beyondbrics

A fascinating report from Kingsmill Bond and colleagues at Citi on Monday tackles the issue of Russian imperialism and whether investors should be worried.

Absolutely not, says Bond. The fear of Russian imperialism is back, he writes, but there are no grounds for it. In a series of graphs (after the break) he charts the decline of Russia as a global power and argues that its reduced circumstances will force it to make friends with Europe to attract the technology it needs for modernisation.

The report argues convincingly that there is no reason to fear a resurgent Russia. But it leaves to one side the reasons to fear a Russia in decline.

First, some fun with graphs. Using data compiled by Angus Maddison, an economic historian, Citi shows how Russia’s share of world GDP peaked under Stalin before plummeting with the collapse of the Soviet Union. Its subsequent small recovery in no way returns it to superpower status.

Citi then looks at how China’s share of global GDP compares with Russia’s. China, unsurprisingly, is on a sharp upswing as Russia stagnates. Comparing China’s GDP directly with Russia’s gives us another vivid picture. China’s economy, at nine times the size of Russia’s, has returned to what the report calls “a degree of superiority not seen since the Middle Ages”.

So much for the past. What of the future?

Citi’s conclusion is that Russia’s GDP is unlikely to rise above 3 per cent of global GDP – much less than the 10 per cent it enjoyed at the height of its power. So in spite of what it terms “the gigantist ambitions of certain Russian leaders” and of what for many is “the spectre of a resurgent Russia once more menacing the West”, the report concludes:

• Russia is no longer a threat. Even after a decade long boom in commodity prices, Russia is still only 2.5% of global GDP using the Angus Maddison data or 3% using the IMF data. As the population is at best flat and GDP per capita is no longer rising at much faster than the global average, Russia will likely struggle to increase much from this level. And without a larger share of GDP, Russia is unlikely to present an imperialist threat.
• Russia has little to offer to its potential satellites. In order to become even a regional power, a country has either to offer an attractive ideology, possess military power or have a strong economy. While the Soviet Union had the first two factors, modern Russia arguably does not, and has struggled even to attract Ukraine into its sphere of influence.
• Russia must modernise to survive. Faced with the inexorable rise of China, it is highly likely that Russia’s leaders will embrace real modernity so as to increase GDP per capita growth rather than simply paying lip service to it.
• Russia’s future lies in Europe. As argued by Dmitry Trenin, Russia will be likely to seek its future in a Europe as an equal partner rather than with China as a junior partner.
• The risk is that populists appeal to nostalgia. As outlined by Gaidar, the risk to the Russia story is that a populist leader arises who appeals to nostalgia for the past and seeks somehow to recreate its perceived glories. Within that context, investors should perhaps see the relatively known quantity that is Putin in a more favourable light. Investors should also realise that it is quite rational for a Russian leader to play a double game, appealing to nostalgia to get support from the population and at the same time being quite constructive with the West. Aggressive statements are usually made ‘for internal use’ and often have limited implications for real foreign policy.

But should investors – and indeed the outside world in general – really be so sanguine?

We direct readers to a recent column by the FT’s Philip Stevens, which begins:

The west used to worry about an over-mighty Russia. A Russia in decline is the more threatening proposition

and concludes:

American and European interests lie in a modern, stable and prosperous Russia closely engaged in the world. A declining Russia will prefer to seek out enemies rather than make friends. Sad to say, all the signs are that [Vladimir] Putin is beyond convincing. Like the oligarchs, he is frozen in time.

Related reading:
Putin’s Russia: frozen in decline, Philip Stevens, FT
Russia feels the pain as investors take flight, FT
Putin seeks to calm investor fears, FT
Putin’s Eurasian Union: what’s in it for Kazakhstan? beyondbrics