Original article (in Bosnian) was published on 14/2/2024; Author: Nerma Šehović
Several media outlets have disseminated propagandistic assertions that the Russian economy is “the strongest in Europe,” even amid sanctions. These claims are a distorted interpretation of data released by the World Bank.
An article with the following title was published on January 11, 2024:
How did the Russian economy become the strongest in Europe during the year of isolation? (VIDEO)
It claims that Russia has ascended to the fifth position globally and leads Europe in purchasing power, surpassing major economies like Germany. Additionally, the piece includes a television report aired on January 11 on RTRS Dnevnik 2. This report suggests that the sanctions imposed on Russia due to its conflict in Ukraine have inflicted more harm on Western countries than on Russia itself. Moreover, the Russian military action in Ukraine is referred to as a “special operation” in the article.
The claim that Russia has emerged as the “strongest economy in Europe,” surpassing Germany, was echoed in various media outlets in December 2023 and January 2024 (references 1, 2, 3). Several articles cite statements made by Russian President Vladimir Putin to support this claim (references 1, 2, 3).
Is Russia Truly the Strongest Economy in Europe?
During the summer of 2023, some media outlets in Bosnia and Herzegovina (BiH) and the surrounding region claimed that, according to World Bank data, the Russian economy had become the strongest in Europe. This assertion was based on the World Bank’s July 1, 2023, publication of a ranking that listed countries’ gross domestic product (GDP) on a purchasing power parity (PPP) basis. The 2022 data used for this ranking indeed placed Russia fifth globally and first in Europe in terms of PPP. An update to this list in December 2023 confirmed that Russia maintained its fifth-place position.
Gross domestic product (GDP) measures the market value of all final goods and services produced within a country over a specified period, typically one year. It is a key indicator used to gauge the size and growth rate of a country’s economy and can be calculated as either nominal or real. Real GDP adjusts for inflation, providing a more accurate reflection of an economy’s size and growth by accounting for changes in price levels, unlike nominal GDP.
Purchasing power parity (PPP) is a method used to determine the exchange rate at which the currency of one country, when converted into another country’s currency, would purchase an equivalent amount of goods and services. It establishes a point of equilibrium where the cost of a specific basket of goods is identical in two different countries once exchange rates are considered. This metric is widely used in macroeconomic analysis to compare living standards and economic productivity across various nations. To facilitate these comparisons, the International Comparison Program (ICP) was established in 1968. The PPP exchange rate converts the local currency of a country into a common currency, typically the US dollar or the “international dollar,” a theoretical currency that provides a consistent basis for comparison.
GDP based on PPP translates gross domestic product into international dollars using the PPP rate. This approach aims to transform nominal GDP into a measure that allows for easier comparison between countries with diverse currencies, offering a more accurate reflection of relative economic strength and living standards.
Although the World Bank ranks Russia first in Europe and fifth globally in terms of GDP based on Purchasing Power Parity (PPP), this ranking alone does not define it as the “strongest economy in Europe.” The assessment of an economy’s strength is multifaceted and relies on a variety of economic indicators.
For instance, World Bank data from December 2023 places Russia eighth globally in nominal GDP, trailing behind Germany, France, and the United Kingdom. In terms of gross domestic output (distinct from GDP as it measures the total value of all goods and services produced within a given period by production means owned by residents of the country, regardless of where they are located), Russia ranks 10th worldwide, behind Germany, France, the UK, and Italy. Furthermore, when looking at gross domestic product per capita, calculated by two different methods, Russia is positioned at a considerably lower 57th and 72nd place, far beneath most European nations.
Hence, Russia surpasses Germany and other European nations in only one aspect—GDP based on PPP. While some economists argue that PPP is a metric that offers a more realistic comparison of the economic conditions of different countries, others dispute its accuracy in reflecting economic reality. Among the critics is Russian economist Sergei Guriev, who expressed skepticism about the reliability of PPP as an economic indicator in an interview with the Russia Matters website last August.
“Responding to RM’s questions in an Aug. 11 email, renowned Russian economist and current Sciences Po Provost Sergei Guriev argued that “PPP is a measure [of] how much we can buy with one dollar within Russia and thus this does not reflect the international importance of Russian GDP.” “For the role of a country in a global economy we need GDP in nominal dollars,” argued Guriev—who does allow one exception: “GDP, PPP is often considered when we talk about defense spending,” Guriev wrote.”
Raskrinkavanje reached out to BiH economist Admir Cavalic for clarification on whether Russia’s leading position in Europe in terms of GDP based on PPP signifies it as the strongest economy in the continent. Cavalic explained:
“The fact that Russia ranks first in Europe based on GDP PPP does not automatically make it the strongest economy. GDP PPP is merely one of many indicators reflecting a country’s economic health. Other critical factors include the economy’s structure, production value, long-term prospects, and, importantly, the quality of life and wealth distribution. Moreover, the reliability of this indicator heavily depends on the data’s availability and transparency for the specific economy. Institutions releasing such data always exercise caution regarding the data’s accuracy.”
Economist Svetlana Cenic also weighed in on this discussion, stating:
“Of course it doesn’t mean that! GDP based on purchasing power parity (PPP) measures the value of goods and services produced in a country relative to another country’s currency – usually the US dollar. Purchasing power parities (PPPs) are currency conversion rates that are applied to convert economic indicators expressed in national currencies into a common artificial currency – the purchasing power standard (PPS), which equates the purchasing power of different national currencies and enables a purposeful comparison of volumes between countries.“
Cavalic, explaining which indicator is more authoritative when assessing the size and progress of a certain economy (nominal GDP or PPP-based GDP), said that nominal GDP is traditionally more dominant in comparison, but that PPP-based GDP is used to get an additional overview regarding local economic conditions, such as the standard of living and the like. He stressed that it is best to use both indicators and that it is not recommended to monopolize one in order to support a certain narrative about the state of an economy.
Sanctions within the Propaganda Narrative
Raskrinkavanje addressed the Russian propaganda narrative that sanctions boomerang back on the countries that implement them in February of last year. Following the invasion of Ukraine on February 24, 2022, the European Union, the United States, the United Kingdom, and other countries and organizations imposed a series of sanctions against Russia. These sanctions targeted various sectors, including the import and export of goods, the energy sector, finance and banking, and transportation. Individuals, media outlets, and institutions faced sanctions, and specific services to Russia and its citizens were halted. While some sanctions against Russia were first introduced in 2014 after the annexation of Crimea, the sanctions imposed in 2022 were on a significantly larger scale.
Russia responded by imposing sanctions on “enemy states.” Shortly after the initial sanctions against Russia, a propaganda narrative emerged in the media and on social networks, claiming Russia was unaffected. This narrative was often bolstered by false claims, such as the ruble becoming the strongest currency in the world, suggesting that Russian citizens felt no adverse effects. Additionally, it spread fake news about shortages of certain products and the closure of gas stations in European countries. According to an analysis by Raskrinkavanje:
We consulted Ilyau Bar, a journalist and fact-checker from Russia, regarding the perspective of Russian citizens on the sanctions imposed. He conveyed to Raskrinkavanje that the general sentiment among Russians is that the tangible effects of the Western sanctions are less pronounced than the West had intended. Although life is gradually getting worse, the decline is so slow that it’s barely noticeable.
“Experts knowledgeable about the Russian economy suggest that the true, profound impact will only become apparent in 3-4 years,” Bar noted.
Gathering data on the sanctions’ impact is challenging, with much of the information likely to emerge over time. Official statistics on Russia’s economy are becoming scarce and increasingly inaccessible. Certain data sets, such as those on foreign trade, monthly oil and gas production, and financial figures of major companies, which were previously updated regularly, are now withheld from publication. These include, for example, data on foreign trade, imports and exports, monthly oil and gas production, financial data of large companies, data of the Central Bank on the monetary base, data on direct foreign investments, airlines and passenger numbers. This lack of accessible and verifiable data facilitates speculative narratives about the resilience of the Russian economy. Nonetheless, there is a broad agreement among experts that the effects of the sanctions on Russia are significantly more severe than Russian media portrayals suggest.
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Many economic analysts concur that it is the long-term aftermath of the sanctions that will crucially impact Russia. As Kulbaka explained, “Russia needed the conflict over Ukraine, among other things, to freeze the ‘green transition’ that Europe had started, which was supposed to break Europe’s energy dependence on Russia to a large extent. But the hopes of Russian leaders did not bear fruit. The attack on Ukraine led Europe to accelerate its energy diversification. So, even after the sanctions are lifted, Russia will have to operate in a more competitive environment in Europe, which will lead to lower profits for Russian energy companies”.
Although Russia has adapted to some sanctions by finding ways to mitigate their impact and continues to showcase its economic resilience globally, a detailed analysis published by Reuters in October 2023 suggests that this may be the “calm before the storm.” This cautionary outlook stems from the shift of Russia’s economy to fully fund the war effort.
The defense budget increased to 3.9% of GDP this year, up from 2.7% in 2021, before the invasion of Ukraine. It is expected to surge by over 70% in 2024, reaching approximately 6% of GDP, according to official projections. These estimates are on the conservative side, as they do not account for other war-related expenditures, such as new constructions in occupied territories, which are obscured within different budget sections.
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The future looks grim for Russia once military spending starts to decrease. The partial evasion of sanctions fails to offset the loss of technology transfers from Europe and the United States. The diversion of public funds from education to military priorities is anticipated to hinder productivity growth in the medium to long term. Additionally, in a country where the life expectancy at birth is already below 70 years—compared to over 80 in Europe, 78 in China, and 76 in the US—diminished investment in healthcare is expected to exacerbate the country’s already severe demographic challenges.
What’s worse, Russia will emerge from the current situation as a financial vassal of its big neighbor. The price of the economic boom is a growing financial dependence on China. The trade between the two countries has increased as Beijing has bought much of the oil that Russia can no longer sell to Europe. And the yuan replaced the dollar as Moscow’s preferred currency.
Russia exhibits all the problems of a developing economy with the growth rate of a mature industrial one and is forced to rely on a currency that is not fully convertible, controlled by another government, to further its interests. This could eventually become the most powerful economic and strategic time bomb.
Regarding the impact of sanctions on the Russian economy, Cavalic said the following:
Many uncertainties surround the Russian economy, particularly the status of its currency, the ruble. Sanctions pose undeniable challenges, primarily through the opportunity costs associated with foregone foreign trade relations with the EU and other global economies. Although Russia, as a key energy exporter, stands to benefit from periodic energy crises, there is no evidence of significant structural changes within its economy.
Svetlana Cenic emphasized that Russia remains an economic power due to its large reserves of oil and natural gas and that, according to projections, it will maintain that status in the coming decades.
In conversation with Raskrinkavanje, economist Zoran Pavlovic observed that sanctions have necessitated Russia’s reliance on its internal resources, a situation that could have some beneficial effects. However, he unequivocally noted the damage inflicted by sanctions, especially Russia’s exclusion from the SWIFT payment system.
Accordingly, we assess the claim that Russia has emerged as the ‘strongest economy in Europe’ to be a manipulation of the facts.