ECONOMY
5. GEOGRAPHY AND RUSSIA'S ECONOMY
SOURCE. Allen C. Lynch, "Roots of Russia's Economic Dilemmas: Liberal Economics and Illiberal Geography," Europe-Asia Studies, Vol. 54 No. 1 (January 2002), pp. 31-49.
The implications of Russia's difficult geography for its economy have already been touched upon in RAS in relation to agriculture (Issue No. 4, item 3). In this article, Professor Lynch (University of Virginia) demonstrates the enormous impact of geography on the Russian economy as a whole, and arrives at some striking conclusions.
The author begins with an assessment of the main problem facing Russia's economy today -- namely, the critical condition of infrastructure after a decade of cumulative capital depreciation. The crisis affects the energy complex (power stations, residential heating, electricity, oil and gas), transportation (rail, roads, ports, domestic aviation), and telecommunications as well as industry and agriculture. We must add a number of spheres which he leaves out of account, such as public health, sewage, and pollution control. (1)
The capital requirements of preserving and restoring this infrastructure over the next decade or two are colossal, amounting to hundreds of billions of dollars. But Professor Lynch points out that the Russian capital expatriated to bank accounts abroad is also enormous (though according to my rough calculations not quite as great as estimated requirements). If capital flight could be rapidly reversed, then at least a good start could be made.
But how is more capital, both expatriate and foreign, to be attracted to Russia? The usual answer is that the main barriers to development lie in the political, administrative, and institutional spheres: political uncertainty, red tape, an inadequate legal regime, excessive taxation, poor corporate governance, corruption, etc. The author does not deny the importance of any of these issues, but he questions whether their resolution would in itself suffice to trigger investment on the scale required. Investors, he argues, are deterred not only by political risk and institutional deficiencies, but also by the huge costs of production and distribution which are inherent in Russia's geography.
Professor Lynch emphasizes three geographical factors:
(1) Russia has the most severe climate in the world (with the exception of Mongolia). Permafrost covers 59 per cent of its territory. Long cold winters and short hot summers limit the potential output of agriculture.
(2) Russia's vast size and low average population density, combined with severe climatic conditions, increase the cost of infrastructure. Roads and pipelines are good examples. Moreover, long distances separate natural resources, concentrated in Siberia and the Far North, from the main markets of European Russia. This problem grows worse as the more accessible resources are used up.
(3) Owing to the south-north flow of most rivers and the difficulty of access to the world ocean, expensive land and air transport predominate over cheap water transport. [This problem will become less acute as global warming melts the Arctic ice cap. -- SDS]
The analogy often drawn between the climate and geography of Russia and those of Canada is untenable. Unlike Russia, Canada has excellent river access to the world ocean, and most of its population lives in areas near the US border which enjoy a relatively moderate climate. Russia may be compared with north-central Canada (e.g. the Edmonton and Winnipeg areas), but certainly not with southern Canada.
It is for these reasons that production costs are 2--3 times higher in Russia than they are in the US, Japan, or Western Europe, despite the fact that skilled labor is much less well paid in Russia than in those countries. The initial costs associated with new Siberian resource development are especially forbidding. To quote one Russian economist, many oil and gas reserves are for all practical purposes "no more accessible than methane from Jupiter."
Nothing can induce investors to bear such costs so long as more attractive opportunities are available elsewhere in the world. And therefore, the author concludes, liberal economics is incompatible with Russia's illiberal geography. "Russia has never developed under conditions of free movement of capital and possibly cannot do so." Mercantilist controls on the movement of capital and high tariffs on imports are therefore essential to the balanced development of Russia's economy.
Professor Lynch ends by posing two disturbing questions. To what extent does a liberal world need Russia at all? And to what extent can historical Russia exist in a predominantly liberal world order?
Note
(1) Some components of the crisis have been examined in RAS: see Issue No. 1 item 15 on the electricity network, Issue 2 item 8 on water supply, and Issue 4 item 7 on one aspect of public health infrastructure.
Next Article