Blog Post

Could Russia’s troubles affect the world economy?

The sanctions applied by the European Union and the United States against Russia in retaliation for its annexation of Crimea might seem relatively mild, but they are a sign of deteriorating confidence in Russia as an economic partner, which in the longer term could progressively undermine the Russian economy. This in turn raises the question of a global spillover from a potential Russian crisis through real-economy channels.

By: Date: April 8, 2014 Topic: European Macroeconomics & Governance

Read also comments ‘Can Europe survive without Russian gas?‘ and ‘The cost of escalating sanctions on Russia over Ukraine and Crimea

The sanctions applied by the European Union and the United States against Russia in retaliation for its annexation of Crimea might seem relatively mild, but they are a sign of deteriorating confidence in Russia as an economic partner, which in the longer term could progressively undermine the Russian economy. This in turn raises the question of a global spillover from a potential Russian crisis through real-economy channels.

But although Russia is the world’s eighth largest economy, ranked between Brazil and Italy in GDP terms (IMF, 2013, in US$), there are limited grounds to fear a global spillover, for five reasons:

First: Despite Russia’s economic rank, it generates slightly less than 3 percent of global economic output, at approximately US$ 2000 billion. Russia thus poses a limited systemic threat.

Second: Russia is relatively well integrated into international trade flows. Imports and exports of goods correspond to slightly more than 40 percent of GDP (compared to trade-intensity in Germany: 75 percent, and in the US: 25 percent). However, Russia plays the smallest role of all WTO/OECD countries in global value chains. While in Germany the value of exported goods is up to 30 percent of imported intermediate products, in Russia it is less than 10 percent. Only in Russia’s automotive industry is this ratio up to 20 percent. Hence, an economic crisis in Russia would have little impact on foreign suppliers – there are hardly any.

Figure: Domestic value added content of gross exports, %

Source: OECD

Third: An economic crisis in Russia would have little impact on the country’s exports. Russian foreign trade is heavily biased towards energy, raw materials and agricultural commodities . In terms of value, the greatest share of Russia’s exported goods is indistinguishable from corresponding foreign products. Other countries could step into any breach created by a decline in Russian exports. Depending on the depth of the decline, however, there would be an impact on world market prices (see my blogpost on replacing natural gas exports). Nevertheless, a major decline in energy and commodity exports in particular is not expected because continued use of the existing and very profitable plants is likely even in the case of a severe economic crisis. Only in arms exports might the main importers, such as Venezuela, Syria and Algeria, find it hard to replace Russian goods.

Table: Top ten export categories 2012

Export category

% of total exports

In million US$

1

Mineral fuels, mineral oils and products of their distillation

70%

368853

2

Iron and steel

4%

22608

3

Natural or cultured pearls, precious or semi-precious stones, precious metals, metals clad with precious metal, and articles thereof

3%

13823

4

Fertilisers

2%

11177

5

Inorganic chemicals

1%

7839

6

Nuclear reactors, boilers, machinery and mechanical appliances

1%

7642

7

Aluminium and articles thereof

1%

7262

8

Wood and articles of wood

1%

6735

9

Cereals

1%

6252

10

Copper and articles thereof

1%

5790

Source: UN COMTRADE

Fourth: Russia’s huge revenues from energy exports allow it to act as a major buyer on global markets. In 2012, Russia imported goods amounting to US$ 300 billion – the GDP of Denmark. But Russia is a pick-and-mix purchaser. Few countries sell more than one-twentieth of their exports to Russia. These are – in addition to nine former Soviet republics – Poland, Serbia, Finland, Uruguay and Paraguay.

In addition to these countries that would be directly affected by reduced exports to Russia, there could be second-round effects – countries selling goods to the countries that export more than 5 percent to Russia might also be affected.

Table: Countries that sell more than 5 percent of their exports to Russia, 2012

Uruguay

5%

Poland

6%

Kazakhstan

7%

Serbia

8%

Paraguay

10%

Finland

10%

Latvia

11%

Kyrgyzstan

13%

Estonia

18%

Lithuania

19%

Armenia

19%

Ukraine

26%

Rep. of Moldova

30%

Belarus

35%

Source: UN Conmtrade

Fifth and finally, foreign firms in Russia might lose (a part of) their business there. There are many prominent and visible examples of foreign investors ranging from the Carlsberg brewery to Volkswagen (see stories in the FT and the Spiegel). But one has to put these exposures into context. Russia has been much less able to attract foreign direct investment than other countries of its size. For 2012 the OECD reported that the stock of foreign direct investment to Russia amounted to US$ 137 billion. This is about a third of what Brazil was able to attract (US$ 354 billion) and about the same level as Poland (US$ 118 billion).

A post-Crimea Russian economic crisis is hardly desirable, not least because of the internal instability that it might provoke. But it would be unlikely to have substantial direct spillovers onto trading partners. Shock-transmission through the financial sector is another concern discussed by Silvia Merler in a previous blogpost.

Assistance by Olga Tschekassin is gratefully acknowledged.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.


Warning: Invalid argument supplied for foreach() in /home/bruegelo/public_html/wp-content/themes/bruegel/content.php on line 449
View comments
Read article Download PDF More on this topic More by this author

External Publication

Taking stock of the Single Resolution Board: Banking union scrutiny

The Single Resolution Board (SRB) has had a somewhat difficult start but has been able to learn and adapt, and has gained stature following its first bank resolution decisions in 2017-18. It must continue to build up its capabilities, even as the European Union’s banking union and its policy regime for unviable banks continue to develop.

By: Nicolas Véron Topic: European Macroeconomics & Governance Date: April 18, 2019
Read about event More on this topic

Upcoming Event

May
16
10:00

Future of taxation in the EU

A conversation with Mateusz Morawiecki, Prime Minister of Poland, on future of taxation in the EU.

Speakers: Marie Lamensch, Mateusz Morawiecki and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event More on this topic

Past Event

Past Event

Can the euro area weather the next crisis?

Is the euro area strong enough to make it through another crisis? What reforms are still needed. Klaus Regling will join us for this roundtable event in Washington DC to discuss these questions.

Speakers: Masood Ahmed, Klaus Regling, Maria Demertzis and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: 2055 L Street NW, Washington DC 20036 Date: April 11, 2019
Read about event More on this topic

Past Event

Past Event

Spitzenkandidaten series: Frans Timmermans

The sixth event in the The Road to Europe - Brussels Briefing Live: Spitzenkandidaten series. The series features the lead candidates for the European Elections of six parties and is jointly organised by Bruegel and the Financial Times in March and April 2019.

Speakers: Mehreen Khan, André Sapir and Frans Timmermans Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: April 11, 2019
Read about event More on this topic

Past Event

Past Event

Spitzenkandidaten series: Manfred Weber

The fifth event in the The Road to Europe - Brussels Briefing Live: Spitzenkandidaten series. The series features the lead candidates for the European Elections of six parties and is jointly organised by Bruegel and the Financial Times in March and April 2019.

Speakers: Anne-Sylvaine Chassany, Manfred Weber and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: April 9, 2019
Read article Download PDF More on this topic More by this author

Parliamentary Testimony

Promoting sustainable and inclusive growth and convergence in the European Union

This speech was delivered by Guntram Wolff at the Informal ECOFIN Meeting in Bucharest on 5 April 2019.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: April 8, 2019
Read article More on this topic More by this author

Blog Post

Is this blog post legal (under new EU copyright law)?

How new EU rules on using snippets from news publishers and on copyright infringement liability might affect circulation of information, revenue distribution, market power and EU business competitiveness.

By: Catarina Midoes Topic: European Macroeconomics & Governance Date: April 8, 2019
Read article Download PDF

Policy Contribution

Promoting sustainable and inclusive growth and convergence in the European Union

This Policy Contribution was written for the Informal ECOFIN Meeting, Bucharest, 5 April 2019. The authors look at the EU’s economic agenda, discussing the priorities for the next five years.

By: Maria Demertzis, André Sapir and Guntram B. Wolff Topic: European Macroeconomics & Governance, Innovation & Competition Policy Date: April 4, 2019
Read about event More on this topic

Past Event

Past Event

Spitzenkandidaten series: Jan Zahradil

The fourth event in the The Road to Europe - Brussels Briefing Live: Spitzenkandidaten series. The series features the lead candidates for the European Elections of six parties and is jointly organised by Bruegel and the Financial Times in March and April 2019.

Speakers: Jim Brunsden, Maria Demertzis and Jan Zahradil Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: April 4, 2019
Read article More on this topic More by this author

Blog Post

How visible are independent fiscal institutions in public debate?

Independent fiscal institutions have no formal powers to act and have to rely on soft power to influence the budgetary process. This blog post investigates how they exercise this soft power by enhancing public scrutiny of fiscal policies.

By: Grégory Claeys Topic: European Macroeconomics & Governance Date: April 3, 2019
Read about event More on this topic

Past Event

Past Event

Spitzenkandidaten series: Luis Garicano

The third event in the The Road to Europe - Brussels Briefing Live: Spitzenkandidaten series. The series features the lead candidates for the European Elections of six parties and is jointly organised by Bruegel and the Financial Times in March and April 2019.

Speakers: Luis Garicano, Mehreen Khan and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: April 3, 2019
Read about event More on this topic

Past Event

Past Event

Spitzenkandidaten series: Bas Eickhout

The second event in the The Road to Europe - Brussels Briefing Live: Spitzenkandidaten series. The series features the lead candidates for the European Elections of six parties and is jointly organised by Bruegel and the Financial Times in March and April 2019.

Speakers: Bas Eickhout, Guntram B. Wolff and Rochelle Toplensky Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: April 2, 2019
Load more posts