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 about event More on this topic

Upcoming Event

Apr
25
12:30

Central banking in turbulent times

This event will look at fundamental questions about the central banking systems and how the Great Recession might have prompted a reassessment of the old central banking model.

Speakers: Maria Demertzis, Paul De Grauwe, Marianne Nessén and Francesco Papadia Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event More on this topic

Upcoming Event

Apr
26
16:30

Youth UP Europe: Future of democracy in Europe

Bruegel and the European Youth Forum are teaming up to organise an event series in which young people, researchers and policy makers debate policy issues relevant to the future of Europe.

Speakers: Anna Ascani, Alice Mary Higgins, Luis Alvarado Martinez, Thodoris Georgakopoulos and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More by this author

Podcast

Podcast

Director's Cut: EU risks US tariff pain in standing by the WTO

As global trade war continues to unfold, Bruegel director Guntram Wolff is joined for this Director's Cut of 'The Sound of Economics' podcast by Bernd Lange MEP, chair of the Committee on International Trade (INTA), to discuss Europe's options.

By: The Sound of Economics Topic: European Macroeconomics & Governance, Global Economics & Governance Date: April 18, 2018
Read article More on this topic

Blog Post

The European Globalisation Adjustment Fund: Time for a reset

It is only in the last decade that the EU has had an active policy to reintegrate workers who lost their jobs as a result of globalisation, through the European Globalisation Adjustment Fund (EGF). In this blog, the authors assess the performance of the Fund and make three recommendations to improve its effectiveness. To be more successful, the Fund should improve its monitoring and widen the scope of its usage.

By: Grégory Claeys and André Sapir Topic: European Macroeconomics & Governance Date: April 11, 2018
Read article More by this author

Opinion

How Should the EU Position Itself in a Global Trade War?

It is high time for the EU to work on more than just wishful thinking in response to the US challenge to global trade. With the first cracks appearing in the multilateral system, it will be difficult for the EU to maintain a middle course between the US and China.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance, Global Economics & Governance Date: April 5, 2018
Read article More by this author

Podcast

Podcast

Director's Cut: Developing deposit insurance in Europe

In this week’s Director’s Cut of ‘The Sound of Economics’ podcast, Bruegel director Guntram Wolff talks with Nicolas Véron, senior fellow at Bruegel, about the implementation of a European Deposit Insurance Scheme (EDIS), one of the three pillars needed for the completion of banking union.

By: The Sound of Economics Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: April 3, 2018
Read article More on this topic

Blog Post

Do wide-reaching reform programmes foster growth?

With growth gathering momentum in the eurozone, some have claimed this is the proof that structural reforms implemented during the crisis are working, re-opening the long-standing debate on the extent to which reforms contribute to fostering long-term growth. This column employs a novel empirical approach – a modified version of the Synthetic Control Method – to estimate the impact of large reform waves implemented in the past 40 years worldwide.

By: Alessio Terzi and Pasquale Marco Marrazzo Topic: European Macroeconomics & Governance Date: March 28, 2018
Read article More on this topic

External Publication

Europe in a new world order

The EU is a relatively open economy and has benefited from the multilateral system. We argue that the EU should defend its strategic interests. The Singapore ruling has offered a useful clarification on trade policy. Addressing internal imbalances would also increase external credibility. Finally, strengthening Europe's social model would provide a counter-model to protectionist temptations.

By: Maria Demertzis, Guntram B. Wolff and André Sapir Topic: European Macroeconomics & Governance Date: March 26, 2018
Read article More on this topic More by this author

Blog Post

The Brexit Transition Deal

Michel Barnier, the European Union’s Brexit negotiator, and David Davis, Britain’s Brexit secretary, announced a transition deal on March 19. We review recently published opinions about the deal and its implications.

By: Silvia Merler Topic: European Macroeconomics & Governance Date: March 26, 2018
Read article More on this topic More by this author

Opinion

Greece must capitalise on its growth momentum

Better-than-expected growth performance reflects the underlying positive changes in the Greek economy – but net investment is in fact negative, while Greece has various institutional weaknesses. Further improvements must be made regarding Greece’s attractiveness to foreign direct investment. A new (at least precautionary) financial assistance programme would improve trust in continued reforms and also address eventual public debt financing difficulties.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: March 26, 2018
Read about event More on this topic

Past Event

Past Event

Could uncertainty derail the European recovery?

It is a contradictory time for Europe. The economy is recovering but the political climate is uncertain. There is excitement about common projects but also rifts and increasing nationalism and populism.

Speakers: Franco Bruni, Maria Demertzis, Zsolt Darvas and Marietje Schaake Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: March 22, 2018
Read article Download PDF More on this topic

Policy Contribution

The European Globalisation Adjustment Fund: Easing the pain from trade?

With the European Globalisation Adjustment Fund (EGF), the EU now has an instrument to help workers negatively affected by trade find new jobs. However, only a small proportion of EU workers affected by globalisation receive EGF financing. How to improve the EGF? Revising the eligibility criteria to qualify for EGF assistance, enlarging the scope of the programme beyond globalisation and collecting more and better data to enable a proper evaluation of the programme.

By: Grégory Claeys and André Sapir Topic: European Macroeconomics & Governance Date: March 22, 2018
Load more posts