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Russia is now the fourth largest economy. But how?

In today’s Finshots we tell you how Russia’s economy is moving north despite Western sanctions.

The history

Russia is now the fourth largest economy!

And neither Russia nor we are saying that. It is the World Bank.

In August last year, the World Bank released its PPP-based GDP (gross domestic product based on purchasing power parity) data for global economies as of 2021. In simple terms, it compared the economic performance of different economies in terms of the goods and services they produce, while also taking into account their standard of living. And it found that Russia overtook Germany to become the fifth largest economy.

However, a few days ago, she revised that report. She said her last report was based on outdated data. And this new data shows that Russia has actually overtaken Japan to become the world’s fourth-largest economy in terms of GDP on a PPP basis in 2021, and has managed to stay in fourth place since then.

But that’s the point: Since Russia began invading Ukraine, most Western economies such as the US, UK and EU have imposed sanctions on the country.

They have refused to accept a range of goods from Russia and have also banned the country from non-essential exports. They have cut Russia off from the SWIFT (Society for Worldwide Interbank Financial Telecommunication) network, a global interbank messaging network that facilitates international transactions between countries. And damn it! They have even frozen nearly $300 billion in foreign exchange reserves that Russia had parked with them as emergency reserves before the war broke out.

The motives were simple: restricting trade with Russia could damage the Russian economy and make it more difficult to finance the war.

But despite the economic downturn, Russia’s GDP actually grew by over 3 percent last year.

Are you wondering how we managed to defy all adversities?

First of all, Russia’s oil exports still end up in US and UK tanks thanks to a legal loophole exploited by countries like China and India.

Russia is the second largest exporter of crude oil in the world. And China and India are the two largest importers. Their transportation sector relies on crude oil for the most part for its supply. And they even process that crude oil to re-export the refined products to other parts of the world. But since they don’t produce enough of it, they rely on imports.

And their oil imports from Russia only started to increase after the war between Russia and Ukraine started. That’s because no one was willing to buy Russian oil because of Western sanctions. So Russia actually had to sell the product at a lower price to make it attractive to countries that couldn’t do without it.

China and India obviously bought the cheaper oil, added crude from other countries during the refining process, and exported it legally to the US and UK! This is because the “rules of origin” in a particular country classify crude oil refined as a product of that country, even if it comes from somewhere else.

Take India as an example. In fiscal 2023, the country was able to import Russian crude oil at an average price of $83 per barrel. However, if one goes by the Dubai crude benchmark, which sets the base price for most Indian crude oil imports, the same commodity would be $12 more expensive.

For this very reason, the Jamnagar refinery, the world’s largest, now imports nearly a third of its crude oil from Russia – a stark contrast to the fact that it imported no oil from Russia at all before the war. The oil is then blended with other foreign crude and refined into gasoline, diesel and other products that can then be legally exported to American companies.

And the end result is that, despite the countless sanctions, Russian crude oil still finds its way into Western countries and stimulates their economies.

But it is not just oil exports that help, but the war itself.

Yes! Russia’s public spending has increased since the declaration of war. The central bank is printing even more money so the government can buy weapons and ammunition, tanks and planes, and even pay its armed forces and compensate their families when they die. In addition, Russia has increased its industrial production over the past two years. Its factories produce everything from boots to ammunition and run around the clock, often in mandatory 12-hour shifts with double overtime to keep the Russian war machine running.

And this increased spending and increased production only increases GDP.

But wait a minute… Won’t all this excessive spending cause inflation?

This is indeed the case. In fact, the ruble has lost about a third of its value against the US dollar in 2023.

But Russia had a miracle cure for this too.

The central bank quickly raised interest rates to make it harder for people and businesses to borrow and spend more money.

Aside from that, it has even become difficult for Western companies still operating in Russia to get money out of the country. To put things in perspective, foreign companies that sell their Russian assets are not allowed to withdraw the proceeds in dollars or euros.

Moreover, Western companies winding up their business even have to agree on a selling price in rubles. If they insist on receiving money in a foreign currency, this can only mean that they will have to face delays or even suffer losses on the amounts they are eventually able to take with them.

And money that stays in the economy can actually serve as an additional effective control against its devaluation.

So that’s what’s been supporting Russia’s economy so far. But is this war-induced growth sustainable in the long term? Most economists would disagree. But only time will tell.

See you then…

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