Russia is poor and dangerous

Exactly one year ago, on February 22, 2022, two days before the invasion, my article "Russia is poor and dangerous" appeared in Frankfurter Allgemeine, Germany's leading daily. Today, Russia is even poorer, perhaps even more dangerous.

#Russia #Ukraine #Putin #War

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Russia: Poor and dangerous

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Hermann Simon[1]

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It is astonishing that Russia's economic situation is almost completely left out of the public discussion about the current Ukraine crisis. While politics currently outshines everything else, in the long run economic strength will gain the upper hand and limit Russia's political options for action. Putin's current behavior is likely to prove counterproductive for Russia's economic development. Unfortunately, continuity is evident in this regard.

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In 2021, Russia had a gross domestic product (GDP) of $1.65 trillion. U.S. GDP was $22.94 trillion. Russia accounts for only 7.2 percent of U.S. economic output. This percentage was 12.7 percent in 2013, before the annexation of Crimea. Russia's relative economic strength compared to America has nearly halved over the past eight years. It looks no better when compared to the European Union, which came in at a GDP of $15.17 trillion in 2020. Russia's GDP amounted to 10.9 percent of the EU's economic output. In 2013, it was 12.9 percent. If you take the U.S. and EU together, Russia generates just 4.3 percent of their combined GDP.

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In 2021 Russian per capita GDP was $11,273, which is $3,490 less than in 2013. In 2021, the U.S. reached $69,379 GDP per capita, in 2020 it was $32,997 in the EU. And in 2021, even China put itself ahead of Russia with a per capita GDP of $11,891. What humiliation must Putin perceive when seeing these figures and these trends? Russia is a poor country whose economic power in no way compares to that of highly developed countries.

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What about Russia's export strength? We take a long-term view and look at exports over the ten-year period from 2010 to 2019. China is clearly in first place with $20.9 trillion, followed by the United States with $15.4 trillion and Germany with $13.9 trillion. Russia reaches $4.3 trillion, which is less than one-third of Germany's exports. The structure of Russian exports is known to be extremely lopsided. Oil and gas account for about three-quarters of Russian exports. The rest is essentially other commodities. For all these commodities, Russia is at the mercy of world market prices. Depending on whether they rise or fall, the value of Russian exports varies.

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What about Russia's innovative strength? Here we use the number of European patents as an indicator. Patents do not measure everything, but individually they are the most meaningful indicator of a country's innovativeness. In the ten-year period from 2009 to 2018, German companies registered 1,812 European patents per million inhabitants. Japan came to 1,048 patents per million inhabitants, and the U.S. reached 535. These impressive figures for the U.S. and Japan prove that European patents allow a valid measurement of global and not just EU-internal patent activity. The corresponding figure for Russia over these ten years was six patents per million population. That is one three-hundredth (or 3 per mil) of the German patent number. Even China left Russia behind with 12 patents per million population.

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Russia is rich in raw materials. But then, so is it. And it can only exploit these treasures economically with the help of large investments from abroad. But in recent years, exactly the opposite has taken place, namely a gigantic outflow of capital. Most major international banks have withdrawn from Russia. How can a country with an economic power that is marginal compared to the U.S. and the European Union think it can compete in the military-technological arena? To become a strong economic nation, Russia would have to do the exact opposite in many ways of what it practices today. Most of the conditions that the book "Why Nations Fail" lists as prerequisites for growth and lasting prosperity (freedom, property guarantee, no corruption, independent judiciary, etc.) are not met by Russia today.

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The leaders in Russia are certainly aware of these realities. They must find them humiliating. At the same time, the system is proving incapable of taking the right steps to improve the economic situation and catch up internationally instead of being overtaken. All of this makes Russia dangerous. Should the West do more to help Russia get on its feet economically? Would blocking the Northstream 2 pipeline make Russia even poorer and therefore even more dangerous? What goals is Putin pursuing with his threats? One can feel sorry for this great and beautiful country, which could become rich and prosperous if it were to say goodbye to great power posturing, threatening gestures and military bravado.

[1] Prof. Dr. Dr. h.c. mult. Hermann Simon is founder and honorary chairman of Simon-Kucher & Partners