With the second coming of the cold war, it is no surprise that so much of the news (if mostly propaganda) is dedicated to the rapidly escalating events in Ukraine in particular, and in Russia in general. But how much do people really know about the history and economy of the largest country in the world? Not much. Which is why we have compiled the following charts meant to provide some further insight into what this particular conflict is about and what the real motivations behind Putin's actions may be.
First, a quick reminder of what the Russian "org chart" looks like:
And, as we showed before, here is an annotated history of the former (and perhaps) future empire.
Narrowing the timeline a bit, here is the relatively near-term history of the current conflict.
But enough foreplay. When one thinks Russia, all one really has to think about is commodities because exported commodities represent 20% of Russian GDP. Additionally, commanding over 10% of the global gas and oil market, Russia is a huge marginal producer of the most important commodities on a global scale (and with over 40% of the produced palladium, one can see why its price in recent weeks has exploded).
But nowhere is Russia's commodity dominance more important than in Europe, where Russia represents nearly all oil and gas imports for a bevy of countries. Russia supplies literally all of the natural gas that Finland and the Baltics consume and 70% of what Ukraine consumes, a key point of Russian leverage in the current dispute. Dependence is not limited to smaller, immediately neighboring countries; Germany relies on Russia for around one-third of its total gas supplies. Although seasonal and other factors could lessen the impact of disruptions to these flows, there is no doubt that such potential disruptions would negatively impact European growth. Of course, it is not one way: Europe’s saving grace is likely to be that Russia’s dependence on its oil and gas revenues – which amount to roughly 10% of GDP – make this a story of interdependence between Russia and Europe that neither side has economic incentives to disrupt.
It's not all energy commodities, though. Russia's vast territory covers so many resources that it is a key producer of virtually everything from agriculture to zinc.
What about the inverse: which countries would suffer should their exports to Russia be cut off. In top spot are Germany and Sweden, with about 0.87% of their GDP generated by exports to Moscow.
However, as the chart below of value added to final demand shows, while Europe could in theory lose Russia, its export exposure to China is far greater. It is here that Europe should be worried about a potential Chinese-Russian axis, since the leverage power of such an entity would be virtually unlimited.
Yet while total European exposure via the export and GDP channel is rather limited, Europe's exposure via the financial/bank channel is more acute. Cross-border exposures of European banks to Russia and other parts of central and eastern Europe suggests (1) these balance sheet exposures are significant; (2) the magnifying effect of the impact via central and eastern Europe is more important than the direct exposure to Russia itself; and (3) the most significant exposures are in Sweden and Italy, whose banks play an important role in neighboring CEE countries.
It is the financial channel that has seen the fastest impact, with substantial private capital outflows already having taken place, and much more expected to flow out in the coming months.
Ironically, unlike the great powers of the developed world which have been unable to grow at a BRIC-like pace, and thus were forced to borrow heavily from the future for some very modest growth today, Russia did not have that problem. As a result, Russian total external debt is tiny when viewed from the prism of an insolvent G-7 country.
And since the world is extremely reliant on Russia for its energy needs, and will pay it in the reserve currency du jour, it is also very likely that Russian oil production - already said to be the biggest in the world in terms of daily boes - will only increase, and with it so will Russia's leverage. In summary, it appears it is not the mutual assured destruction of epic debt amounts that is guiding Russia decision-making, but its explicit ability to crush world growth should it turn off the energy switch.
Finally, here is an amusing glimpse at the "experts" of the developed world, the same ones who said Putin would never dare annex Crimea - it is they who until recently said Russia was almost neck and neck with the US in terms of its "democracy"... it is they who are now shouting what an "authoritarian, despotic" state Russia has become.