Russia, China and the Western Way of Life

Russian Fall

It wasn’t so long ago that bankers, investors and financial commentators were recommending we pile our cash into emerging markets in far off lands. The one useful reality from the post-pandemic world of 2021, is that these politicians and investment gurus have been exposed as having very little insight at all. Things change, they always do one way or another – if not by conflict, by ideology or something else – in this case, a global disease. And as Churchill once said – “Those who fail to learn from history are condemned to repeat it.

Growth rates in Russia, the Middle East, and Africa are now settling into a state of near-stagnation. Russia is of course, at the forefront of this decline, having registered no meaningful growth at all since 2014. And so Vladimir Putin’s response is to blame everyone but himself – mainly oil and gas prices of course.

The reality is that the West has finally woken up from its collective stupor, realised the toxic nature of Putin and his crony cabal and started acting to defend our way of life.

Russia’s economy is in decline because its political and economic policies favour corruption, not the free market and most certainly not any form of liberal democracy. And it doesn’t help, of course, that Western sanctions are adding to its woes, which deters investors.

And there is tangible evidence that one system works over the other. Those countries that made the decision to join the European Union have significantly improved their governance of not just political but economic policies, and the results have seen those same countries GDP converge with Western Europe. For instance, the growth rate of Hungary, Poland, and Romania between 2014 and 2019 grew at an annual average rate of 3.9%, 4.1%, and 4.7%, respectively. The same can’t be said of Russia, whose economy grew by just 0.7 per cent. Don’t forget that global inflation in 2019 was 3.5 per cent alone.

Nowadays, Romanians and Turks are better off than Russians. In fact, on the continent, only Bulgaria is still poorer than Russia.

Putin had a choice and he took the wrong fork in the road and has now entrenched his failing position. He has systematically attacked the institutions of civil society. He has maliciously gone about undermining the courts and judicial system – just as he has with law enforcement, dissenting voices, the media and so on. Putin believes it is a better policy to assassinate his opponents than to revitalise the huge human potential of a nation with 144 million people on the worlds largest country landmass.

Putin’s ideological position is strangling private investment and business development and most of all confidence. Russia is a full-blown kleptocracy and ranks 129 of 180 on the global corruption index – straddled between Mali and Togo (source).

The aim of any government should be to maximize its citizens’ welfare through political and economic policy. That, in turn, creates wealth, which creates revenue for the government. It’s a financial feedback loop – and Russia has rejected it.

Secure property rights lie at the centre of these successful policies but with Western sanctions, Russia can attract only speculators and racketeers. Average annual inflows of foreign direct investment fell from 3.1% of GDP to a paltry 1.4% of GDP between 2008-and 2019.

The latest round of sanctions imposed by the West now means any investment could be targeted next – and so the risk will be too great even for desperate speculators. The biggest issue now confronting investors is their inability to use dollars.

The end result of Putin’s clampdown on the political economy is that the Russian standard of living has fallen by 11% in the last seven years. Worse, it now ranks 69th of 70 in the ‘Living Standards Index’ (source) and 52nd in the Human Development Index (source).

It is telling that Russia’s GDP has slumped by more than one-third – from $2.3 trillion in 2013 (before sanctions) to $1.5 trillion in 2020. Not only that but Russia’s stock exchange is valued at only 53% of its May 2008 peak.

Who would bet on such a rapidly shrinking economy as that other than the foolhardy?

Putin’s strategy – create Western enemies for his people to fight back. But not even they believe him – so he poisons dissenters instead.

China’s hidden millions

Despite its phenomenal headline economic growth over the past four decades, China is nowhere near as wealthy as it appears. By GDP it is, but by any other criteria, it dramatically fails.

Pre-pandemic 2019, saw China’s GDP (measured at market exchange rates) touching $14 trillion. It was the world’s second-largest economy after the USA ($21 trillion), with Japan ($5 trillion) in third place. That looks impressive until you look at per capita GDP, which was $8,242, placing China somewhere between Montenegro ($8,591) and Botswana ($8,093). In the USA, per capita GDP is $65,297, the UK’s is $42,330 and in the EU it is $35,623. Even Russia’s rapidly declining income outshines China’s at $11,585.

Even adjusted for the cost of living, the average Chinese person is earning $16,804. This is below the global average of $17,811 and puts China 86th in the world, between Suriname ($17,256) and Bosnia and Herzegovina ($16,289).

China’s current level of income inequality is similar to that found in India. This can be seen with a population of 1.4 billion, where 600 million live on a monthly income of $155. Viewed through this perspective, who would want to be Chinese or Russian.

Instead of distributing that enormous revenue across its very poor, China chooses to use that money for geopolitical advantage. It’s purpose is nothing other than malevolent.

An investigation by The Times newspaper recently showed that the Chinese have bought $135 billion of British assets including large stakes in critical infrastructure providers including Thames Water, UK Power Networks and Heathrow airport to name just three (source) with an admission, that the actual number is likely to be far higher.

China did the same to Australia by buying key strategic assets and now are squeezing the country politically and economically as Australia has recently chosen to take sides with the USA and be more suspicious of China’s intent. The result, a trade war has broken out and warnings like this: “Countries like Britain, Germany, France and Japan need to understand from Australia’s lesson that they should not pick the US’ side in the China-US rivalry” (source – South China Morning Post).

Britain has backed away from the Huawei 5G infrastructure project, much to China’s anger. The problem is that they have leverage over Britain’s infrastructure – and the UK government has somehow only just realised this.

Conclusion

There is a reality behind Russia and China as far as western democracies are concerned. They are not our friends and do not want to trade with us unless it is on their terms.

The West needs to create something like a NATO of trade – an infrastructure of self-dependency on Western ingenuity and manufacturing. It should stop investing in the mentality and greed of profit via ‘offshoring’ (and heavily tax those that do) and build resilience by bringing home supply chains. Granted, this means the return of inflation, but it also means more meaningful jobs with more meaningful wages circulated through our own economies.

We keep being told by politicians that we should ‘build back better’ – one way to do this is ‘build it at home.’ The sooner that happens, the sooner Western liberal democracies can start the job of unifying their people under a concrete cause – building for a better future and one that is more resilient.

We should reject Chinese manufactured goods and fight back against Russia’s constant undermining and meddling of our democracy. The opportunity to do all this is staring at Western democracies right now, we should take it and not look back.