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#6 - JRL 7007
Asia Times
January 7, 2003
Russia's quest for economic sustainability
By Sergei Blagov

MOSCOW - 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 once all data are computed - a drop from the 5.5 percent it achieved in 2001, which itself was substantially lower than 2000s 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 US$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 past 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 tonnes 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 government wants sustainable growth, argues President Vladimir 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.

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 the 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 US 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.

(Posted with permission from KWR International, Inc, (KWR), a consulting firm specializing in the delivery of research, communications and advisory services.)

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