Economist Jim O'Neill on Russia "The West Will Decide on Putin's Bankruptcy"
As a teenager, Jim O’Neill, 65, wanted to play professional soccer for Manchester United. But his father, a mailman, encouraged him to study economics. He earned his Ph.D. at the University of Surrey, with his thesis focusing on the trade policy of oil exporters. Since then, he has focused on economic models and their effects on the real world of currencies and goods. Between 1995 and 2013, O’Neill was a partner at Goldman Sachs, serving as the investment bank’s chief economist for some of that time. His primary focus was on the development of the global economy, particularly the future of emerging markets like China and Russia.
From 2014 to 2016, O’Neill worked for the British government, developing strategies to combat rising drug resistance and to boost economic development in the North of England. O’Neill is a member of the House of Lords (as Baron O’Neill of Gatley) and works with think tanks like Chatham House and Bruegel in Brussels. Since 2014, he has been an honorary professor of economics at the University of Manchester.
DER SPIEGEL: In November 2001, you came up with the acronym BRIC to describe four economies that stood out for their exceptional growth: Brazil, Russia, India and China. How do you feel about the BRICs today?
O’Neill: It was a nice dream.
DER SPIEGEL: Wasn’t your own forecast convincing?
O’Neill: It’s comical that people really thought that I would make forecasts for the next 50 years – and that I would be right. That’s ridiculous! It actually was the art of the possible. I wanted to show that four countries that had been economically subordinate in the course of the 20th century could become influential in the 21st century and even overtake the large economies. Their enormous growth was real and impressive. From a certain point onwards, they used their potential for further development very differently.
DER SPIEGEL: That sounds more like four individual dreams, not one.
O’Neill: If you like. Today, the four countries are not in the same league. Years ago, I pointed out that I would only talk about IC, i.e., India and China. Brazil and Russia have not been able to move forward and realize their potential. They have turned out to be massive disappointments.
DER SPIEGEL: In China, the gross domestic product has not increased sevenfold since 2000, as you dreamt, but fully eighteenfold. At the same time, your dream for Russia's GDP – of around 1.7 trillion dollars in 2020 – was almost right on.
O’Neill: The Chinese economy has developed far more than I expected at the time. Russia, on the other hand, left the growth path early. Don’t forget: During the first 10 years, the Russian economy actually grew, since then it has moved backwards.
DER SPIEGEL: Do you regret that you praised the potential of Russia 20 years ago – potentially leading to a lot of foreign money flowing into the country?
O’Neill: I don't have anything to regret. I didn't come up with BRIC to recommend investments. Many may have understood it that way after my observations were widely accepted.
DER SPIEGEL: Would it have been appropriate to warn against Russia at a certain point?
O’Neill: It was the Russian leadership itself that did the job in 2006, when they flattened Mikhail Khodorkovsky's oil and energy company Yukos before the eyes of the world. Investors understand such things as a warning shot. In retrospect, that was the moment when the Russian BRIC dream started bursting.
DER SPIEGEL: People in Moscow, though, seemed to continue believing in it for quite some time after that.
Former Yukos head Mikhail Khodorkovsky in court in 2004. "Investors understand such things as a warning shot."Foto: Alexander Natruskin / REUTERS
O’Neill: That is correct, they did take BRIC as a forecast. I remember an invitation to speak at the St. Petersburg Summit in 2008, a kind of Russian World Economic Forum. The expectations of the hosts were not clear to me at first: I was supposed to talk about the stunning growth of the Russian economy and leave no doubt that Russia would be one of the five largest economies in 2020. But I was not prepared to do that; the reality simply did not reflect it. I fired a warning shot right into the heart of the Russian establishment. After my talk, the mood was at rock bottom; we held on to our coffee cups in embarrassment. That day, I realized that Russia was facing huge problems. While Putin's people were confusing my dream with reality, they weren’t ready to do anything about it. They wanted me to serve as a kind of key witness for a story that was ultimately insubstantial.
DER SPIEGEL: What exactly did you say in St. Petersburg?
O’Neill: That an entire country cannot rely on oil and gas prices rising forever if the economy as a whole is going to grow and be healthy. In the case of Russia, it’s the scale of corruption and the terrible demographics – in particular, the low life expectancy among men. Productivity was and still is a huge issue. On this basis, one might be able to manage 2 percent growth for a few years. But for a stable, long-term development with significantly more growth, profound reforms and reliable and viable institutions are necessary. There’s only one way to boost the economy: by increasing productivity and enabling the establishment of new enterprises as well as attracting foreign investment. In other words, the full monty.
DER SPIEGEL: Was nobody interested in your criticism in Russia?
O’Neill: It was completely unwanted. Most of my contacts, technocrats from the Central Bank or the Finance Ministry, seemed to feel they were on a safe path with Putin. I was often struck by how widely-held the belief was regarding his excellence as a strategist. I never bought into that. The truth is that the international financial crisis of those years benefited Putin because it drove up the price of oil. Hence, he could continue to promise growth and prosperity to the Russian people. It was clear that his huge popularity was bound to decline as soon as the oil price fell, which happened from 2014 onwards.
DER SPIEGEL: And what did the great strategist do then?
O’Neill: He had to change tack when he realized that he couldn’t achieve the growth that had taken place pre-crisis. Nor could he really reform, because much of his personal financial benefit and that of some of the people close to him depended on the status quo. So he began propagating the goal, so to speak, of: "Make Russia Great Again!" Instead of growth, Russians were now getting nationalism. From what we can see, Putin has brought himself economic bankruptcy along with it.
And oil and gas facility belonging to Gazprom in Novoprtovskoye: "An entire country cannot rely on oil and gas prices rising forever if the economy as a whole is going to grow and be healthy."Foto: Andrey Golovanov / AFP
DER SPIEGEL: Can Putin avert bankruptcy by forcing the West to pay for gas and oil imports in rubles?
O’Neill: Since treaties will have to be amended, the West would have to allow itself to be forced. I think it is more likely that Russia will export less after this clumsy demand. But you can also see in it a typical move by Putin, whose hand has undoubtedly been forced by Western sanctions. He obviously wants to put the sanctioning parties, who buy energy from him, under pressure themselves, because if they agree to the demand, they would have to buy mass amounts of rubles from the very Central Bank that has been excluded from international business and whose immense dollar reserves have been frozen. The whole debacle reveals how heavily Putin is dependent on international finance as long as the dollar is the largest reserve currency. In the end, it is the West that will decide on Putin's bankruptcy – and other despots will think twice in the future about where they park their money.
DER SPIEGEL: Can the dollar continue in its current role in light of the huge sovereign debt load of the United States and the continued growth of China?
O’Neill: Nobody knows, but at the moment there is a lot to be said for it, even if there are limits to everything, certainly including America's mountain of debt. But to end the dollar's reserve career – these prophecies are decades old, by the way – a new currency like China's must be ready. That requires reformist steps and an openness not evident in Xi Jinping's current one-party state. Even if the German doctrine "change through trade" ("Wandel durch Handel”) has not worked. It is no coincidence that only democracies – the U.S., Europe and Japan – provide reserve currencies.
DER SPIEGEL: Putin has stashed a lot of gold at the same time. What use – apart from serving as a war chest – do gold reserves still have today?
O’Neill: Gold is an uninteresting, old-fashioned historic obsession of the 1940s. I don't see any use for it, except the one you’ve mentioned. Only governments that lack self-confidence stockpile gold. It's pointless.
DER SPIEGEL: Germany is said to have the second largest gold reserves in the world. What would you do with it?
O’Neill: Do something more imaginative with it! Sell it and invest the money in education or in the fight against disease.
DER SPIEGEL: Or should Berlin, in the light of the transformation announced by German Chancellor Olaf Scholz following Russia’s invasion of Ukraine, buy weapons?
O’Neill: That would still be better than having gold.
DER SPIEGEL: What condition do you think the world economy is in today?
O’Neill: Very, very uncertain and complicated. I have not seen greater macroeconomic uncertainty in the past 40 years. Beyond the difficulties created by the corona pandemic, a situation has arisen that can change daily and lead to extreme reactions on the markets at any time – driven sometimes by fear, sometimes by greed. As is well known, these are the two strongest factors of economic action, which in turn can cause or accelerate crises. What would happen if tomorrow the sanctions were eased again by a peace agreement? The greed on the Russian market would probably be almost unstoppable.
DER SPIEGEL: What worries you most from an economic point of view?
O’Neill: That the general expectation of inflation continues to grow. It is the most dangerous condition for actual inflation. Then, the central banks would have to react and increase interest rates to 6 percent or more to force a recession. That would throw us back into a situation like in the 1970s, which was called "stagflation": Money lost value, wages and prices went up, while the economy didn’t grow.
DER SPIEGEL: How can such a development be prevented?
O’Neill: The current situation is by no means conducive to better productivity. But that is exactly what we should be aiming for – at least at the end of the crisis: to increase the value of work for as many people and companies as possible. One thing is certain: Even before Putin's war, the general conditions had deteriorated considerably and a decline in economic growth in the second half of 2022 was programmed. However, I have hope that the rest of the world can avert a real shock. For Russia it is a nightmare.
DER SPIEGEL: Is there anything that makes you optimistic at the moment?
O’Neill: First, as Winston Churchill said: "Never let a good crisis go to waste.” I strongly believe great opportunities arise from every crisis, not least financial ones. Secondly, the state we are in now demonstrates the importance of cooperation and collaboration – and that there is no advantage to standing alone, especially as the aggressor. And thirdly, we are learning again that bad things can happen, and that history isn’t always on our side. At the same time, we must continue to adapt to new conditions. For Germans, for example, it must be a shock to realize the level of dependency on foreign energy. The same goes for Germany’s dependency on exports. I think it's insane that the largest economy in the heart of Europe can only be doing well if the rest of the world is doing well. It would be good if Germany didn’t only wake up with a new military framework as a result of this crisis, but also did everything it could with great people and ideas to turn its dependencies into a new edge.