SEEDS AND THE RUSSIAN ECONOMIC RIDDLE
Winston Churchill famously described Russia as “a riddle, wrapped in a mystery, inside an enigma”, but he also suggested that the key to the riddle might be “Russian national interest”.
It is hard to disagree with either of his conclusions.
What follows is an assessment of Russia, and the rouble, from a strictly economic and financial perspective. If nothing else, we can at least hope to reach a balanced appraisal, which shows that the Russian economy is neither a giant nor a pigmy.
In fact, Russia emerges pretty well from the SEEDS process.
We cannot hope to understand Russia if we accept the forex markets’ long-established distaste for the rouble. What FX markets think about a currency isn’t science, of course, but the simple application of market exchange rates to rouble numbers can lead to conclusions which make no sense whatsoever. On this misleading basis, it is sometimes said, for example, that Russia has an economy ‘the size of Holland’, and her defence expenditure isn’t much bigger than that of France or Britain. Neither statement is meaningful.
An intriguing point to emerge from SEEDS analysis is that the rouble deserves a lot more respect than it tends to get. Unlike America, Britain, the Euro Area or Japan, Russia hasn’t spent a decade gaming her currency through “monetary adventurism”. Neither, for that matter, has she ever adopted the Western practice of “credit adventurism”.
Russia’s private and public debt equates to just 91% of aggregate national prosperity, at a time when ratios for the Big Four range between 340% for the US dollar and 456% for the Japanese yen. Russian exposure to the banking system is small, too – total financial assets stand at 192% of prosperity, nowhere near America’s 660%, let alone Britain’s 1580%.
Like other developed economies, Russia has in recent years experienced a deterioration in prosperity per capita, but this decline has been extremely modest, and SEEDS projects little or no ongoing deterioration, which – again – is in stark contrast to America, Britain or the Euro Area.
Russia, in fact, is one of the few countries which can look ahead to the prospect of the next crash (GFC II) with comparative equanimity.
SEEDS analysis puts this equanimity into perspective. Growth in reported GDP since 2007 may have been pretty modest, at 12%, but this growth has been genuine, because Russia hasn’t emulated the Western practice of pouring debt-fuelled consumption into the system. Over the last decade, each RUB 1 of reported growth has been accompanied by only RUB 3.28 of incremental debt, a ratio lower than the United States (4.33:1), Britain (5.45:1) or the Euro Area (5.97:1), let alone Japan (13.9:1).
As you would expect, Russia’s trend ECoE (energy cost of energy) is low, estimated at 4.9% in 2017, versus a world average that is not only far higher (at 7.7%) but is also rising a lot more rapidly – by 2025, when the global ECoE is likely to have reached a growth-throttling 9.6%, Russia should still be at (or just below) 5%.
Also in 2025, the average Russian can expect prosperity to be pretty much the same as it was in 2017, a far cry from the rates of deterioration to be anticipated in Britain (-5%) or the United States (-6%). It’s worth remembering, too, that the average Russian is about 9% more prosperous now than he or she was back in 2007, again in stark contrast to America (-7%) or the United Kingdom (-9%).
On a longer perspective, Russians remain 75% more prosperous now than they were back in the dark days of 2000, and rampant inflation (which reached 72% in 1999) has been confined to the history-books.
In short, it’s easy for critics to ascribe the popularity of Mr Putin to crude nationalism or electoral chicanery – but SEEDS analysis suggests that prosperity, and economic resilience, might have rather a lot to do with it.