A snapshot of Russia’s economy at YE11 will likely show a country with one of the most solid economies globally with a budget and current account in surplus, the world’s fourth-largest foreign exchange reserves and a negligible external debt position. And despite the precarious global backdrop, the oil price remains at around $110/bbl. However, looking longer term, we argue that this strength is deceptive and the aftermath of the 2008-09 crisis has exposed structural weaknesses and an economy more dependent on the oil price than ever. We do not aim to dismiss Russia’s economic future, but rather to outline the impediments to its development; in essence we highlight warning signs for investors and target areas for politicians. In particular we focus on the following deficiencies:
- Russia’s 2000-10 average fixed investment amounted to just 20% of GDP, one of the lowest levels in the post-communist world and the BRICs.
- Russia ranks poorly on the three factors that have proven vital for moving from natural-resource dependency to a more diversified economy, namely spending on education and research & development, and foreign direct investments. Government attention must be redirected to these areas.
- Russia faces a declining population, and while the population grew in 2010 for the first time since 1992, Russia continues to have one of the largest gaps between its birth and death rates.
- Amid a declining labour force, job creation remains very slow, with employment only up 4.7% over the past decade, well below that of most emerging markets.
- Russian job creation specifically from FDI is inferior to other emerging markets, while micro and small businesses, although displaying fast growth in employment, only account for 15.4% of total employment vs the EU average of 51%.
A common trait between most of the deficiencies listed above is the subpar business and investment climate. Well-known corruption and economic freedom indices reveal little progress over the past decade and deterioration in the past five years. We find that, internationally, high corruption and low economic freedoms have curtailed economic development as measured by GDP per capita.
To those who argue that almost two decades of negative demographics, high corruption and weak private property rights in Russia have not deterred investors from equities, we caution that, as structural vulnerabilities make strong growth more difficult to achieve, the country’s ills will surely gain more attention.
With the right policy agenda, the opportunity for economic development in Russia is immense. But maintaining the status quo will, in our view, only lead Russia down an economic cul-de-sac. However, we strive to demonstrate that, by focussing on key growth engines, Russia’s economic path does not have to be a dead-end.
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