He’s threatened at least 60 per cent on China and 10 per cent for everybody else so that’s a trade war. That is the Americans declaring a trade war on the rest of the world. Now, would we be included in that or not? I don’t know, it depends on the range of things.
That does two really nasty things. One, it reduces economic activity in the U.S. because you’re paying more for inputs, it’s a supply shock so it reduces growth a little bit or a lot depending on what exactly he does, but also boosts inflation because the cost of goods is rising. So, you have this awful situation where you’re revising your growth forecast down, you’re revising your inflation forecast up and you’re probably raising your rate forecast as well because at the end of the day, central banks have got to manage the inflation side of things. Now, that’s true in the U.S. and it’s also true elsewhere.
What do you see as significant tailwinds and headwinds for the Canadian economy?
Obviously, the commodity sector has been beneficial to us. We’re going to have the Trans Mountain start operating very soon as well so we’re going to benefit from that. There still are relatively strong household and corporate balance sheets in Canada. And then there’s the population dimension, which has been a really powerful tailwind the last couple of years that seems to still be a very powerful tailwind.
On the headwind side, setting aside the election, politics, I think by far the most important is low productivity. It hits our standard of living, it hits our competitiveness, which makes it even more important, say in a Trump tariff world. If we cannot improve productivity in any meaningful way then you have a gradual erosion of competitiveness, a gradual erosion of standard of living, a gradual erosion of well-being in the country and that is a big deal.
Speaking about erosion, I was thinking about housing affordability when you were talking about that. What’s your outlook for home prices?
The market is so undersupplied pretty well across the country. There’s such a large imbalance between supply and demand that it’s very difficult to believe that house prices are going to do anything but rise over the next several years. It’s very difficult to see affordability improving in the next five years.
Will Bitcoin ever be included in your currency analysis?
No. It’s honestly a very difficult thing to analyze. It’s not a currency. There’s no intrinsic value to it. It’s just a financial asset whose value moves up and down on the basis of how many people want to buy and sell it.
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The ‘poor borrower’ narrative rules in media coverage of the Bank of Canada and high interest rates, and that’s appropriate.
A lot of people have been financially slammed by the rate hikes of the past couple of years, which have made it much more expensive to carry a mortgage, lines of credit and other borrowing. The latest from the Bank of Canada suggests rate cuts will come as soon as this summer, which on the whole would be a welcome development. It’s not just borrowers who need relief – the boarder economy has slowed to a crawl because of high borrowing costs.
But high rates are also a big win for some people. Specifically, those who have little or no debt and who have a significant amount of money sitting in savings products and guaranteed investment certificates. The country’s most well-off people, in other words.
Lower rates will mean diminished returns for savers and less interest paid by borrowers. It’s a stretch to say lower rates will improve financial inequality, but they do add a little more fairness to our financial system.
Wealth inequality is often presented as the chasm between well-off people able to pay for houses, vehicles, trips and high-end restaurant meals and those who are driving record use of food banks and living in tent cities. High interest rates and inflation have given us more nuance in wealth inequality. People fortunate enough to have bought houses in recent years are staggering as they try to manage mortgage payments that have risen by hundreds of dollars a month. You can see their struggles in rising numbers of late payments and debt defaults.
Rates are expected to fall in a measured, gradual way, which means their impact on financial inequality won’t be an instant gamechanger. But if the Bank of Canada cuts 0.25 of a percentage point off the overnight rate in June and again in July, many borrowers will start noticing how much less interest they’re paying, and savers will find themselves earning less.
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Anyone who has renovated a kitchen lately knows how expensive stone countertops can be. Look after yours by protecting it from a few common kitchen items.
A helpful explanation of stock market corrections. It seems an opportune time to look at corrections, given how volatile stocks have been lately. Like scouts, investors should always be prepared.
Food inflation requires more careful grocery shopping. Here’s a roundup of food products – cookies, snacks, ice cream – that don’t taste as good as they used to. Food companies have always adjusted their recipes from time to time. Is this happening more because of inflation’s impact on raw material prices? A U.S. list – most products are available are familiar to Canadians, too.
Ask Rob
Q: I have Tangerine children’s accounts for my kids. Can you suggest a better alternative?
A: The rate on the Tangerine children’s account is 0.8 per cent, which actually compares well to the big banks and their comparable accounts. For kids aged 13 and up, check out something new called the JA Money Card.
Do you have a question for me? Send it my way. Sorry I can’t answer every one personally. Questions and answers are edited for length and clarity.
Tools and guides
A comprehensive guide on how to build a good credit score.
Watch: Is now the hardest time ever to buy a home?
Money-Free Zone: Singer-songwriter Maggie Rogers has a new album called Don’t Forget Me and it’s generating some buzz because it’s a great listen. Smooth vocals and a laid back countryish vibe that hits a faster pace on one of my favourite cuts, Drunk.
More PF from The Globe
– He keeps ‘a few thousand in crisp new bills’ at home – is that a good idea?
– The pension pivot: Employers recognizing that workers need help with debt as much as retirement
– Her bond ETF is ‘a dud and not promising at all’ – should she sell?
– Despite high fees, Canadians remain perplexingly loyal to mutual funds. Here’s why
