MOSCOW BLOG: Russia overtakes Germany to become 5th largest economy

By bne IntelliNews July 17, 2013

bne -

Russia passed an important milestone on July 15, overtaking Germany to become the biggest economy in Europe in terms of purchasing power parity and the fifth biggest in the world.

This achievement comes on top of the World Bank's decision a week earlier to upgrade Russia from a "middle-income" to a "high income" country after per-capita income passed the $12,700 mark.

Russia is now the only one of the five BRICS - Brazil, Russia, India, China, South Africa - that is a high-income country and no longer an emerging market.

Indeed, Russia has not been an emerging market for several years already, according to the UN Development Programme (UNDP) rankings.

The World Bank's new GDP rating published last week ranks the US as the world's largest economy by purchasing power parity last year with $15.7 trillion, followed by China with $12.5 trillion, India with $4.8 trillion, and Japan with $4.5 trillion (see table below).

Russia overtook Germany last year to rank fifth with $3.4 trillion, versus Germany's $3.3 trillion. In 2011, Russia's GDP based on purchasing power parity totalled $3.203 trillion, compared with Germany's $3.227 trillion, RT reports.

Russian Prime Minister Dmitry Medvedev was singing Russia's praise after the results were released. "I've just looked at the news story that Russia has moved to fifth place in the ranking of the world's largest economies by GDP, edging out Germany. I don't know the methodology that the World Bank used, probably by purchasing power parity, but this is good news," Medvedev said.

These years are key for Russia as it starts to flex its economic muscle. While most commentators focus on China's astronomical GDP growth rates where Russia does poorly in comparison - Russia's economy grew by a mere 1.6% over the first quarter of this year whereas China's economy expanded by over 7% - this ignores the relatively large differences between the two leading emerging markets: while Russia is a high-income country, China has only recently moved into the middle-income bracket.

Instead of looking at raw growth, if you compare Russia's GDP per capita growth with that of the other BRICS, then Russia is growing by far the fastest amongst the "emerging markets."

It is already the second biggest consumer market on the Continent, and as bne reported in a cover story in February 2012 it will soon become the biggest consumer market in all Europe in the next few years.

However, becoming so rich and having incomes rise so fast comes with its own set of problems.

As both the EBRD's chief economist Erik Berglof and Renaissance Capital's Ivan Tchakarov have argued recently, Russia now faces the danger of falling into the "middle-income trap" where rising incomes makes the economy uncompetitive faster than its backwardness is an advantage. The jury is still out on whether Russia can escape this trap, hence the Kremlin's current emphasis on boosting growth at any cost.

The World Bank's rating differs from the nominal GDP rating compiled by the International Monetary Fund, where Russia ranks only eighth with $2 trillion, while the US is at the top with $15.7 trillion, followed by China with $8.2 trillion, Japan with $6 trillion, Germany with $3.4 trillion, France with $2.6 trillion, the UK with $2.4 trillion, and Brazil with $2.4 trillion.

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