Anti-Russian sanctions backfired on America

Remember the claims that the Russian economy was more or less irrelevant, just the equivalent of a small, not very impressive European country? “Putin, who has an economy the size of Italy,” Sen. Lindsey Graham, RS.C., said in 2014 after the Crimea invasion, “[is] play poker with a pair of twos and win. Of Russia’s growing diplomatic and geopolitical influence in Europe, the Middle East and East Asia, The Economist asked in 2019, “How did a country with an economy the size of Spain…achieve all of this?”

Rarely has the West so grossly underestimated the global importance of an economy. The French economist Jacques Sapir, a recognized specialist in the Russian economy and teacher at the schools of economics in Moscow and Paris, recently explained that the war in Ukraine “made us realize that the Russian economy is considerably larger than what what we thought”. For Sapir, one of the main reasons for this miscalculation is the exchange rate. If you compare Russia’s gross domestic product (GDP) by simply converting it from rubles to US dollars, you indeed get an economy the size of Spain. But such a comparison is meaningless without adjustment for purchasing power parity (PPP), which takes into account productivity and living standards, and therefore per capita welfare and resource use. . Indeed, the PPP is the measure favored by most international institutions, from the IMF to the OECD. And when you measure Russia’s GDP based on PPP, it’s clear that Russia’s economy is actually more like the size of Germany’s, about $4.4 trillion for Russia versus 4, 6 trillion dollars for Germany. From the size of a small, somewhat struggling European economy to the largest economy in Europe and one of the largest in the world, the difference is not insignificant.

Sapir also encourages us to ask ourselves: “What is the share of the service sector compared to the share of raw materials and the industrial sector? For him, the service sector is now vastly overvalued compared to the industrial sector and to basic products such as oil, gas, copper and agricultural products. If we reduce the proportional importance of services in the world economy, Sapir says that “Russia’s economy is vastly larger than Germany’s and probably represents 5 or 6% of the world economy” , more like Japan than Spain.

It makes intuitive sense. Ultimately, we know that providing people with the things they really need to survive, like food and energy, is more valuable than intangible things like entertainment or financial services. When a company like Netflix has a price-to-earnings ratio three times that of Nestlé, the world’s largest food company, that’s more likely a reflection of market scum than physical reality. Netflix is ​​a great service, but as long as around 800 million people around the world remain undernourished, Nestlé will always provide more value.

All this to say that the current crisis in Ukraine has helpfully clarified how much we have taken for granted the “archaic” side of modern economies like industry and raw materials – the prices of which have soared this year – and perhaps overvalued and “tech” services, whose value has recently collapsed.

The size and importance of Russia’s economy is further skewed by ignoring global trade flows, in which Sapir estimates Russia “could account for up to 15%”. If Russia is not the largest oil producer in the world, for example, it was the largest exporter, even ahead of Saudi Arabia. The same goes for many other essential products such as wheat – the most important food crop in the world, with Russia controlling about 19.5% of world exports – nickel (20.4%), iron semi- finished (18.8%), platinum (16.6%), and frozen fish (11.2%).

Such prominence in the production of so many commodities means that Russia, like few other countries on the planet, is in many ways a pivot in the globalized production chain. Unlike “maximum sanctions” on a country like Iran or Venezuela, attempting to sever ties with Russia has meant and will likely continue to mean a radical reorganization of the global economy.

Now that President Joe Biden has publicly renounced America’s decades-old policy of “strategic ambiguity” toward Taiwan, it’s worth thinking about what China’s economy looks like when we remove the same blinders. with which we had always viewed Russia. If we consider China’s economy based on exchange rates – simply converting China’s GDP from Chinese yuan to US dollars – it is valued at around $17.7 trillion (in 2021), compared to $23 trillion for the United States and $17 trillion for Europe. Union.

But if we adjust for PPP, we find that China’s economy grew to nearly $27.21 trillion in 2021, compared to $20.5 trillion for the EU and $23 trillion for the US. In PPP terms, in fact, China’s economy surpassed America’s six years ago.

What if we reduced the proportional importance of the service sector compared to industry and raw materials? Services represent about 53.3% of Chinese GDP, even less than in Russia (56.7%). If we roughly apply Sapir’s ratio of doubling the valuation of the non-tertiary sector to China, we may have to consider that in a very real and relevant way, the Chinese economy is something like 25% to 30% of the global economy on a PPP basis, rather than current estimates of 18%-19%. This would place the Chinese and Russian economies combined at around 30% to 35% of the global economy (again, taking into account PPPs and the overvaluation of the service sector) – a gigantic and probably unsustainable challenge for a transatlantic community. which seems increasingly focused on using maximalist economic sanctions to punish bad actors and achieve desired political results. This challenge becomes even more daunting when one considers that the service sector accounts for around 77% of the US economy and 70% of that of the EU, suggesting a potentially significant degree of overvaluation of Western economic weight and a much greater parity of relative economic power with China and Russia.

How much does this haircut matter? On the one hand, the war in Ukraine and tensions in the Pacific appear to be accelerating a division of the world into Cold War-style political and economic blocs. But while the West accounted for more than 50% of global GDP at the start of the Cold War – with the United States dominating global manufacturing and recording huge annual trade surpluses – the West seems to be in a position of weaker power so more entrenched today, and its main adversaries stronger in some respects than the communist bloc was in 1948.

Before enthusiastically embracing a new Iron Curtain, it is therefore worth pausing to reflect on how many countries in the world will voluntarily stand by our side. The countries of what we call “the West” will undoubtedly remain, for ideological and historical reasons, in addition to economic and military intertwining, relatively united. But the West only accounts for around 13% of the world’s population, with China and Russia together accounting for around 20%. This leaves about two-thirds of humanity “unaligned”, a position most of them would like to maintain. If we force them to choose a side, we might be surprised by many results.

A tally of the countries participating in the current sanctions against Russia, in fact, makes it difficult to tell whether a new iron curtain is being drawn around our adversaries or around the West itself. Countries and nominal U.S. allies as prominent as India and Saudi Arabia have been particularly vocal in their refusal to take sides in the Ukraine conflict.

A revealing barometer of this dynamic is oil. With Western oil sanctions on the world’s largest oil exporter, prices have surged, as you would expect, from around $75 a barrel at the start of the year to over $110 today. today. But countries that refused to participate in the sanctions are now taking advantage of the opportunity to negotiate deliveries of Russian energy at very advantageous prices. If Russia is still able to sell oil around the world, countries like India are able to negotiate below market prices, and western consumers are hammered with inflated prices, who is really being punished? A similar principle applies to the militarization of the US dollar and the Western financial system in general: if non-Western countries are increasingly told that access to dollars and to transaction systems like SWIFT are conditioned by policies crafted in Washington that are not necessarily in their own interests, the result could be a de-dollarization of the global economy, not a strengthening of the Western order.

None of this is to say that the brutal invasion of Ukraine was anything short of an atrocity, and that extraordinary measures may indeed be needed to counter Russian expansionism and its implications for peace. and global stability. But it is possible that the West, in a crisis of self-righteousness and a need to satisfy various domestic demands, will plunge headlong into a future in which the Global South and many others feel increasingly compelled to make a choice. that they don’t. you want to have to do, and which risks leaving the West more isolated than ever in modern times.

About Sharon Joseph

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