Tuesday, December 18, 2007

Russia by the Numbers


After meeting with leaders of the European Union recently, Vladimir Putin boasted that the surging Russian economy has overtaken that of Italy, and will overtake France in 2009. Such astonishing claims have become commonplace in statements by Russian officials, who insist Russia will become the world's fifth largest economy by 2020.

Mr. Putin's popularity at home -- and his standing abroad -- rest in large part on economic performance, so it's worth looking closely at these forecasts. They are based on a system of measurement called purchasing-power-parity (PPP), under which economists try to assign every good -- from rice to subway fares -- the same price world-wide. (The conventional method, by contrast, takes the price of goods produced locally and translate them into dollars at the current exchange rate.) PPP inflates the size of poor economies in which food and the other basics of life are cheap. In the Russian case, black bread, vodka and run-down apartments pump up GDP.

The effect can be dramatic. Measured in conventional terms, Russia, far from overtaking France in two years, is actually less than half its size -- $1.22 trillion vs. $2.52 trillion. At current growth rates, their GDPs will not be equal for 17 years. All those people who sneered about the puny Russian economy of the 1990s -- no bigger than the Netherlands, they said -- need to update their numbers, but not by much. After eight years of strong growth, the Russian economy -- in conventional terms -- is now as big as the Netherlands plus Belgium and Luxembourg.

Of course, which system of measurement is "right" depends on what you want to know. If you're interested in a country's place in the global economy, then exchange-rate measures are for you. If you want a feel for living standards, then purchasing-power-parity can, carefully used, be a helpful tool. And not just to measure food consumption: During the Cold War the U.S. government estimated the Soviet military budget by asking how much it would cost for the U.S. to produce the same fighting force. Once you assigned Red Army conscripts the same wages as American volunteers, Soviet defense spending looked a lot scarier. You might say this is what Mr. Putin is trying to do for his entire economy.

There are, however, two problems with the way Russian officials treat these GDP estimates. First, they use the PPP numbers to measure something -- their global economic standing -- that the conventional numbers measure better. You have only to play with international trade figures for a while to see how underdeveloped Russia's role in the world economy remains. How much, for example, would you expect the United States to trade with a country that might soon overtake France? The U.S. exported five times more to France in 2006 ($24.2 billion) than to Russia ($4.7 billion). This year the U.S. still exports more to the Dominican Republic than to Russia. And U.S. two-way trade with Malaysia is twice its two-way trade with Russia.

Perhaps, you say, Russian-American trade is atypical, and looking at Russia's trade with its closest neighbor -- Europe -- would paint a different picture? Yes, but not as different as you might think. As Peter Mandelson, the EU's trade commissioner, put it recently, Russia's exports to the EU are, apart from energy, "about the same as those of Morocco or Argentina" -- slightly less than 3.5% of Europe's total imports.

The EU's energy imports from Russia are, of course, about twice that level, or 7% of all imports -- a big number. But it too should be kept in perspective. Between 2000 and 2005, Russia's share in European natural gas imports dropped, from 50% to 42%. European politicians say they want to diversify their sources of supply. They're talking about something that may already be happening and can be pushed further.

There is a second problem with Russian leaders' economic claims. If we use PPP figures as intended -- to compare living standards -- we will be at least as impressed by how far Russia has to go as by how far it has already come. Just consider per-capita GDP growth in Russia, France and Italy. Under Mr. Putin, Russian per-capita income -- even in PPP terms -- has gone from somewhat less than a third of the level of France and Italy to somewhat more than a third. This increase is good news for Russian consumers, but they remain Europe's poor relations all the same.

Interestingly, Mr. Putin himself used to make this point when he first became president. To underscore how poor his country was, and how urgent it was to reform, he observed that it would take 15 years of 8% economic growth for Russia's per-capita income to equal Portugal's. This was a particularly brutal comparison, because Russians saw Portugal not as a rich European state but as a poor one. (And how humiliating to be compared to such a small country.)

These days, Mr. Putin does not use the Portugal comparison so much -- the urgency of reform is less on his mind -- so here's the update. With all its growth Russia is gaining ground, but the absolute gap between the two countries is only modestly narrower than when Mr. Putin first compared them -- just over $12,000 then, just under $11,000 now. Meanwhile, the gap between Russia and both France and Italy has widened slightly. Even if Russia keeps steaming ahead, it will probably not catch up with Portugal until 2020 -- and by some estimates, long after that.

These comparisons do not detract from the Russian economy's extraordinary growth. Its transformation is a huge opportunity for anyone who is a part of it. The reason, however, is not that Russia has catapulted itself into the ranks of the rich, but that it is still relatively poor. The low base from which it is growing means that strong increases can continue for a long time before petering out. (Just ask European machinery exporters: Their sales to Russian companies quadrupled between 2000 and 2006.) Similarly, the low living standards of the Russian people mean that the leveling off of their consumption surge is decades away. It's good politics -- and maybe even good geopolitics -- for Mr. Putin and his colleagues to claim they've come further than they have. But we'll understand today's Russia better if we don't believe them.

Mr. Sestanovich is a senior fellow at the Council on Foreign Relations and a professor of international diplomacy at Columbia University.

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