Krugman: “The Russian economy is headed for a fall like the Great Depression”

The Russian invasion of Ukraine has garnered the rejection of half the world. Vladimir Putin’s strategy to expand more and more throughout the Ukrainian territory has resulted in more than a million refugees and thousands of deaths in just over a week, but also in a condemnation of numerous governments and hundreds of millions of people of the planet. His actions, however, will not go unpunished, given that economic sanctions are already hitting the coffers of the country and the Russians.

In this sense, Paul Krugman, Nobel laureate in Economics, considers that Russia is advancing out of obligation towards an autarkic economy, that is, closed in on itself. The restrictions on air transport by the West, as well as the sanctions on half a dozen Russian banks that have been expelled from the international SWIFT system, are added to the numerous companies that are suspending their commercial activities in the area, from Inditex to Visa, from Microsoft to Toyota, from Shell to Disney.

Therefore, in an article in The New York TimesKrugman considers that “Vladimir Putin has made a huge miscalculation”, expecting a “quick victory” and that he could “easily weather the economic consequences of the war” given Europe’s dependence on Russian energy and its accumulation of foreign currency.

This is leading to forced autarchy in the Russian Federation, which, in Krugman’s words, could lead to “a fall to the level of the Great Depression”. It should be remembered that in that five-year period almost a century ago, The US lost 30% of its GDP.its industrial production fell by 47% and unemployment went from around 5% to more than 20%.

The disaster of autarchy

The Nobel Prize recalls a couple of examples regarding the economic consequences of autarchy, although it shows the notable differences between those times and the current one.

On the one hand, it affects the military siege of japan during World War II, cutting off supplies and leading to the implosion of the Japanese economy.

On the other hand, he recalls that during the Napoleonic wars in the early years of the 19th century, US President Thomas Jefferson eliminated international trade to prevent his ships from being seized by the British, something that is estimated to have cost the US about 8% of your GDP.

“In 2022, Russia is much more exposed to international trade than the US was in 1807: US exports were then only 13% of its GDP, while Russia’s before the invasion was roughly twice as high,” Krugman notes.

In addition, he points out that the current economy is globalized and supply chains are interlinked throughout the entire planet, much more than in Japan in the mid-20th century or in the USA in the early 19th century, and which also did not depend so much on a few key elements, such as semiconductors today, so the economic punishment for Russia could be even greater than simply the fall in its exports.

Krugman leaves out of the article the economic relations of Russia and China. Some see in the Asian country the departure of Putin to mitigate economic suffering. But in a Twitter thread, the economist points out that his economies “are not very complementary” and that Xi Jinping’s country is immensely more powerful economically, so Russia would have to be the “inferior” partner in its alliance with China.

“It would be ironic if Putin’s attempt to restore the Russian empire ends up turning Russia into a Chinese vassal state. But that’s exactly what will happen if he trusts China to bail him out now.”

The speed with which Russia has been cut off from the world economy has been as stunning as the slowness with which Russian forces have advanced in Ukraine. But can Putin offset the de facto blockade by dealing with China? That would be harder than many imagine 1/

— Paul Krugman (@paulkrugman) March 5, 2022