Russia's
Economic Sustainability Remains on the Agenda
By
Sergei Blagov
The
Russian economy has picked up somewhat following a decade-long
decline. However, economists warn that a lot must be done to
secure the country's sustainable development. In 2002, annual
growth of Russia's Gross Domestic Product (GDP) is expected
to reach 4 percent -- a drop from the 5.5 percent it achieved
in 2001, which itself was substantially lower than 2000’s
10 percent growth rate.
Despite this slowdown, Russia outpaced many other nations in
GDP growth for the second year running. However, last year the
Kremlin went ahead with daring reforms, notably implementing
a new Land Code and restructuring the pension system. Moreover,
high prices for gas and oil exports had boosted Russia's revenues.
In 2002, Russia expects its foreign trade surplus to exceed
$30 billion - still lower compared to the $65 billion it generated
in 2000. Correspondingly, according to the Central Bank the
nation's gold and hard-currency reserves rose to nearly $48
billion, almost quadrupling the level of late 1998.
Riding on top of commodity exports, Russian government officials
have depicted a rosy picture of the country's booming economy.
However, experts warn that continued over-reliance on oil and
gas, may eventually push the nation into a vicious circle of
debt crises and an increasing dependence on commodity prices,
a pattern well known among developing nations.
Russia's financial health has improved significantly since the
1998 crisis, largely due to high world market prices for its
main energy and commodity exports. Its performance since the
crisis has been impressive. However, Nobel laureate Joseph E.
Stiglitz, professor of economics and finance at Columbia University,
estimates that the country's GDP still remains almost 30 percent
below where it was at the beginning of the 1990s. Stiglitz notes
that at 4 percent growth per annum, it will take Russia another
decade to get back to where it was before the beginning of transition.
Furthermore, another potential challenge to Russia's sustainable
development is the country's foreign debt level. About $140
billion is owed to Western governments and banks, the World
Bank and International Monetary Fund. Although Russia has managed
to reduce its debt over the last three years, this debt still
represents $1,000 per capita.
Russia is sitting on the world's richest natural wealth, priding
itself with an impressive ranking in the oil and commodity ratings.
It is the world's biggest natural gas producer and exporter,
producing some 550 billion cubic meters (bcm) a year -- pumping
over 200 bcm abroad. With the country's proven 12 billion metric
tons of oil deposits, Russia is the world's second biggest oil
producer, generating more than 7 million barrels per day (bpd).
However, most of Russia's oil and metals industries were sold
to well-connected tycoons at dirt-cheap bargains. Oil and metal
magnates have opted to siphon their cheaply-acquired assets
out of the country via obscure off-shore entities – instead
of investing in actual production. Now the top 65 private companies
in Russia are controlled by no more than eight holding companies.
This concentration of ownership rights, the attendant small
numbers of new firms entering the market and the lack of economic
diversification all suggest that, despite its considerable achievements,
there is still much reform work to be done, argued Christof
Ruehl is World Bank chief economist for Russia.
In fact, Deputy Economic Development and Trade Minister Arkady
Dvorkovich warns that the economy will start shrinking as early
as 2004 if the pace of reforms is not accelerated.
If the governmentit wants sustainable growth, argues President
Putin's top economic adviser, Andrei Illarionov, it must cut
expenditures by nearly a third, . He said the government should
cut spending to 25 percent of GDP from the current 35 percent.
If the ratio remains at its present level, economic growth will
average 2.9 percent a year through 2015, according to Illarionov's
Institute for Economic Analysis. But if spending drops to 25
percent of GDP, he believes growth would average 8.9 percent.
President Putin has pledged that the average Russian will "be
happy" by 2010. However, that date is well after the expiration
of his maximum constitutional presidential term.
In 2002, Russia still seemed to be heading toward the light
at the end of the tunnel. Favorable economic factors gave athe
Kremlin yet another chance to secure the country's sustainable
development. On the other hand, Russia faces a problem of the
uncertainty over oil prices, fueled by worries of possible U.S.
military strikes against Iraq. Since Russia is still dependent
on oil, it remains a matter of debate whether the country can
sustain its current level of growth with potentially lower commodity
prices.
