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Russianomics: the economic bunker needs supplies to endure

In previous posts on Russia’s economy under warfare, it has been shown that the country is facing sanctions on its war machine funding and its supply chains by the US-led coalition. This time, a range of figures will illustrate the readiness of the Russian economy to cope with the West’s penalties on its economy.

Understandably, President Vladimir Putin expected a backlash by the West to damage the Russian economy, as reported by Serina Sandhu, who explained that the economy could face a bank run if the sanctions set by the Western countries were successful.

 

The Russian economic bunker

Russian officials likely thought that the West’s response would lie in the attack on confidence in the economy. A good measure of confidence is the value of the domestic currency –thus, the attack on the national currency might be taken for granted.

On the other hand, it is well known that having enough gold and foreign exchange is a good backing for a domestic currency. Russia stored 2.271 tonnes of gold in 2019, fivefold the quantity held in 2000.

Such a speed of accumulation of real assets was not followed by any other country in Europe. Russia’s movement toward gold storage can be seen in the Russian reserves as a percentage of the US reserves, which rose from 5% to 25% –keep in mind that the US is the country with major gold tonnes stored according to the data reviewed.

Figure 1. Gold reserves of the Russian Federation

Chart made by the author with data from Market Index

 

In the economic hard times, Russian officials have drawn upon gold purchases; after the 2008’s financial crisis, Russia stepped up its purchases of gold and increased the pace even more after 2014 –when the problems with the US and Europe got worse due to the Euromaidan and Crimea integration into Russia.

The thing is that gold international prices in US dollars trended to rise in the last decades. First, the prices of that asset skyrocketed from 2000 to 2012, and then, from 2015 to 2020; If the bull trend turns into the new normal, the Russian government will have a sizeable amount of real assets getting exchange value –a Marxist way to say it –over time.

 

Low debt level

Also, Russia got its economy ready drawing upon austerity; while the government debt to GDP ratio has increased in Europe since the 2008’s global financial crisis (being over 90% of GDP) in Russia the debt fell since 2000, growing slightly since the pandemic outbreak.

Figure 2. The Russian Federation government debt (%GDP) 

Source: Trading Economics (government date %GDP)

 

According to the World Bank database (click here), after the Crimea conflict in Ukraine in 2014, the Russian Federation raised its international reserves faster than its debt, being one of the countries with the highest ratio of international reserves to debt. That is to say, the country counts on enough assets to meet its debt payments.

Such healthy finance has been possible given the trade-balance surplus Russia has enjoyed, exporting more than importing. Something that can be explained by a lack of investment momentum –a fact that is not favorable at all when it comes to long-term economic growth.

As you can see, exports grew faster than the whole economy (GDP), imports kept mostly following the economy, while consumption grew as fast as exports and investment fell behind, growing much lower than the whole economy.

Figure 3. Russia’s GDP index by component

Figure made by the author of the article with data from Penn World Table 10.0

 

In short, before its military intervention in Ukraine, Russia accumulated enough real assets in its warehouse as well as foreign exchange and kept its liabilities as a small portion of its economy. In other words, Russian officials turned the economy into a financial bunker solvent enough to keep steady the investors’ confidence.

 

Supply chain issues and prices hikes

However, as mentioned in a previous post, Russianomics: economic shelling on Russia’s supply chains!, the West has set several penalties on the Russian Federation that turned it into the most sanctioned economy. That means that importers have to face a range of hurdles in carrying out imports of foreign goods and services.

The prices in Russia are reflecting the negative effects of the West’s sanctions, which is why the growth of the consumer price index reached two digits figures immediately after Russia intervened in Ukraine, which comes about on 24 February 2022.

Figure 4. Inflation in the Russian Federation

Source: Trading Economics (consumer prices growth rates)

 

However, from April to June the growth in prices slowed down. Such a behavior matches with a strengthening of the ruble, which recovered its value after its drop in March.

Figure 5. Exchange rate U.S. Dollar/ Russian Ruble 

Source: the chart is taken from TradingView

 

As reported by The Wall Street Journal, Russia manufactured demand for its currency through the selling of gas in rubles rather than dollars and euros, thus, making “sanctioning nations support Russia’s currency” and ensuring “all funds from energy sales support its value”.

Although for now, Russia has been a sanction-proof economy, a question arises: how long can the Russian economic bunker endure economic warfare?

If we accept that prices are the reflection of relative scarcity and that the economy is about real value rather than nominal value, at the end of the day, whether Russians want the pace of prices to continue going down, their economy will have to cope with production and supply chain issues. In other words, it will have to deal with scarcity.

As already seen, investment in Russia has been pretty weak, and the reconversion of the Russian economic apparatus from Western-capital goods intensive to Asian-capital goods intensive (its industrialized allies) can be a very demanding task.

In a previous post it was stated that, when it comes to sanctions, the problem of the Russian economy lies in its capacity to import rather than export. Apparently, sanctions are working through the supply chains.

The following graph illustrates what Russia has to deal with: Russia stepped up its sales to China while its purchases from that country went down. 

Figure 6. China’s exports to and imports from Russia

Source: Peterson Institute for International Economics

 

According to PIIE, imports from sanctioning countries have fallen by 60% and from non-sanctioning countries by 40%. Besides, it reads that: China is the second-largest contributor to Russia’s import decline since the invasion, despite President Xi Jinping’s promise of «no limits» cooperation”.

Although it might mean that China is not backing Russia as it was expected, it is also possible that Russian companies are not able to reconvert their plants as fast as managers wish.

Furthermore, it is worthwhile to mention that a fall in economic activity –due to the pandemic and supply chain disruptions –would naturally bring down the number of imports (a sizeable economic downturn is forecasted click here). In other words,  it is hasty to say that import behavior is infallible evidence of real political support.

 

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Medardo Alfonso Palomino Arias

Por Medardo Alfonso Palomino Arias

Economista y Magister en Gestión Pública graduado en la Universidad Santiago de Cali, Colombia. He sido Profesor desde el año 2014 en distintas universidades de Cali. En la actualidad me encuentro adelantando estudios y viajando en Australia. El proposito de mi blog es difundir conocimiento sobre economía y brindar un espacio para el debate.

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