Russia’s Policymakers Need a Long-Term Vision for Economic Growth

Russia is about to move toward even a much slower economic growth until 2014, which will be inadequate and close to actual stagnation. This is one more confirmation that despite higher oil revenues in the past, no one in Moscow or elsewhere has ever tried to elaborate a truly credible strategy for economic growth.

First, higher oil export tariffs and mineral extraction taxes are a good chance for improving Russia’s long-term economic growth. Second, policymakers have to develop a vision for long-term economic growth, rather than focusing on day-to-day issues. This is partly the summary of my views concerning the most pressing requirements for forming a real competitive economy and spurring growth that could be beneficial to all citizens, with no exception.

Let us now take a specific look at what is omitted in the current debate regarding Russia; namely, that creating conditions for prosperous and sustained growth results in increasing interdependence within a regional and multi-polar global context. During the past eleven years, Russia has witnessed enormous social and economic change – a fact which has left no one in doubt. The world economy is being increasingly interconnected by way of trade, finance, and labor migration flows that quite logically are affecting the Russian economy these days. This reality also interconnects stock exchanges, currencies, global companies, technology spillovers, etc., making Russia more vulnerable to global economic turbulence and vicissitudes.

This specific reality at the domestic and international level should drive our analysis. For example, we have a specific issue regarding the European sovereign debt crisis and its aftereffects, which caused a heavy sell-off in the Russian stock market, with the MICEX index falling 17% during the first ten days in August. Since the disintegration of the Soviet Union in the early 1990s, the Russian stock market has been either among the best performing or worst performing markets in the world, according to analysis by Renaissance, a Moscow-based investment bank. This therefore is evidence that the Russian economy is a huge cyclical market, and Russian policymakers have to confront this in the long-term.

Russia has also benefited greatly from high oil and gas prices during the past decade, and the increasing flow of resources coming to the country’s budget has been coupled with considerable foreign direct investment. The FDI has greatly benefited Russia, but it has passed its peak. Unfortunately, a part of the country is still poorly shaped and led by a short-term vision to the extent that investors are now pulling money out of Russia, as they are afraid to continue investing in an environment which offers little possibility for real economic growth. Already in 2008, for example, the Russian stock market was the worst performing of all major stock exchanges in the world. Over $30 billion left the country in the first half of this year, and the total could hit $40 billion in 2011. The Central Bank and economic experts consider this an eventuality. This would also imply that the ruble could weaken further along with the weakening economy, thus leading to an even further depreciation of the ruble in the next few years.

Rising oil prices have helped the government increase tax revenue in the past, but future economic growth depends on the government investing these huge one-off oil revenues into a larger economic growth scheme. It should not be indefinitely building up the Reserve Fund, as I have already written for the Valdai Club’s columns. Unless the economy is transformed into the real engine of growth, it is truly possible that the country will remain trapped and vulnerable to a drop in oil prices at all times.

If the current economic situation in Europe worsens, this would affect the price of a barrel of oil as well, and Russia would be damaged even further. For example, Kingsmill Bond, the chief Russia strategist for Citygroup, has estimated that for each $10 drop in the average annual price per barrel of oil, Russia loses 1% of its GDP. Should oil prices fall in the next few years, this would result in a dramatic hindrance to economic growth. Therefore, Russian leading economists must design a concept of how to reengineer government spendings. If in 2008 the Russian budget was profitable at oil prices above $60 per barrel, now the Russian government estimates it will need to collect taxes on oil at prices above $120 per barrel to balance the budget, some experts say.

The situation calls for important and timely decisions to build the foundation for a sustainable, positive, and stable future. While the earlier debate among economic experts was simply on whether to focus more on oil and gas as a source of budgetary policy stability, the larger issue of directing and realizing newer economic growth was not addressed. This so-called debate was kept within cozy academic circles, with most of them absent from the discussions for whatever reason, and the possibility to provide a realistic recipe for needed economic growth had then been lost. Importantly and highly related to this larger debate, it must be added and stressed as well that the hydrocarbon market is relevant for Russia and its growth both presently and in the future. It is ever more momentous and important to think now in terms of how to attain rational and well-sustained growth for today and especially for future, long-term, success.

The painful truth is that experts from the Ministry of Economic Development simply deliver pessimistic reports about the nation’s economic outlook, stating the country's annual economic growth rate of between 3.5% and 4.5%, without adding a larger context to these numbers, e.g., they do not represent strong growth in a long-term Russian context. While it is true that they have indeed revised their own earlier forecasts, we must face the fact that Russia is about to move toward even a much slower economic growth until 2014, which will be inadequate and close to actual stagnation. This is one more confirmation that despite higher oil revenues in the past, no one in Moscow or elsewhere has ever tried to elaborate a truly credible strategy for economic growth.

What is needed is a proactive growth strategy, which should form the centerpiece of the country’s program for economic growth and sustainability. Although a series of economic measures have been partly realized in the past, much of what I prefer to call realistic sustainability has not been achieved so far. Specifically, I am referring to the need for Russian economic policymakers to move away from short-term mentality towards a broader long-term vision of economic growth. Moreover, such a vision should follow the trend for multipolarity in the global economy, which we currently see.

In this context, a recent analysis by the World Bank (Global Development Horizons 2011. Multipolarity: The New Global Economy) ranks countries in terms of their influence on global and regional growth. These rankings are used as a means to identify when an economy is capable of significantly driving growth at global and regional levels. Russia had been identified as a key “regional growth pole” in Eastern Europe and Central Asia for the 2004-2008 period (ahead of Turkey and Czech Republic). Being a “current growth pole” nation means that a country has spillover effects that create growth at the regional level.

At the global level, Russia has been identified fifth as a “potential growth pole,” after China, the US, and Euro area countries, and just one notch lower than Japan (NB: Japan is already classified as a potential growth pole). Russia is, in fact, ahead of Korea, the UK, and India when using a PPP-adjusted index. When using the Harrod-Balassa-Samuelson index as an alternative, however, the World Bank ranks Russia fourth overall, after the Euro area countries, China, and the US, while still not classifying it as a “current growth pole”, but as having a “potential” to drive growth.

Put simply, Russia’s policymakers have to think realistically and realize that their country at this time is not a driver of global growth. It was, however, a significant driver at the regional level. A new vision for Russia has to start from here, nurturing innovative and productive potential along the way. The country benefits from huge natural reserves, and whatever the price level or levels may be, the country will enjoy this ongoing export status for long periods ahead and far into the future as well. Thus, the next step is fathoming the deep and crucial relationship between domestic investment in R&D as an engine for economic growth and such elements as the FDI, labor intensity, and labor productivity. In this context, and as has been reported widely, the ability to develop innovative capacity and greater demand at home is the key for economic growth at larger and more fundamental levels. This means mainly relying on greater speed determinants and related but specific benchmarking to realize actual technological breakthroughs, stimulate adoption/innovation and the diffusion of technologies, and improve the efficiency of capital. Simply put, it should raise total factor productivity. Russia must emphasize the importance of a fresh look at the educational system and R&D as a way leading to prosperity and promote innovation.

This change in focus will have important positive consequences, and a whole range of variables will come into play as a means to improve economic performance.

To conclude, the processes of regionalization and globalization are continuing to develop; they are changing the rules of the game and require adaptation and innovation, greater ability to “catch up” technologically, higher educational standards, and institutional reforms. These trends offer extensive opportunities for the development of all current and prospective companies operating in Russia – both domestic and international – but, to be successful, those companies have to take the route of continuous innovation. They may become the source of Russia’s future accelerated economic growth, and this is crucial if the country wants to stay competitive in the long term; a renewed approach provides more opportunities than threats for entrepreneurs to expand their business opportunities in Russia. In reality, the current international arena has never offered so many opportunities and challenges to individual Russian managers, businesses, and the academic community alike. The expansion of markets has created a need for capable managers and modern institutions, and the future Russian president, who will take over the country’s government in the spring of 2012, has to stimulate this process to turn it into a success story.

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.