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Russian President Vladimir Putin has made a huge bet. After preparing for a war in Ukraine for a decade he must have known the Western response to the invasion would be extreme sanctions. And the sanctions were even more extreme than the Kremlin could have anticipated. Limits to machinery and technology were to be expected. Even restrictions on energy exports could have been anticipated. But banning Russia from the SWIFT messaging service was off the table until the last minute until it wasn’t, and the seizing of the Central Bank of Russia (CBR)’s $300bn of reserves came completely out of left field.

How is Russia going to cope with being cut off from one of the biggest and richest markets in the world? That is Putin’s gamble. Actually, the West is not the biggest and richest market in the world. The Global South is.

So far, Putin’s bet is working. The Global South has largely thrown its support behind Russia, or at least it has sat on the fence – as bne IntelliNews exploded in another DATACRUNCH on UN voting patterns – and maintained its trade with Russia, which has allowed the Kremlin to evade sanctions almost completely.

Outside Europe and North America, it's business as usual for Russia. Russia has successfully switched its entire European oil exports to Asia and has earned more money from these exports in the last two years than at any time since the collapse of the Soviet Union. And it has earned more money from these exports in the last two years not only from before the war, but more than at any time since the collapse of the Soviet Union.

“October-November data suggest that Russia’s crude oil exports are increasingly slipping beyond the G7’s reach. First, compliance with the price cap appears to have been virtually zero in recent months. Second, Russia’s reliance on its “shadow fleet” continues, meaning that the cap’s leverage is fading quickly,” KSE said in its last update.

1223 EURO Russia largest importers of fossil fuel from Russia 2023 CREA

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1223 GLOBAL Russian oil laundromat exports of refined products to sanction coalition countries CREA

The Emerging Markets have already become the biggest and fastest growing markets in the world a decade ago. As Cambridge University professor Neil Ferguson pointed out, the West has enjoyed 500 years of global dominance thanks to the technology of the Industrial Revolution. That period is coming to an end as the rest of the world catches up.

Putin’s bet is that the West has overestimated its power to hurt Russia, as there is enough demand in the rest of the world to replace it in Africa, Latin America and Asia, which are all flourishing and are keen customers for Russian energy, arms, technology and raw materials, and have largely opted out of the sanctions regime.

After two years of war the first round of sanctions have run their course. The twelfth sanctions package in December was devoid of any new painful measures, except maybe a ban on diamond exports. At the same time, technology sanctions have also failed as Russia imported more technology and chips in 2023 than it did on the eve of the war in 2021.

Even in the retail sector sanctions have proved ineffective. Most of the Western brands that disappeared in the first months of the war after the multinationals withdrew have long since returned via traders from countries such as Turkey, or have been replaced by Russian analogues. After one year of operations, Russia’s McDonald’s replacement, Vkusna I Tochka (Delicious. Period), is already more successful than the original that operated on the Russian market since 1990, the new owner claimed in June.

Long-term headache

However, the sanctions regime will cause problems in the long term. Russia’s lack of technology remains a huge problem, as it has missed out on two revolutions in the development of precision tools, leaving it impossibly behind the other developed nations. But China has not, and with the release of the commercially viable 7nm chip this year it is closing the gap. Putin is banking on China, a close Russian ally, to become a source of advanced technology in the future.

The dominant use of the dollar in global trade remains another big problem, but Russia and China have already moved over to use their national currencies in mutual trade as part of the yuanisation of the Russian economy, and the weaponisation of the dollar has already led to the latter's share in reserves falling noticeably, although this is another change that will take decades to complete.

These problems and others have slashed Russia's economic growth potential by more than half to 0.3%-0.5%, apparently condemning the country to long-term stagnation unless Putin’s bet pays off. However, as bne IntelliNews reported in a history of Russian crises, its economy has proved to be increasingly resilient to each crisis and keeps surprising on the upside, as it has done again in 2023.

Another Western miscalculation is that the extreme sanctions imposed in March 2022 would cause the Russian economy to collapse, and it nearly did. However, as 2023 comes to an end Russia is currently the fastest growing economy in Europe thanks to a military Keynesianism effect after Putin put the economy on a war footing. It is European economies that are stagnating, not Russia’s, thanks to de-industrialisation and the boomerang effect of sanctions.

Another of the West’s miscalculations in the current crisis was to underestimate the quality of the liberal macroeconomic team, headed by former finance minister Alexei Kudrin and CBR Governor Elvia Nabiullina, that manage Russia’s economy.

Putin’s bet has worked for two years, but what will happen long term? Can Russia replace the G7 trade with G20 trade? Is the Global South a more potent economic force than the developed world? Is Chinese technology a real replacement for Western microchips and machines? Does the Russian economy need to be globally integrated to avoid stagnation or can it flourish in the new fractured world without Western help and investment?  

Population explosion

The West has the money and the technology, but the Global South has the people.

People are one of the biggest drivers of economic growth and the emerging world has long since overtaken the West as home to most people on the planet, and is still growing. The more consumers you have, the more economic activity you need to feed, clothe, employ and entertain them.

During the Obama presidency, the “dying Russia” meme was predominate, but Putin’s babies was one of the Kremlin’s biggest and unsung reform successes; a raft of natal and maternity reforms didn’t reverse the fall in Russia’s population, but dramatically limited it beyond even the most optimistic projections following the demographic disaster of the 1990s.

In fact, the whole Western world is suffering from the same “dying” problem Russia has confronted. By contrast, the Global South is experiencing decades-long population booms, a sustained population explosion that has been going on for at least three generations and is driving meteoric growth.

When this correspondent was born there were 1bn people on the planet. When my children were born there were 3bn and today there are some 8bn. When their children are born the global population is expected to be around 12bn – close to the maximum scientists say the planet can support.

That’s Putin’s bet: the Global South century began when in the 1980s some 3bn capitalists in the West were joined by another 3bn people that had been living in socialist states but abandoned their failed ideology to join the free market. The united 6bn strong market took off, but it has only been in the last decade or two that that change has really begun to bear fruit.

Even with the West increasingly being held back by growing demographic problems, it will still be at least another five decades until the first of these new additions will overtake the West to become the biggest economies in the world in nominal, as well as PPP terms, but Putin is hoping Russia will be lifted by that rising tide for years to come.

Most of these new additions to the global population are being born in the Global South, and in China, India and Africa in particular – all key Russian allies. Meanwhile, in countries like Germany, the population replacement rate has fallen to well below the 2.1 simply needed to sustain a stable population. A big part of Putin’s bet is on new babies in his partner countries that will outweigh their lack of investment capital and technology.

In the 1960s the US was the most populous country in the world, according to International Monetary Fund (IMF) data, but China already overtook the States in 1974 and then India overtook it as well in 1984.

The 1970s were a golden era for the Soviet Union, when it seemed the socialist paradise was working. Russia was the fourth most populous country until about 1977, when economic stagnation set in, and its population began to fall before collapsing in the 1990s. However, by 2017, out of the top ten most populous countries in the world all but two of them are emerging markets, with Nigeria leading the charge from Africa.

As the chart shows, the picture changes somewhat if you include Europe as a block (including Ukraine, excluding Russia). In this case Europe was the most populous block until 1997, when China again became the most populous country, with India in third place until it overtook Europe in 2016. India became the second largest only in 2000.

If the definition is narrowed to just EU countries then the EU as a block is the most populous in the world in 1960 with just over 200mn people, with the US in second, and China in third with 100mn.

After overtaking the US for second place in the 1970s, China then overtook the EU in 1988 together with India, pushing the US into fourth place, but the non-EU countries at this point (including Ukraine) are still in seventh place with just over 100mn people. By 2002 both China and India had become number one and two respectively in terms of population, followed by Europe and the US.

Cutting Russia off from Europe is to cut Russia off from a very large market indeed, but with today’s combined population for China and India of about 2.5bn people, the demographic gains those two countries have made in just the last decade more than compensates for the much slower growing combined population of the EU and US today of 788mn people.

From a demographic perspective Putin’s bet on switching to the Global South looks like a good one.

PPP race

Part of the West’s miscalculation is that it has believed its own rhetoric that Russia is nothing more than US Senator John McCain’s “petrol station masquerading as a country.”

The Western politicians believe they can ignore Russia, as it had a nominal GDP of circa $1.8 trillion in 2022, on a par with Italy or Mexico ($1.8 trillion) and half that of just California ($3.6 trillion).

Nominal dollar-value GDP comparisons are the most trivial metric to compare economies, and they are misleading. Economists prefer to compare countries in PPP terms (purchase power parity): the value of goods you can buy with the local currency rather than the foreign exchange adjusted valuation. For example, using The Economist’s famous Big Mac index: the burger costs more than $5 in New York in December but just under $2 in Moscow. On this basis Russia’s economy is worth twice as much if counted only in terms of the ability to buy burgers (but still only on a par with California).

The deeper you dig the more complicated it gets. As bne IntelliNews reported, if you start looking at manufacturing power then thanks to the industrialised Soviet legacy, Russia is the most powerful manufacturing economy in Europe – ahead of even Germany – where services dominate. The size of the Russian economy even overtook Germany last year to become the fifth-biggest economy in the world in PPP terms.

In times of war, manufacturing outweighs services. Last year the EU promised to send Ukraine a million artillery shells by March, but only delivered around 300,000; Russia is currently producing around 2mn shells a year, more than all of Nato combined, and is expected to fire 5mn of them at Ukraine in 2024.

Global South takes the lead

The West has long since fallen behind the global south both in terms of demographics and also wealth, measuring in PPP GDP adjusted terms in billions of dollars, according to the IMF’s World Economic Outlook Database for October 2023.

It has taken more than two decades since the end of the socialist experiment at the start of the 1990s – the collapse of the Soviet Union, and Deng Xiaoping’s switch to “one country, two systems” in the 1980s that represented the start of economic liberalism – for the emerging world to catch up with the West.

As the chart shows, collectively the Global South (Latin America, SE Asia, Eurasia and Africa) overtook the West (North America, Europe and Japan) in terms of size on PPP terms in 2005.

And Japan played an important role in that change. If you limit the West to just the trans-Atlantic partnership it would have taken several years less for the Global South to become the dominant economic power on earth.

In the following two decades the combined GDP of the Global South has become twice as big as that of the West.

Of course, it will take a lot longer for the Global South to overtake the West in terms of nominal GDP. According to Goldman Sachs, China will become the biggest economy in the world in nominal terms by 2075, and India the second largest.

That suggests Putin has acted maybe 50 years too early, but also underscores his basic bet is correct; Russia has hitched its wagon to the winning team in the long term.

The second slide in the same chart shows the same information split into the major regional blocs and alliances. Again, the G7 dominated in 2000, but the aftermath of the 2008 global financial crisis helped turn the tables and the slowing G7 lost its lead to SE Asia by 2010.

The rise of the emerging world is even more noticeable amongst the BRICS, which collectively overtook the EU in 2002 and then North America (including Canada) in 2004. Today SE Asia and the BRICS are well ahead of North America and the EU.

Reviewing the same data in the third chart in terms of the performance of individual countries, no one will be surprised by the fact that in 2000, the start of the post-communist-era boom years, before the geopolitical rivalries between Russia, China and the West appeared, the race for the top slot was between the US and China.

China’s economy became bigger than that of the US in 2016 in PPP terms, while India’s remains in third place but is on course to overtake the US too by around 2030, according to the IMF forecasts.

Further down the ranking another surprise is that Russia’s economy became larger than Germany’s in 2012, the same year that Putin switched all state spending from supporting economic growth to modernising the army in preparation for the current war in Ukraine, and kicked off a decade of underperformance.

By 2013 Russia’s economy began to stagnate as a result of this change and fell behind Germany again the next year. Russia’s economy struggled for the next decade until the military modernisation was more or less completed by 2018, but in the run-up to the war the Kremlin did not switch investment back to civil projects. Putin sacrificed the prosperity of Russia’s boom years in the noughties to prepare for the coming war with the West. It was only after the war started and Putin put Russia on a war footing that growth resumed with heavy state investment. One of the reasons that Putin remains so popular is that at street level the prosperity of the noughties feels like it is back thanks to the bump the war has given the economy.

As bne IntelliNews reported, Russia has once again overtaken Germany to become the fifth largest economy in the world in PPP terms thanks to the mutually complementary effects of a military Keynesianism boost to Russia’s economy and the boomerang effect of sanctions on the German economy, which is now teetering on the edge of recession.

You can use the filters in the top left corner of the chart to drill down into regional comparisons or add comparative regions to those already in each chart.

One of the stories that jumps out from a comparison of the G7 countries with Asia in the next slide of the same chart is Indonesia’s rapid rise, another Russian ally, which overtook Italy in 2011, then France in 2018 and should also overtake Germany some time in 2030.

Turkey’s (yet another Putin ally) economy is also flourishing, now it has a new sensible monetary policy. It has already overtaken Spain and is also expected to overtake both the UK and France in the next few years.

But maybe the most telling regional comparison of all is comparing Asia to the non-G7 members in Europe. By the start of 2024 from the top ten countries by size, eight were Asian and Putin allies, with both Spain and Poland in third and fourth place respectively. If Putin’s bet is that he can replace trade with Europe with trade with Asia then this list suggests that he has eight new markets in Asia that are bigger than all but two of his former rest-of-Europe customers.

Doing a similar comparison in the slide for non-EU European states vs Latin America and it's clear that both Brazil and Mexico, a key Chinese trade partner, outrank most of the rest of Europe, with Argentina and Colombia also doing well. But clearly the opportunities for Russia to trade with South America are heavily concentrated in Brazil and Mexico.

Finally, a similar comparison between Europe and Africa highlights that of the 54 countries in all of Africa only Egypt, Iran and Nigeria stand out, as Africa is still probably the least developed of all the world’s large geographies.

Per capita breakdown

The last chart looks at GDP per capita in PPP adjusted current prices as a way of drilling into how rich the people of each region are, not their country as a whole.

Bigger countries have higher nominal and PPP adjusted GDPs simply because they are big. But the people of many of the world’s biggest countries, such as India, are actually very poor and so the business opportunities are less.

This is where Putin’s bet could go wrong. Almost all of the charts above show the PPP-based GDPs of the emerging world are now bigger than those of the West, but in terms of per capita GDP the Western world still dominates.

Asia has been the star of the last two decades, with the economies there easily overtaking those of the West in the last decade. But in PPP adjusted per capita terms the richest regions in the world remain in the West by a long chalk and are decades away from being overtaken by the developed world. The G7 countries are top of the table and even adding in the poorer EU member states only pulls down the collective per capita incomes by a small amount.

While Asia leads in PPP size, Emerging Europe leads Asia and the rest of the global south by a long way in per capita terms. Nevertheless, the per capita GDP of Emerging Europe is still half that of the EU.

 

Conclusion

Clearly there is a trade-off between big fast growing Emerging economies and the wealth of their populations. The Emerging World may be poorer, but that is offset by the fact that their economies are so big and growth is driven by the burgeoning populations. Putin is banking on the hope that the Emerging World is already big enough and rich enough to sustain Russia even if the populations are a lot poorer than in the West.

The first part of Putin’s bet has come off: the Global South has proved big enough to absorb all of Russia’s oil exports that used to go to Europe. At the same time, Russia has successfully evaded almost all the twelve packages of trade sanctions.

In terms of money, in 2021 Russia earned an all-time high current account surplus of $120bn before the war. That blew out to a whopping $225bn in 2022 – twice the previous record. So far Russia has earned enormous profits from the war.

The current account surplus fell heavily to $53bn in the first ten months of 2023, according to the CBR, but that is only the money that officially returns to the government coffers. As Russia’s oil export business has become opaque thanks to the use of the shadow fleet and deals cut with friendly countries, a lot of the money earned from oil exports is not returning home but remaining overseas at the level of oil companies' international trading subsidiaries.

In this way a slush fund worth an estimated $140bn has already been built up – something Western sanctions have been powerless to prevent. In December the US announced new tougher banking sanctions that can hit a bank even if it inadvertently facilitates these financial flows, which will force banks to do much more extensive due diligence on all their clients. But what started as elegant measures using market mechanisms like access to SWIFT or the Western-controlled insurance business is increasingly turning into a game of whack-a-mole that is next to impossible to win.

To illustrate, according to the KSE updated forecast, oil and gas exports will reach $225bn in 2023, while the level of imports this year remains similar to those in 2022, when the huge surplus was earned.

The CREA oil export diagram above shows that a significant amount of Russian oil exports – roughly a quarter – is still ending up in Western markets via Russia’s partners. However, the same diagram does not detail the final destination for the other three-quarters of Russian oil exports. Those are being sold to friendly countries such as India and China that are not participating in the sanction’s regime. And the money earned from these exports, worth hundreds of billions of dollars in the last two years, is largely unaccounted for. Clearly not all of it is going back to Russia and being used to pay taxes. 

The oil sanctions are being tightened and the Kremlin expects oil prices to fall to under $80 a barrel next year, but KSE still estimates Russia will earn $186bn in 2024 from oil exports and $176bn in 2025. If the level of imports and current account surplus remains at current levels, that suggests that Russian companies could be squirrelling as much as $100bn a year away in its growing slush fund.

It may be too early to switch entirely from trading with the West to trading with the Global South, but clearly the balance between poor people and growing economies will shift in Russia’s favour over time as incomes in the Global South are also growing fast.

What remains to be seen is how much damage will be done from Russia’s stagnation until this balance shifts to a net positive for Russia. However, here too currently Putin’s bet is paying off as it is Europe that is stagnating and has no growth engines, not Russia.

Russia’s economy is expected to end 2023 with over 3% growth, whereas all of Europe’s member states are growing at less than 1% if they are growing at all. Russia’s growth outlook will slow to around 1.6% in 2024 and 2025, according to the CBR, but the Russian economy has consistently outperformed expectations since the war started.

Europe’s leading industrialists say they will recover from the crunch caused by the Russian in 2025, according to recent reports, but without lifting sanctions on Russian gas and materials it is hard to see how the process of deindustrialisation can be reversed. At the very least this recovery will come by moving Europe’s biggest industries out of Europe, but the biggest winner from this will be the Global South markets, which will only bolster Putin’s bet, as Russia will be able to sell the same inputs to these firms as it used to sell to the West.

Putin’s bet is not a binary deal: “nash ili vash”, them or us, as the Russians are fond of saying. The way Putin’s bet will work out in reality over the coming years is bound to be a lot more nuanced.

China is a key Russian partner and both Chinese President Xi Jinping and Putin have made it clear they want to see the expanded BRICS+ club as a geopolitical rival to the West. India is also a key Russian partner but Prime Minister Narendra Modi made it clear at the G20 summit a few weeks later in August that he sees that organisation as an economic cooperation club to lift all emerging markets through better integration with the Western system. The Global South is not a uniform body with any sense of identity yet.