How Will the Russian Economy Emerge From the Crisis?

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(Note: The clip above is a discussion of the global financial crisis that was posted on President Dmitry Medvedev’s video blog last fall.)
This week’s summit of the so-called BRIC countries in Yekaterinburg, Russia was meant to celebrate the emergence of Brazil, Russia, India and China as emerging economies and major players on the world stage. It is a bit ironic then, that this meeting was held in Russia, given the current state of that country’s economy.
Perhaps no country has been hit harder by the financial crisis. After growing at an average annual rate of 7% between 1997 and 2008, Russia’s economy contracted 9.5% in the first quarter, and is likely to run a budget deficit of at least 7.5% this year.
To make up for the shortfall, Russia has had to spend down its foreign currency reserve holdings, which have fallen to $406.6 billion from a high of $598.1 billion less than one year ago. Russia will also likely be compelled to resume borrowing on international markets for the first time since its sovereign default in 1998.
The sudden drop in oil and natural gas prices has exposed the limits of an economic model predicated on hydrocarbon exports.
The Russian economy is clearly at a crossroads. To remain a great power over the long-term, it must modernize its economy, a task made difficult by Russia’s declining labor force and dysfunctional political system.
To explore whether and how Russia’s economy will emerge from the crisis, the New America Foundation is hosting an event on Monday, June 22 from 1:00 pm2:30 pm. The event will feature the release of a new McKinsey Global Institute report, “Lean Russia: Sustaining Economic Growth Through Improved Productivity.”
The event will feature McKinsey & Company Moscow Office Director Yermolai Solzhenitsyn, McKinsey Global Institute Chairman Lenny Mendonca, New America Foundation/Global Strategic Finance Initiative Director Douglas Rediker, and Akin Gump Senior International Advisor Toby T. Gati.
Steve Clemons will moderate the discussion, which will stream live here at The Washington Note.
— Ben Katcher

Comments

5 comments on “How Will the Russian Economy Emerge From the Crisis?

  1. JohnH says:

    Actually I agree with you Wigwag. Of all the major energy exporters, Russia should be the one that least resembles a petro-state, given the vast size of its economy, its educated workforce, and agricultural lands. Energy should not dominate, the characteristic of petro-states. It really should be a dynamic, diversified economy that manufactures specialized products for its market and adds value added services to imports.
    Norway and UAE are the only possible exceptions to the petro-state “oil curse.” Norway is an exception because it got a special deal when its North Sea oil came on-stream. The deal allowed Norway to develop a hi-tech oil & gas sector, which has now become a globally important service industry. UAE defies the rule because it has become a financial hub for the Gulf, collecting money saved by other oil exporters and using it for investments.
    Otherwise, the situation in petro-states is best described as the “oil curse.”

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  2. WigWag says:

    JohnH, you say,
    “Yes, “the sudden drop in oil and natural gas prices has exposed the limits of an economic model predicated on hydrocarbon exports.” But until someone can figure out how to change the economic structure of petro-states into mixed economies (which no one has), they will have to do the best they can with the hand they were dealt.”
    I would introduce a small caveat to your statement that you may or may not agree with.
    I think you’re right about “petro-states” like Iran, Iraq, Kuwait and Saudi Arabia. They have had little or no success in diversifying their economies.
    But there are many states where energy exports make up a very significant portion of GDP that have diversified economies that you would call “mixed.”
    Canada has the second largest oil reserves in the world but it clearly has a mixed economy. Mexico has large (albeit dwindling) oil reserves but its economy has many other viable legal (and illegal) sectors. The same is true for Norway and to a lesser extent Venezuela.
    The UAE has an economy that is primarily dependent on energy exports that is expanding to include other sectors. This is especially true for Dubai. To a lesser extent Bahrain has other viable sectors other than oil including the production and export of aluminum as well as finance and real estate development.
    What I’m trying to get at is that Russia may be a “petro-state” but it shouldn’t be. It should have more in common with Canada and Norway than it has with Saudi Arabia and Kuwait.
    Russia has a highly educated and literate population. As a legacy of the Soviet Union it should have vibrant high tech, biomedical, defense and chemical sectors. It has a manufacturing base that while decrepit, is far superior to anything seen in more typical “petro-states.” Low labor costs should insure that Russia is able to compete in a variety of manufacturing endeavors (textiles might be one example.)
    I think the fact that you view Russia as a “petro-state” is perfectly emblematic of everything wrong with the Russian economy. The Russians don’t have to make the incredibly difficult journey that you define as the transition from a petro-state to a modern, diversified economy. Instead they need to figure out how to prevent a modern diversified economy from deteriorating into a “petro-state.”
    Given the demographic obstacles I mentioned above, the Russian journey may prove to be especially difficult.

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  3. JohnH says:

    The Russian economy will do fine. Even if the world economy does not grow, oil continues to be depleted. New sources–TBD– will have replace 4 million barrels per day. Bottom line–oil driven economies will get the money they needs as prices rise do to tight supply.
    Yes, “the sudden drop in oil and natural gas prices has exposed the limits of an economic model predicated on hydrocarbon exports.” But until someone can figure out how to change the economic structure of petro-states into mixed economies (which no one has), they will have to do the best they can with the hand they were dealt.

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  4. WigWag says:

    Glad to see the picture though. It’s good to know that Russia can still afford to buy President Medvedev a lap top computer.

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  5. WigWag says:

    One of Russia’s major challenges is confronting its extraordinarily poor demographic prospects. Many major world powers face declining birth rates. While the United States population is increasing, population growth in Western Europe, Japan and even China (because of the one child policy) is leveling off or even declining. No where is this trend more profound than in Russia.
    Russia’s population peaked in the final years of the Soviet Union in the early 1990s at about 148 million people; today (according to the CIA World Fact Book) Russia’s population is 143 million. The U.S. census bureau estimates that if current trends continue, the Russia population will fall to a mere 111 million people by 2050; a loss of more than 30 million people or 20 percent of the total.
    Russia loses about 800 thousand people per year and the major causes of its demographic problems are unusually high death rates, low birth rates, extremely high abortion rates and very little net immigration.
    Russia has a death rate of 15 deaths per thousand people; the world average is 9 deaths per thousand and the U.S. average is 8 deaths per thousand. And life expectancy in Russia is remarkably low, especially for men (primarily due to high tobacco and alcohol usage). Average life span for males is 59 years while women’s life span is much better at 72 years.
    A replacement total fertility rate to maintain a stable population is 2.1 births per woman in Russia, the fertility rate is 1.3 births per woman.
    Russia’s demographic problems are both a symptom of and the cause of its many economic challenges now and in the future.
    Unless Russia gets a handle on all of this, its future economic prospects are quite bleak. Another likely result will be serious political dislocation in the Russian Federation that might in time come to resemble some of the things we are witnessing today in Iran.

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