My friend Jeff Hummel sent me a link to a recent 28-minute interview that DW News did late last month with Jeffrey Sonnenfeld of the Yale School of Management. Jeff asked me to evaluate it. I find it highly credible.
The big bottom line: Russia’s economy is in the tank and the reason many of us have thought differently is that Putin literally makes up the numbers.
Here are some highlights:
2:00: Rosstat, Russia’s official agency that estimates GDP, stated that the economy contracted by only 2.1% in 2022.
2:14: The interviewer says that the IMF expects the Russian economy to grow by 0.3%.
3:00: Sonnenfeld says that the World Bank and others get their information from Rosstat. One little problem is that Rosstat has had a change of leadership 3 times. Why? Sonnenfeld says it’s because Putin is looking for lackeys (my word) who will state the data he wants stated.
3:30: As a member of the IMF and the World Bank, Russia is required to submit data to the IMF and World Bank. “They are not submitting.” By the second quarter of 2022, Russia stopped submitting the data.
4:00: Putin wakes up in the morning and decides what the GDP should be.
(My economic historian’s mind clicked in here. I remember reading, in John Flynn’s book on FDR titled The Roosevelt Myth, that after FDR took the U.S. off gold, he woke up in the morning and decided what the price of gold would be. Here’s the relevant segment from that book:
Thereafter each day Morgenthau and Roosevelt met, with Jesse Jones, head of the RFC, present, to fix the price of gold. They gathered around Roosevelt’s bed in the morning as he ate his eggs. Then “Henny-Penny” and Roosevelt decided the price of gold for that day. One day they wished to raise the price. Roosevelt settled the point. Make it 21 cents, he ruled. That is a lucky number- three times seven. And so it was done. That night Morgenthau wrote in his diary: “If people knew how we fixed the price of gold they would be frightened.”
Why do these things seem to happen in the morning?
4:45: The Russian economy is in a tailspin.
5:40: Every key industrial sector is down. The auto industry is down 99%.
6:30: The work force is even more of a government work force than it was before the war. While Sonnenfeld doesn’t say it explicitly, it is clear that he understands that that’s not good.
7:10: Thousands of refrigerators are being torn apart to harvest chips that can be used by the military. [I had recently heard this from another friend who follows the Russian economy.]
9:45: Russia is losing money on energy. He goes into this later in detail after about the 19:20 point.
10:45: Ruble (not ruple—his pronunciation) is not being traded.
12:10: Yellen, Raimondo, and Blinken all say that Sonnenfeld’s team has informed them on this.
12:40: Companies that have pulled out of Russia.
16:14: Koch Industries has pulled out and gone from a grade of F to A.
17:30: Companies should not only accept a loss but should accept a complete write-down and “it won’t cost them a penny.” In case you think Sonnenfeld is pulling a Kramer (the Seinfeld character) and saying they “write it off,” he’s not. What he’s getting at, without using the term, is sunk cost. They recognize that an asset that is valued on their books at $X is really worth approximately 0. And by getting out, they avoid further losses.
18:14: Doing good and doing well are not antithetical.
19:20: The economics of Russia’s oil supply. Why Russia is at best breaking even.
20:30: Russia’s economy is smaller than that of Chile.
21:15: Russia cannot gain back its business in Western Europe even after all this is over. Fascinating story about liquefied natural gas. The market comes through.
23:20: Putin can’t sell natural gas to India and China because he doesn’t have the pipelines he would need.
25:25: The mayor of Moscow, until he was silenced, admitted in April that hundreds of thousands of idled workers “were in the streets with nothing to do.”
25:50: 3 million highly sophisticated workers have fled Russia. [DRH comment: Biden should allow a bunch of them in. They wouldn’t go on welfare and would help us.]
This is one of the most informative videos I’ve seen in months.
I have one concern, and it’s not about the truth of Sonnenfeld’s statements. I put a high probability on the idea that he’s correct.
No, the concern is that he seems to celebrate implicitly the destruction of the Russian economy. But Putin’s not suffering. It’s Joe Six-Pack, or maybe Sergei Vodka Bottle who’s suffering. Also, Sonnenfeld and I both agree that Vladimir Putin is an evil man. What does an evil man with nuclear weapons do when he’s going down? That concerns me.
READER COMMENTS
Jon Murphy
Mar 5 2023 at 7:51am
That’s my major concern too. Especially if he (and other Russians) think the West intends to break up Russia. Facing an existential crisis (either real or imagined), the threat of nuclear war rises considerably. After all: if you believe you a doomed, then the marginal cost of nuclear annihilation falls to near-zero.
David Seltzer
Mar 5 2023 at 7:02pm
Murph, I suspect fear of NATO on its border and nationalism were Russia’s reasons for invading Ukraine. On the other hand, Ukraine and NATO also have their respective elements of fear and national self-interest in this geopolitical conflict. These seeming irreconcilable ends may lead to a larger and more tragic conflict. The war in the Ukraine is bankrupting Russia just as the ten year war in Afghanistan did. If these conditions persist, Putin may well believe he has nothing to lose and this evil man with nuclear weapons becomes incredibly dangerous. It seems to me others in the Politburo have an enormous incentive to remove him as their survival demands it.
Jose Pablo
Mar 6 2023 at 7:47pm
the marginal cost of nuclear annihilation falls to near-zero.
Not at all. The “marginal” cost of going from “believing” that you are doomed to having Moscow “actually” looking like Hiroshima in 1945, is not “marginal” at all.
he has nothing to lose.
Except he has. Like a lot!
As history shows, you can only use nuclear weapons against a country that has no nuclear weapons to retaliate.
nobody.really
Mar 5 2023 at 1:29pm
Thanks for the link, and the summary; very readable!
That one should go on the “featured” part of the blog’s web page!
Scott Sumner
Mar 5 2023 at 2:19pm
“Russia’s economy is smaller than that of Chile.”
I’m willing to accept that Russia’s economy has a lot of problems, but this sort of statement doesn’t exactly inspire confidence in the messenger. What sort of per capita GDPs in those two economies would make that claim correct?
Jon Murphy
Mar 5 2023 at 2:30pm
A quick (and I do mean quick) Google search has Russian GDP per Capita at about $12,200 and Chile’s at about $17,000
Mark Brady
Mar 5 2023 at 6:42pm
Jeffrey Sonnenfeld: “Russia’s economy is smaller than that of Chile.”
Really? The first statement is about two national economies, and it is surely incorrect even now in 2023.
Jon: “A quick (and I do mean quick) Google search has Russian GDP per Capita at about $12,200 and Chile’s at about $17,000.”
The second statement is about GDP per capita, and I’ll accept it for the purposes of this exchange, but it doesn’t address the truth or falsehood of the first statement.
The Luxembourg GDP per capita is much larger than the U.S. GDP per capita but would anyone say that the U.S. economy is smaller than the Luxembourg economy?
https://countryeconomy.com/countries/compare/luxembourg/usa
The numbers are calculated at market exchange rates, but using purchasing power equivalent wouldn’t change this story.
Jon Murphy
Mar 5 2023 at 7:43pm
I used GDP per capita because that’s what Scott asked for
David Henderson
Mar 5 2023 at 8:50pm
Right, but he asked for it to see what would make it correct. Those per capita GDPs would definitely make the claim false.
Scott Sumner
Mar 6 2023 at 7:23am
Thanks Jon, that’s about what I expected. Given the population disparity, Russia would have to have a GDP per capita around $2000, which is clearly not the case.
Again, I agree with much of what he says, but I think he’s a bit sloppy in some of the assertions.
Jim Glass
Mar 5 2023 at 4:36pm
I’m willing to accept that Russia’s economy has a lot of problems, but this sort of statement doesn’t exactly inspire confidence in the messenger
How so? The data is not secret.
New York State’s GDP is $2.1 trillion. Russia’s before the war was $1.8 trillion. Ranked as a US state, Russia would be #4.
California $3.6 trillion … Texas $2.4 …. New York $2.1 … Russia
$1.8 … Florida $1.4 …
The idea of Russia as a “great power” is delusional, who do so many believe it?
Part of the pathology of Putin and his cadre of 70-year old ruling siloviki is that they really believe Russia has a moral/imperial/religious right to be a world power, and so to rule over Ukraine, the Baltics, Poland, etc. as their domain. When Russia is a pipsqeak in decline with nukes. Separating oneself from reality like this does not end well.
But this did not start with them. It is a theme in Russian politics that goes back to after the Mongol invasion. Time and again Russian leaders over-reach, there’s a collapse, in the collapse a new ‘strong man regime’ arises to reclaim rightful glory, overreaches… Through the Tsars, Soviets, today.
To understand Russia do a YouTube search on “Stephen Kotkin”, he’s the definitive biographer of Stalin and number one source on Russia today (also pretty darn good on China and authoritarian regimes generally). Anything you find will be worth it.
Also, as a bonus, he’s entertaining! He’s a grown up NYC kid called “the Joe Pesci of geopolitics”. Here’s a recent sample…
China Xi Jinping’s Purge and Why Russia is Failing | Stephen Kotkin (Speaking with economist John Cochrane, historian Niall Ferguson and General H.R. McMaster at Hoover. The discussion moves to Russia from China at minute 27:30)
David Henderson
Mar 5 2023 at 4:48pm
I think you’re missing Scott’s point. He’s challenging the Sonnenfeld claim that Russia’s economy is smaller than that of Chile, not a claim that it’s smaller than that of New York.
Jim Glass
Mar 5 2023 at 6:54pm
Sonnenfeld’s point, to quote him…
“Russia has become an economic afterthought. Russia is in no way an economic super-power. Their economy they used to say is smaller than Italy, it’s smaller than Chile now, but Italy and Chile don’t go around with the swagger of Putin pretending they are the big neighborhood bully…”
What I hear Sonnenfeld say is: Russia is nowhere near as “big” as many people think it it, or as it tries to pose as being. He may have been being sarcastic by invoking a comparison to Chile, or he may have misspoke — but either way he makes the same point – and it is correct.
I don’t see how that reduces his credibility at all. He was making a correct and important political point in spontaneous conversation — Russia has none of the “bullying” power it tries to profit from pretending it has. He wasn’t giving a lecture on data relationships.
Adjust for the value subtracted from GDP by corruption and misrepresentation, and I might say the Russian economy is smaller than Liechtenstein’s now, and not be sure whether I am being sarcastic or not!
Mark Z
Mar 5 2023 at 9:02pm
Whatever you heard him say, what he actually said is, “it’s smaller than Chile.” Whatever one’s broader point, when one makes acute errors in the process of making that point, it can undermine one’s credibility, and for his claim to be true, official GDP estimates of Russia have to be off by about an order of magnitude.
Scott Sumner
Mar 6 2023 at 7:27am
Jim, We are talking past each other. I agree that Russia’s economy is quite small for a European power with 145 million people. But it’s not THAT small. The official figures are embarrassing enough (and may somewhat overstate reality.). No need to exaggerate.
Knut P. Heen
Mar 6 2023 at 10:35am
GDP cannot be compared between countries because different cultures produce different numbers. A stay at home wife who is cleaning the home and looking after the children counts zero in the GDP calculation. Use a cleaning service and a kindergarten and it counts in the GDP calculation. The old joke about the economist who married the housekeeper and thereby reduced the GDP is still funny.
Production of bombs also count as GDP in the same way as the production of butter. Historically, GDP has been known to increase during war-time despite all the destruction. What do you expect when you count the cost of destroyed war equipment as production?
Jim Glass
Mar 6 2023 at 1:52pm
[Scott Sumner wrote:]
Jim, We are talking past each other.
It’s the Internet!
Airman Spry Shark
Mar 5 2023 at 3:30pm
I suspect the root of such sentiments is a form of “Russia delenda est.” We’d thought the collapse of the USSR was the end of a persistent threat to the First World order, but somehow
PalpatinePutin returned.Utter annihilation of its economy could free the rest of the Russian Federation from Muscovite oppression and eliminate the primary threat to European peace & freedom indefinitely. I don’t think it terribly likely, but I can see how the prospect would be attractive enough to motivate non-kinetic efforts to increase the chances.
nobody.really
Mar 5 2023 at 4:11pm
On this blog, people generally favor international trade (for reasons of comparative advantage, among others). Moreover, Ukraine is not part of NATO or the European Union. So why should NATO-ish nations (or any nation) alter trade policies based on a conflict between Russia and Ukraine? I don’t mean to imply these nations shouldn’t; I mean to articulate a rationale. (You know the old joke: “That’s all right in practice, but how does it work in theory?”)
1: Would it be useful/fair to think about Russia’s actions as generating externalities?
2: Would it be accurate to say that NATO-ish nations are trying to control that externality by setting aside a general posture of embracing international trade with Russia, and instead restricting that trade?
3: Would it be accurate to say that the policy is working–or at least has some prospect of working?
Jose Pablo
Mar 6 2023 at 8:06pm
NATO-ish nations (or any nation) did NOT alter trade policies based on a conflict between Russia and Ukraine when it happened in 2014
Then Russia started not a “conflict” but a “war”.
The message “you cannot be part of a network of open trading nations AND invading your partners with tanks” should be obvious to any leader.
The question is not why other nations should support the obviousness of this message. The real question is why this obvious message was not clear enough to Putin a year ago.
vince
Mar 5 2023 at 5:02pm
China might step up help to it’s neighbor.
Jim Glass
Mar 5 2023 at 7:10pm
China might step up help to it’s neighbor.
China’s spent the last year selling LNG gas to Europe to make up the shortfall from Russia, after Russia cut off the gas supply to stick it to the Europeans. Friend!
In fact, a lot of that gas it bought from Russia at low-ball prices and then re-sold to Europe at hefty profit. Good neighbor!
China’s #1 interest is China. It trades with the US and Europe, each, on the order of 10x as much as with Russia. Who’s it going to choose to offend?
vince
Mar 5 2023 at 7:45pm
Hopefully, you are right. But I’m not as sure as you are. Taiwan hangs out there.
Jim Glass
Mar 5 2023 at 11:33pm
By the same measure…
Sergei Guriev on the political economy of Putin’s war in Ukraine: Global Economy Lecture 2023
Guriev is the highest-ranking economist in Putin’s regime, economic advisor to President Medvedev, to come West (“compelled, within 24 hours”). He’s the best former regime insider to explain the course of the economy up to the war, and its status currently…
[] “Putin and Medvedev agreed that the Russian economy should follow the Korean model, but couldn’t agree on South or North Korean,” 🙂
[] “In December alone, by official numbers, Russia had a one-month budget deficit equal to 2.5% of annual GDP.”
[] The OECD says the war is costing the global economy $1 trillion annually and will continue to do so into the future.
[] Russian retail turnover is down 10% and tax revenue down 9%. That’s a much better measure of the economy than GDP in wartime, which includes the value of artillery shells, etc.
[] With the oil price boom though May the Russian decline of 3% of GDP through then was terrible, GDP should have gone up with booming oil.
[] Oil sanctions are working. Oil prices have plunged since May and the price of Urals has separated from and fallen about $30/b below the Brent price — see the December deficit figure given above.
This is a long presentation, even at YouTube’s 2x speed. Perhaps skip ahead to the extensive Q&A starting at minute 53:00 — it covers about every subject I’ve ever heard mentioned about the war.
E.g.: China, and it selling LNG gas to Europe to help make up for the Russian cut-off. … Putin’s health … Possible break-up of Russia … Pensioners, a powerful political force, are losing income at 10% per year, while police and security force salaries are indexed, so –? … Russia using refugees as a weapon … Economic objectives of the war … How much popular support for the was is there in Russia? … Turkey and Ergodan … Effects of Russia’s population exodus … Russia’s sovereign wealth fund …How will a peace agreement affect Putin? … World grain markets and shortages … much more… Notable:
[] Are the sanctions working? “They have cost Russia many billions of dollars. Every billion is a billion Putin can’t use to kill Ukrainians by buying mercenaries and drones, and is a loss that makes more difficulties for him. He delayed mobilization because he wanted a paid army, but ran out of money. The mass mobilization is one of his biggest political problems.”
[] Inefficient and “unfair” sanctions: “I’ve had bank accounts of my own closed and lost the money in them, lost wire transfer funds, had credit cards cancelled, because I am Russian, even though I’ve been here for years. This is rational behavior by banks and credit card companies, and necessary collateral damage. It is a minor cost to help contain the mass destruction in Ukraine.”
[] Free trade versus de-globalization: “I love global trade as an economist, it reduces poverty and increases welfare. But Putin thought he could invade Ukraine successfully because of Europe’s dependence on Russian hydrocarbons — a great many have died and we have lost $1 trillion of global GDP as a result. Losses from war are much greater than marginal gains from trade. Perhaps we should think more of ‘friend shoring’ trade in certain areas with nations who think like us and won’t turn it to war. I want free trade everywhere, but if de-globalization in some cases can reduce risk of war, I’ll choose that.”
[] How about your friends still in the Russian Central Bank and Finance Ministry?: “It’s a tragedy for many people I know. Every billion dollars they save for Russia is money Putin spends to kill Ukrainians. They know it, but at the end of the day I am sure they look in the mirror and say they are doing it to save the poorest Russians from suffering in an economic collapse, and that they succeed at thinking this. Also, if they try to resign and Putin says no, they can’t, he can kill them – this is not theory.”,
Anders
Mar 6 2023 at 7:47am
I sincerely doubt the economy is in a tailspin. Consumer sentiment has risen, and record oil and gas prices continue to fill coffers even if sanctions have raised transactions costs and forced workarounds. I never saw the 99% figure on the automotive sector, but avtogaz does not sell much outside the former ussr and some developing countries (and, for historical reasons, Italy).
But Putin clearly wants to thicken the cloud of mystery about his tactics and domestic risks, which is perhaps why Rosstat stopped reporting. His strategic objectives are too clear as to be a disadvantage, he laid all the points out back in 2007 and would have accepted the Minsk arrangement (only Crimea was essential, improving rights for ethnic Russians or whichever term you prefer was the gravy and also a concern with obvious legitimacy from a Western concept of human rights.
Finally, we call him delusional and tyrannical. I do not want to defend him, but look at pretty much any ruler throuough Russian imperial (ant anti imperial, as the soviet union defined itself) history, and Putin is downright pusillanimous, equally trapped between modernisation and that semimystical Russian nationalism that Tolstoy likens to psychedelic drugs in a scene in Anna Karenina, as all rulers since Ivan and Peter.
A Catherine the Great would not be content with a war of attrition, but would have carried out one of conquest and absorbtion. A peter the great would not just intimidate and occasionally murder (in a way that made the killer obvious but ridiculously denied). They were building an empire, a third room, and a state deserving of the Holy Alliance. And of course, they would spurn even at the spurious pseudodemocracy in Russia today.
Jim Glass
Mar 6 2023 at 1:49pm
I sincerely doubt the economy is in a tailspin. Consumer sentiment has risen, and record oil and gas prices continue to fill coffers
The price of oil has fallen back down to where it was before the war, and Russia’s Urals oil has separated from the pack and fallen about another $20-30 below that,
In January of 2022, before the war, Urals sold in the range of $80-90/barrel. During the last three months it has been trading in the range from $48 to $62.
https://tradingeconomics.com/commodity/urals-oil
Subtract from that another $10/barrel or so for the cost of sending oil on ships via the great circle route to India and China. When your cost of production is $25-$45/b and your revenue is averaging $~55/b, that $10 counts.
A Catherine the Great would not be content with a war of attrition
Neither was Putin. Remember that he planned to win in four days.
Did you read the prepared-in-advance victory pronouncement that was published by RIA Novosti celebrating “the end of the operation” on February 26, day #3?
https://twitter.com/sea_inside3/status/1498065730042011648
That’s what Putin really had in mind. Lest we forget.
Ooops. Well, the Germans planned to win both World Wars with lightning strikes because they knew full well they couldn’t win wars of attrition. I doubt that they were “content” with the wars they got instead. But when you start a war you have to take what the gods of war give you, being content with it or not has nothing to do with it.
Jim Glass
Mar 8 2023 at 4:57pm
Russian Companies Told: “Buy Your Own Air Defense”
Only Russia…
Jim Glass
Mar 10 2023 at 9:59pm
Update…
Huge budget deficit is building up in Russia’s economy
Moscow’s oil and gas revenues plummeted 46% in January-February.
March 07, 2023
According to the Russian Ministry of Finance, federal budget revenues in the first two months of 2023 were down 25 percent compared with the same period in 2022…
Parallel to the shrinking revenues comes a significant increase in state spending. Budget expenditure in January-February amounted to 5,744 trillion rubles, up 52 percent year-on-year…
The figures show that a major budget deficit of 2,581 trillion rubles, or about 45 percent [of expenditures] has built up over only two months.
The so-called none-petroluem revenues shrunk by nine percent year-on-year, much of it reportedly caused by a drop in collected income taxes….
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