Henry Kirby in London -
After months of downward pressure, the ruble went into near free-fall during the first week of December. From 36 to the dollar in early August, the Russian currency fell rapidly from 47 to 53 to the greenback in just a few days, amid rumours (later discredited) that the Kremlin was considering capital controls.
This sudden further drop led to press reports that Russian GDP, having previously been valued at over $2,000bn, is now worth just $1,300bn. Having been the world’s eight-largest economy, the argument goes, Vladimir Putin’s Russia is now languishing in 13th place, only slightly ahead of still-stagnating Spain.
On closer inspection, though, such analysis is rather crude and certainly selective. While the ruble has clearly fallen sharply against the dollar, the Russian economic picture is somewhat less bleak.
The ‘Russia-is-now-Spain’ headline hinged on devaluing Russia’s 2013 GDP by the entire extent to which the ruble has fallen against the dollar from the end of 2013 (RUB32.8) to December this year (RUB50.3). On that basis, the GDP contraction was indeed enormous – from $2,090bn to $1,370bn, a fall of 34.6%.
This is dubious methodology for three obvious reasons.
Firstly, since 2013 the Russian economy has grown and is predicted to record 2014 growth of 0.5-1.0%.
Secondly, to take the daily rate of the ruble as a clear indicator of the overall size of the Russian economy would be to say it can grow or shrink by several hundred basis points a day. Between the last Friday of November and the first Monday of December, the ruble lost 5.9% of its value against the dollar. An economy shrinking by such a number over an entire year would be disastrous yet believable. To claim it could happen over a single weekend to a country that has registered GDP growth in every quarter of 2014 is fanciful, if not simply misleading.
Thirdly, Russia’s energy-heavy economy is not measured only in rubles. Its vast exports, which make up 28% of its GDP, are measured in dollars. If its ruble-based economy is devalued to reflect its weakness, then surely its dollar-denominated wealth should be inflated reciprocally. Doing this using the ‘Russia-is-Spain’ methodology would see the economy shrinking to $1,880bn, slipping just one place down the world rankings, from eighth to ninth. This method still takes a single day’s exchange rate as symbolic of the overall economy. Thus using instead the far more representative average exchange rate for the year to date (RUB36.9) would be more appropriate, albeit still rather crude, and result in the economy shrinking by 4.5% to $2,030bn.
Even factoring in Russia’s foreign currency-denominated exports into the equation fails to recognize that the majority of Russia’s trade is actually with the Eurozone. Repeating the calculation with the ruble’s value against the euro rather than dollar shows the economic climate to somewhat less volatile than suggested by the ‘Russia-is-Spain’ headline-writers. Devaluing to the RUB62.6/EUR rate at the beginning of December would see a 9% contraction, while a devaluation using the year-to-date average rate of RUB49.2/EUR would result in a contraction of only 3% and Russia remaining the eighth-largest economy in the world.
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