By Ben Aris, Intellinews, 6/4/24
The Russian economy has overtaken Japan to become the fourth largest in the world in PPP terms (purchase power parity), according to revised data from the World Bank released at the start of June.
As bne IntelliNews reported in August, Russia had already overtook Germany to become the fifth biggest economy in adjusted terms. Hit by multiple shocks recently and cut off from cheap Russian gas, Germany is now stagnating and has fallen to sixth place in the World Bank’s ranking.
PPP GDP measurement is preferred by many economists, as it takes into account the difference between local prices and nominal prices similar to The Economist’s famous Big Mac index: a burger in Moscow costs about half as much as the same burger in New York.
The World Bank improved Russia’s ranking after revising its data and says that Russia actually overtook Japan in 2021 and has maintained its position as number four since then. Its previous calculations were based on 2017 data but have now been updated to reflect 2021 figures.
Previously, Russian President Vladimir Putin set his government the goal of producing economic growth ahead of the global average. Before the war in Ukraine started, Russia’s economic growth was well behind that of the global average and close to stagnation. However, following the invasion of Ukraine in 2022, the economy has been enjoying a military Keynesianism boost and is currently the fastest growing of any major economy in the world.
And Russia has overtaken Japan ahead of schedule. Putin explicitly set his government the goal of attaining fourth place among the world’s largest economies in terms of PPP earlier this year, and the Cabinet was instructed to prepare measures to achieve this goal by March 31, 2025.
By breaking off relations with the West Putin has made a big bet on the Global South Century, where most of the developing world countries are growing much faster than the West. Currently China and India are in the number one and three slots in the global ranking in PPP terms but both are expected to become the leaders in nominal terms as well over the next three or four decades. Most of the fastest growing economies from lower down the list are also from the Global South.
As bne IntelliNews has extensively reported, Russia has changed its economic model and after decades of austerity began to invest heavily, spurring growth in a new Putinomics. At the same time as investment is pouring into the military industrial complex, Putin has also launched the National Projects 2.1 programme to invest into the civilian economy as well and improve the quality of life for the average Russian, as he made clear in his recent guns and butter speech. And the war is proving to be a boon for Russians, as Russia’s poorest regions have been the biggest winners and as bne IntelliNews recently reported, the country’s despair index has fallen to its lowest level ever this year – the sum of inflation, unemployment and poverty.
As a result of these changes, economists estimate that Russia’s growth potential has increased from 1-1.5% pre-war to around 3.5% now. Last year, Russia’s economic growth caught analysts off guard with a 3.6% expansion. This year the World Bank has already almost trebled its forecast for growth from 1.1% to 3.2%. Russia’s Economic Ministry is similarly bullish.
Even the World Bank’s PPP adjusted size of the economy may be an underestimate. The World Bank also estimates that 39% of Russia’s economy is in the shadows, while the shadow economy only makes up 10% of Japan’s economy, which would add an additional $2.5 trillion to Russia’s $6.4 trillion PPP adjusted economic size – still not enough to overtake India’s $14.6 trillion PPP adjusted GDP value, but widening the gap with Japan further.
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World Bank upgrades Russia to “high-income” country due to war-spending boost
By Ben Aris, Intellinews, 7/3/24
The positive economic news keeps coming for Russia after the World Bank upgraded it from an “upper-middle-income” to a “high-income” country, putting it in the same group as the leading G7 nations, the bank said on July 1.
Bulgaria and Palau were also upgraded to “high-income” in the World Bank’s ranking.
Russia’s economy has defied expectations by outperforming all expectations following the imposition of harsh economic sanctions that have been offset by heavy spending on the military industrial complex.
“Economic activity in Russia was influenced by a large increase in military related activity in 2023, while growth was also boosted by a rebound in trade (+6.8%), the financial sector (+8.7%), and construction (+6.6%). These factors led to increases in both real (3.6%) and nominal (10.9%) GDP, and Russia’s Atlas GNI per capita grew by 11.2%,” the World Bank said.
The World Bank’s reclassification is based on the increase in the size of the economy based on its 2023 gross national income (GNI) per capita of $14,250, the World Bank said in a blog. Any country with a GNI per capita of more than $14,005 is considered to be a high-income country.
However, the World Bank noted that the increase in wealth is mostly due to the military Keynesianism boost that the Russian economy has enjoyed as a result of the war with Ukraine that broke out over two years ago. Incomes have also been artificially driven up by the chronic labour shortage that has pushed up nominal wages well above the rate of inflation.
Russia’s economy grew by an unexpected 3.6% last year making it the fastest growing major economy in the world, and is on course to grow again this year by at least 3%, according to the latest Central Bank of Russia (CBR) monthly macroeconomic forecast.
If sanctions were designed to collapse the Russian economy, they have been a failure and some have argued that the economy is now stronger than ever as a result of a fundamental change to Putinomics strategy from hoarding money to releasing massive amounts of pent up fixed investment. Some economists have argued that what started as a Keynesian bump is now transforming into a structural change in the nature of Russia’s economy thanks to the investment that will make growth stronger and more persistent in the medium-term.
Last month Russia also overtook Japan to become the world’s fourth largest economy in the world in PPP (purchase power parity) terms, according to World Bank data. Three of the world’s five largest economies are now BRICS members: China, US, India, Russia and Japan, in that order. Germany was fifth in the last ranking, but has now been pushed into sixth place. Both Japan and Germany are seeing their economies slow in PPP terms while most of the leading Global South countries are seeing their economies accelerate and rise up the income rankings in recent years.
The World Bank attributed Russia’s economic uplift to a significant increase in military-related activities and rebounds in trade, the financial sector, and construction.
Despite the challenges posed by international sanctions and ongoing geopolitical tensions, these sectors have demonstrated resilience and contributed to the country’s economic performance, the World Bank reported.
Ukraine also had an upgrade to “lower-middle-income” to an “upper-middle-income” country, after its GNI per capita rose to $5,070 in 2023. Like Russia, Ukraine was lifted by heavy military spending that has largely been funded by international financial aid – money that Ukraine did not have access to before the war broke out. Since the start of the conflict Ukraine has received some $86bn from donors, equivalent to about two thirds of the value of the pre-war economy.
The World Bank Group assigns the world’s economies to four income groups: low, lower-middle, upper-middle, and high. The classifications are updated each year on July 1, based on the GNI per capita of the previous calendar year. GNI measures are expressed in dollars.
The classification of countries into income categories has evolved significantly over the period since the late 1980s. In 1987, 30% of reporting countries were classified as low-income and 25% as high-income countries. Jumping to 2023, these overall ratios have shifted down to 12% in the low-income category and up to 40% in the high-income category.
The scale and direction of these shifts, however, varies a great deal between world regions. The World Bank profiled some of the notable changes in its blog:
·100% of South Asian countries were classified as low-income countries in 1987, whereas this share has fallen to just 13% in 2023.
·In the Middle East and North Africa there is a higher share of low-income countries in 2023 (10%) than in 1987, when no countries were classified to this category.
·In Latin America and the Caribbean, the share of high-income countries has climbed from 9% in 1987 to 44% in 2023.
·Europe and Central Asia have a slightly lower share of high-income countries in 2023 (69%) than it did in 1987 (71%).