The Rather Pathetic Economy of Russia | Economics Explained

this is russia the largest country in the world and the primary belligerent in what may prove to be the most consequential conflict of this century from the get-go i want to stress that i like almost every armchair general on the internet and woefully underqualified to speak about the details of the ongoing invasion of ukraine however this is a conflict that more than any that came before it is being fought just as hard with economics as it is with tanks and fighter jets and from that angle we can learn a lot about a country that by many metrics is absolutely terrifying but by many others is something else entirely as all of us have been doom-binging the latest updates of the situation in new ukraine there is a sound bite that we have been fed over and over again which is that despite russia's vast size immense resource wealth and large population its economy is comparatively kinda pathetic its national output has been compared in size to american states like texas and florida which is probably a bit disingenuous if for no other reason than the economy of texas is massive but it also sends the wrong message because the economy of texas is by almost every other metric better than russia's it's strange to call the 11th largest economy in the world inadequate but it's not the headline figures that tell the full story as much as it's the squandered opportunities had a few things been done differently over the past three decades there is no reason to expect that russia couldn't be one of the wealthiest most prosperous nations in the world today this was a country that in less than 10 years grew its output by over 800 percent it had a population that was ready to embrace the free market and work their butts off to build a better future for themselves and it had a world that by and large wanted it to do well to avoid regressing back into the cold war so what happened just how large and powerful is russia's economy today what stopped the growth it was experiencing in the early 2000s and finally is it in a position where it can justify a conflict as costly as the one it just got itself into as always once we've done all of that we can put russia on the economics explained national leader board yeah this is gonna be another country i'm not allowed to travel to for a while again okay so the economy of russia as we know it today started at the end of 1991 after the soviet union was officially dissolved and the russian federation was born out of its ashes alongside armenia azerbaijan belarus estonia georgia kazakhstan kyrgyzstan latvia lithuania moldova turkmenistan uzbekistan and ukraine the second most powerful entity in the world at the time disappearing effectively overnight left a very serious power vacuum after living through a failed pure attempt in 1989 mikhail gorbachev the last leader of the ussr wasn't overly keen and sticking around as a public figure any longer than he needed to that left boris yeltsin a former high-ranking soviet politician as the singular ruler of the new russian federation while the west was thrilled that the soviet union their arch nemesis for the better part of half a century was gone they were in many ways more scared of russia at this time than they were in the years before this represented the single most dramatic shift of power in world history even ignoring the humanitarian crisis of millions of people not sure where they should go to work or where they should get food or how their new country was supposed to operate the rest of the world was wrestling with a potentially bigger issue which was that this fragile state had a stockpile of thousands of spicy fireworks and it could easily just regress back into another communist adversary yeltsin was at the end of the day a former soviet politician so there was no reason to expect that he couldn't just revert the country back to a soviet system of government seeing this potential threat and wanting to smooth out the situation as much as possible a plan was put in place based off a handbook published by the international monetary fund and other international financial institutions here's a question for you let's say you have a country that is a complete failure the government is gone the currency no longer exists people don't know who owns what basically everything is starting from zero what do you do well luckily some very smart people thought of exactly what to do which is why we had the washington consensus so named because it was formulated by the kinds of institutions that have their offices in washington dc the washington consensus is basically the ikea instruction book you use when you are trying to build a national economy from nothing but flat pack components and it has 10 basic instructions fiscal policy discipline with avoidance of large fiscal debts relative to gdp redirection of public spending from subsidies especially indiscriminate subsidies towards broad-based provision of pro-growth pro-poor services like primary education primary health care and infrastructure investment tax reform broadening the tax base and adopting moderate marginal tax rates interest rates that are market determined and positive but moderate in real terms competitive exchange rates trade liberalization the liberalization of imports with a particular emphasis on elimination of quantitative restrictions like quotas licensing and tariffs liberalization of inward foreign direct investment privatization of state enterprises deregulation and legal security for property rights basically put these things in place and you should have an economy now some of these were easier to implement than others trade liberalization for example started off slow between its former soviet peers but eventually russia started trading its raw materials with the rest of the world it also implemented a new currency in 1992 which it made exchangeable for the old soviet ruble that came before it a funny little side note was that the one ruble coin worth less than one american sent at the time was practically identical in size and weight to the five swiss franc coin which led to many russians taking bags of these coins to hundreds of swiss vending machines and buying trucks full of snacks that they would take back to russia i guess it didn't take them too long to embrace capitalism after all that's not very important but it is very funny what was very important was the point about the privatization of state enterprises you might think given examples like china that opening up to international trade and embracing the free market was something of a cheat code to guarantee economic growth at least in the short term unfortunately that didn't really play out in russia and in the decade following the fall of the soviet union russia's gdp actually more than halved the biggest reason for this was the botched privatization of the nation's industries in the soviet union all industry was owned by the state but the washington consensus calls for value-adding industries to be privatized there are two reasons for this recommendation the first is that it establishes a free market you can't reform your economy on the foundation of capitalism if all of the biggest industries in the nation are controlled by the state the second reason for this recommendation is because it can make the country a lot of money in a very short space of time governments all over the world sell public assets off to free up cash and former communist nations theoretically have the most to sell off think of this as generating seed capital to launch a new business venture only instead of it being a company it's an entire country russia did have a lot of valuable industries natural resource extraction being the big one but there was also telecommunications utilities and manufacturing the only question became who should this go to the logical answer would be the highest bidder but there are some problems with this at the time the highest bidder would have been companies from the west and it was understandable that the new russian federation wasn't ready to stomach an american company controlling their oil fields just yet so most of these assets got sold off internally the problem was that people emerging from a failed social estate normally aren't flush with the kind of cash needed to make realistic bids on pieces of national infrastructure the corruption that followed almost cemented russia's fate for the following decades officials in charge of dishing out the nation's industries were paid off to award factories and minds to well-connected individuals many times themselves a family member or whoever gave them the best bribe this not only left major industries in the hands of a very small number of very corrupt people but it also meant that the country didn't raise nearly as much revenue as it could have had this privatization process been handled more fairly these well-connected individuals or oligarchs as they came to be known not only ran these industries poorly but they also took almost all of the money they made from their dodgy operations and invested it abroad this process was assisted by the russian government's insistence on maintaining a high foreign exchange rate any money made within russia by the oligarchs could be transferred to american dollars or more commonly british pounds at a rate higher than the free market would normally dictate the russian government paid a lot of money to maintain this exchange rate but all it really did was help wealthy and corrupt russian businessmen buy flats and football teams in countries that they thought were worth investing in this capital flight meant that the government had a hard time raising money and had to rely on continued international borrowing this all came to a head in 1998 when a failed war in chechnya and the asian financial crisis combined to give the new russian federation its first economic crisis the government was no longer able to pay its debts and the exchange rate fell sharply mismanaged industries were failing to attract foreign or domestic buyers and companies weren't even able to make payments to their staff leading to widespread workers rights across the country foreign investors fled the country further driving down asset markets and causing a run on the reserves of the russian central bank the world bank and the international monetary fund tried to intervene with an injection of 22 billion dollars these institutions were happy to provide support not only because that's their core function but also because nobody wanted this financial turmoil to push russia back towards soviet-style socialism unfortunately and perhaps to nobody's surprise it was later revealed that as much as 5 billion of that injection was stolen by connected officials as soon as the money entered russia but this sharp decline after a rather disappointing decade was something of a springboard for the russian turnaround russian luck started to turn around after this crash for a few reasons the first was that they didn't have that much further to fall but on a more serious note the currency lost 80 percent of its value practically overnight which is terrible for the economy at large but did allow for debts and unpaid wages to be paid back with relative ease russia was also a great beneficiary of the steady increase in oil prices that would be felt over the following decade it was at this time that one vladimir putin would become president succeeding boris yeltsin who had fallen sick and handed the reins to his then prime minister the new president oversaw a series of reforms that in fairness did do a lot of good for the economy but his first order of business was put into action on the 31st of december 1999 and it was titled on guarantees for the former president of the russian federation and the members of his family this ensured that corruption charges against the outgoing president and his relatives would not be pursued basically it was a presidential pardon for the ex-president's corruption scandal which conveniently also happened to involve putin himself yeah not off to a great start anyway despite continued corruption russia did do well for itself over the next decade large industries became increasingly consolidated but that meant that they were able to compete with their larger international rivals the domestic market was the real winner though for the first time ever the russian people had access to a financial system similar to what we take for granted in the west the people were able to borrow money find formal jobs and use this income to support genuine businesses in the country itself yes an enormous amount of wealth was still being disproportionately and perhaps even unfairly distributed to a very small group of people but let's be honest with ourselves it's not like that doesn't happen in our own economies right that's just part of being a free market economy well more on that later russia also managed to get through the global financial crisis of 2008 relatively unscathed its banks were so new and unsophisticated that they avoided most of the problems caused by advanced financial instruments they were however hit temporarily by the rapid decline in oil prices at the time nevertheless by 2013 strong growth had resumed and the economy was more than 10 times larger than it was at the lows of the 1990 financial crisis the new president was certainly controversial but sometimes a struggling nation needs strong leadership to get it headed in the right direction the problem was primarily who this prosperity went to serve a point that became particularly apparent in 2014 with the invasion of crimea following the shocking actions taken by the russian government the united states the european union australia canada and japan imposed sanctions on russia these sanctions did three things they put a ban on the provision of technology for oil and gas extraction they put limits on travel for international russian citizens who were close to president putin aka the oligarchs and it banned the provision of credits to russian oil companies and state banks that last one was the big one if state banks and oil companies couldn't raise money they couldn't lend money which in theory should starve the russian state of the resources needed to continue hostilities in practice it really didn't do too much for a couple of reasons they weren't particularly harsh and they were rolled back pretty quickly after the fact russia was also more or less ready for them decades of selling oil and gas internationally meant that russia had huge foreign currency reserves almost all oil is traded in american dollars which meant that the russian government and russian businesses were easily able to stockpile the world reserve currency to keep on hand for a rainy day the nation did need to use some of these reserves and the value of the ruble did drop in international markets but in many ways this was kind of a good thing for export businesses in russia because a devalued domestic currency made them more competitive in international markets that wasn't to say that there were no consequences the economy did shrink and the country experienced higher levels of inflation as imported goods were banned meaning supplies of everything from food to medicine was restricted to what could be produced locally this period was not great for the average russian but the thing is the decision makers didn't care russia is potentially the most unequal country in the world and i know i've said that about a few places but here's the thing we use a measurement called the genie coefficient to measure inequality this can either be used to measure income inequality as in my boss owns three times as much as i do or wealth inequality as in my boss has three houses and drives a car worth more than the apartment i share with four other broke students in the case of russia we will be looking at wealth inequality the genie coefficient ranks economies on a scale of 0 to 1 or 0 to 100 depending on who you ask zero represents perfect equality everyone has exactly the same amount of wealth and 100 means that all the wealth in a country is controlled by a single person and everyone else has nothing according to the world bank russia has a wealth genie of 37.5 which is not great not terrible it's certainly better than the united states 41.4 and far from south africa's top spot at 63. the problem is that these figures are only constructed using the data that the world bank has access to the financial elite of russia all the way up to the president himself have been exposed time and time again for moving money all over the world in order to hide and protect their true wealth studies from institutions such as credit suisse have theorised that if this money was moved back and counted within russia then the country would comfortably be the most unequal in the world what this meant was that the people with the money and power to influence policy decisions were not the one being hit by these sanctions russian banks that were dry on cash could just tap foreign currency reserves and redirect lending away from regular consumers all while those regular citizens struggled to find food and build a future in a failing state in a regular democracy this would have been the end of the powers that be but of course russia hasn't really ever been a real democracy in a place like australia or america you hold on to power by keeping the voting population happy yes there are political donations and yes there are news networks that can influence these outcomes but it still all comes down to the votes in a place like russia you hold on to power by appeasing the same group of people that squirmed and bribed their way into owning the major industries of the nation this leads us to the russia of about three weeks ago the country that had made itself a lot of money by selling a lot of oil and gas to a lot of countries that were beholden to their natural resource wealth a country that was run by a very small group of people for the benefit of a very small group of people a country that had a larger warchester foreign reserve than it did even back in 2014 and a country that saw very little in the way of consequences for its past acts of aggression the only thing left to see now is if this new wave of sanctions will be enough to finally get them to regret their decisions something that we will be trying to explore in next week's video but for now it's time to put russia on the economics explained national leader board starting as always with size russia currently has a gdp of 1.48 trillion us dollars this will almost certainly fall dramatically in coming years as sanctions and a costly war hit their economy's bottom line but for now it's still the 11th largest economy in the world and it gets an 8 out of 10. russia has a gdp per capita of just over 10 000 us dollars this is down significantly from its peak of sixteen thousand dollars in 2013 and for reference this figure is putin at behind china which has a gdp per capita of ten thousand five hundred dollars it gets a five out of ten growth has been underwhelming especially when compared to the 2000s when it genuinely looks like russia could be a real modern economic superpower but corruption mismanagement and warmongering are rarely a recipe for economic success and that's clear to see in an economy that despite all of its natural resource advantages has shrunk over the past decade it gets a zero out of ten stability and confidence well even before these latest hostilities you would only ever want to do business in russia if you really needed to do business in russia the sovereign risk of an openly hostile nation is just not conducive to business and given the actions of the nation in the past two weeks it's going to be a pariah on the world stage for a long time to come 0 out of ten finally industry russia has an abundance of natural resources and not much else going for it most businesses that do well for themselves within russia look to leave as quickly as possible to go to the less risky and more accommodating business environments of europe and north america it gets a 3 out of 10. altogether this gives russia an average score of 3.2 out of 10 which puts it in line with other economic success stories like cyprus and el salvador

Channel: Economics Explained

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Keywords: economics explained, the economy of modern day russia, the economics of modern day russia explained, modern day russia economics explained, economics explained modern day russia, modern day russia economy explained, modern day russia economy, modern day russia economy economics explained, modern day russia economics, how modern day russia economy works, russia foreign currency reserves, russia sanctions, russia asset seizures, russia economy, russian economy, ukraine economy

Id: ZAMz5kgb7V4

Length: 18min 57sec (1137 seconds)

Published: Fri Mar 18 2022

Reddit Comments

[u/GailenRho]

The rather pathetic economy of Russia… it’s a sadly true title. I love how there’s all this anti nato hype. Like yo NATO ain’t taking your land, raping your wives, bombing your kids. They’re trying to sell you Big Macs and Milka bars. Why you need to be protected from that?

[u/AnderUrmor]

Sad to see. Russia could have taken a completely different path, setting aside its old imperialistic ambitions and looked towards integrating itself into the European sphere as a democratic nation. They could have been a tremendous player in Europe with co-operation with other European powers such as Germany and France. This path could have made Russia into a significantly greater power than it is today, with a stronger economy and far better relations with its neighbors. So much potential, just wasted.

[u/silverob]

Spicey fireworks 💥 🤣

[u/[deleted]]

Rather ironic that the USSR, that bankrupted themselves fighting in Afghanistan (even when the Cubans, experts in guerrilla warfare, told them that the war was unwinnable) didn’t learn their lesson.

[u/MrBanana21]

I am still of the belief that the world needs to economically attack the average Russian. Once they get pissed, then they will unleash hell. Just like the 1917 revolution. And most Russians support the war, so they need to pay for it.

[u/Philstar1978]

Country of total corruption. Says it all when the ordinary people don’t care.