Updated Russian Economy Estimate

Low: $4.868 Trillion, High: $6.4211 Trillion: Econ is tricky

The Ruble has declined 10.75% since July 11 when I made my last estimate of the size of its economy

A crude calculation could call the decline in dollar value from 6.16 trillion to 5.5 trillion, assuming all other things are equal https://tradingeconomics.com/russia/currency

But money supply has expanded since July into August 2023.

https://tradingeconomics.com/russia/money-supply-m2

4.54% increase from my last estimate.

In that prior estimate, I assume that the increase in money supply is directly proportionate to the increase in Ruble GDP. This is why when I stated that there was a 72% increase in broad money between 2020 and 2023 when I wrote that, the GDP grew from 110 trillion rubles to 189 trillion rubles.

I neglected to recalculate the new Broad money to GDP ratio, because as more money goes into an economy, the more inflation risk increases. With an economy of 189 trillion rubles and broad money at 86 trillion rubles, the new ratio is 45.5% broad money to GDP. Usually when there's that much monetary expansion, we see a currency zone's exchange rate worsen against the dollar, which is why I revised my old Russian PPP figure from 26.5 Rubles to the US Dollar to 30.68. Whether there is increased monetary velocity or reduced is hard to tell with the data.

So if the broad money supply is up 4.54% from three months ago to 90,110 billion rubles, then that is a crude increase from 189 trillion rubles to 197.58 trillion rubles. That puts its broad money to GDP ratio at 45.6%.

Why switch from a broad money to GDP ratio to a 1:1 broad money expansion to GDP expansion ratio? Because inflation has plunged, which suggests that supply chains have been repaired and that the additional money is getting reinvested. We see high monetary expansion and decreased inflation which suggests the money is adding to productive capacity. We can correct for errors here by adjusting the dollarized calculation by the exchange rate shift since the prior article was written.

If we use the same 69.9% broad money ratio and don't change it, we get about 129 trillion for the Russian GDP, which is close enough to the official figures (https://tradingeconomics.com/russia/gdp-constant-prices). But we have seen that economic Maskirovka is an important part of Russian economic reporting, as analyzed here:

Part 2: https://aaronlee.substack.com/p/one-trillion-dollars-in-2023-how-9d4

Part 3: https://aaronlee.substack.com/p/one-trillion-dollars-in-2023-how-74e

And when we look at the rate of change between broad money and GDP ratios, we see that the ratio was increasing (https://data.worldbank.org/indicator/FM.LBL.BMNY.GD.ZS?name_desc=false&locations=RU) concurrently with a dollar value decline with the dollar exchange rate and rising oil prices, which showed about a 20% decline in Ruble to Dollar exchange rate from 2019-2020 and then stabilizing. Despite 2022's volatility for the ruble, its average basically stayed stable. Using this method, we see that Broad Money to GDP ratio was probably stable until 2023. The lower that ratio, the higher the money velocity. The higher that ratio, the lower the monetary velocity. More money should mean more circulation which should mean more income which should then be measured. With the ruble dollar exchange rate truly worsening by 50% or so, that should mean some serious inflation. Instead what we see is that Russian inflation has plunged to pre-war levels not seen since 2020. This supports the productivity theory. It's also an argument for keeping the Broad Money to GDP ratio at 69.9%. That would give us the 129 trillion ruble figure.

But declining inflation would be a sign that the PPP of the Ruble should be improving against the dollar, because less money is chasing an increasing supply of goods and services. Some of that is China imports, which was covered here

but most of it is military production, which we see on the battlefield. And since I was able to discover so much intelligence about the Russian military economy and its production, merely by drilling into its economic data, I find it unlikely we're getting anywhere close to the truth about its true productive base by using standard western economic methodologies, because those have failed somewhat.

Therefore, if we use the lower 129 trillion Ruble figure, we should continue to use the 26.5 Ruble to Dollar PPP exchange rate, because macro is improving for Russia and the entirety of its GDP growth can be accounted by expanded military production, import substitution, and rising commodity prices—which haven't impacted its inflation rate like in the West. Since energy and food aren't even used when calculating inflation and since the Ruble price of oil is linked to gold, we can even postulate that Russia's total net inflation is actually at 0%. That would give Russia a $4.868 trillion dollar economy by exchange PPP. Since we know at baseline that Russia is spending about 26.5 trillion rubles on the war (I'm assuming it has gone up a little bit from March), which we have estimated to be worth about $1 trillion dollars, and since we've seen Russia can outproduce the rest of the world's combined arms production, this would mean Russia's civilian economy was about $3.868 trillion dollars, which would be about the same size as its pre-war civilian economy. But we've seen that all the macro factors have moved in favor of Russia in the last few years. Oil and gas have been up and Russia's revenues in those areas have remained stable. Russia is importing more goods from China to substitute for western goods... that should alleviate inflation pressures. It seems much more likely that Russia's civilian economy also expanded since the war's start.

If we use the original calculation which gives us 197 trillion rubles and then we also use an inflation calculation for adjusting the dollar PPP for the Ruble we get 30.68 * 10.75% for a new PPP of 33.9781. That gives us a dollarized GDP estimate of $5.7978. Since Russia exports energy and since Gold prices have dropped and along with it, the cost of gasoline in Russia by a huge amount (https://tradingeconomics.com/russia/gasoline-prices), so one should see a rise in living standards. At the very least, the increase in oil prices from March 2023 when I first wrote my article surveying the Russian military economy until now should mean the total value of the Russian oil sector should have increased in dollars to $308 billion from the $245 billion original calculation. But since PPP exchange rate is so dramatically different from actual exchange rate, we should see the $63 billion gain modified by our actual PPP which is about 1/3 of the official dollar to ruble exchange rate. That gives us a PPP improvement of $189 billion. TTF gas has stayed stable since the original estimate, while coal and steel have dropped a little. Russia still shows net dollar to ruble industrial PPP gain, and meanwhile, their Chinese imports have surged from $72.69 billion in 2021 (https://tradingeconomics.com/russia/imports-by-country) to that same amount by early September 2023 (https://tradingeconomics.com/china/exports-to-russia). So Russia is on track to import about $40 billion in dollars more of Chinese goods than it did in 2021. This also suggests that Russia's standard of living has increased.

Therefore, using the lower figure, while seemingly more consistent with prior methods, fails to map changing events in a low-data-confidence environment. Lower inflation, more imports, rising commodity prices, and monetary expansion all combine to suggest that the higher GDP estimate is superior to a straight Broad Money to GDP ratio. The spread is about one trillion dollars between the two methods.

Using the higher figure, we can presume that the Russian economy is maxed out. It shows signs of inflationary strain building up in the industrial economy, alleviated by declining prices in the consumer economy. We see in the higher figure assumptions that the dollar PPP size of the Russian economy has shrunk since July. That is QUITE plausible, especially as Russian industrial capacity utilization probably reached close to 100% by mid summer as military spending converted into arms production. IE the initial gains were easy and painless, whereas now, new capital plant, and skilled labor is needed to expand production. If you want to assume that consumer prices have dropped more than reported, then one can readjust the Ruble Dollar PPP exchange rate to stay stable at our 30.68 rate, which would place the Russian dollar GDP at about $6.4211 trillion.

The lower figure of about $4.868 trillion would suggest that Russian living standards stayed stable and that the entirety of the GDP increase was in military production. That does not jibe with the other data points we just reviewed. Still, if you don't like this higher assumed GDP figure of $5.7978 trillion – $6.4211 trillion you can use the lower figure of $4.868 trillion.

I'm of the opinion that the Russian economy is running at its capacity and needs more imports and production expansion in order to grow. So I find it quite intriguing to assume the Russian economy declined from $6.16 trillion to $5.7978 trillion. I don't consider either number really accurate, but rather data points that suggest rapid growth proportionate with increased military productive expansion. Since scaling up arms production means unit costs go down, that could be an argument for the higher GDP estimate, but I need more data to see if that is right.