Russia must stop waiting for Godot
Bruno Sergi is Professor, International Economics at the University of Messina and is a Principal Research Fellow & member of the Advisory Board of the Centre for EMEA Banking, Finance and Economics at the London Metropolitan Business School.
Russia has seen foreign direct investment shrink dramatically: levels have halved since the economic boom, and due to the current downward pressure, are now virtually at a standstill. This fact is indeed discouraging. Russia needs to take resolute action to attract more foreign investment, Russia's Finance minister and deputy Prime Minister Alexei Kudrin said recently. The country needs to see economic growth back up at 7% per year, as in other emerging market economies, Finance Minister Kudrin added. Kudrin's concerns are, in part, directed at those of his government colleagues responsible for economic development. They forecast a government deficit below 2% to 2020, based on an oil price of around $100 per barrel, a not unreasonable level given the current Libyan crisis. This oil-based economic growth trajectory is now no longer in Russia's best interests; the country should instead look to foreign investment, Kudrin posits.
Finance Minister Kudrin is right in that respect. Russia's growth is 3-4 percentage points below that seen in the other BRIC countries and major changes must be implemented as part of a long-term agenda. However, while Kudrin's call to stimulate robust economic growth (in the region of 7% which would double GDP in about a decade) is laudable, a massive inflow of FDI is unlikely to turn up as long as the country remains sluggish. This not to say that Russia cannot or should not count on FDI as an engine of growth. Rather, the country's authorities should attract as many foreign companies as possible in order to bring money and expertise into the country. Now a couple of crucial points on how this growth is rooted, we must keep in mind that this new growth strategy needs to be developed and applied during the worst economic crisis for decades.
First, the great challenges facing Russia today are its well-known huge geographical and resource asymmetries, complicating factors in any post-economic crisis growth model. That is, there is nothing simple about generating outstanding growth figures. Growth needs solid foundations it cannot just be plucked out of thin air. Russia's economic development policymakers need to shift the engine of growth away from oil and gas revenues to foreign investment inflows, or rather from a single origin to a variety of growth sources. However, after a decade-long oil and gas bonanza, Russia is currently facing unprecedented uncertainty over FDI, and policy makers should be aware of the fact FDI is less predictable as a growth engine than natural resources. It might flow into the country, but then again it might not. It could transpire in the near future or in the long-term, could embrace the country's entire economy or simply make the most of particular assets.
Second, there is no rational reason to bemoan the fact that Russia enjoys the status of an oil-rich country, there are many other countries where oil-money wasn't and isn't used to the benefit of the majority of the population. Let's all stop apologizing about using oil resources for growth! I don't agree that Russia should downplay its energy industry. Although no one can say with any real certainty how long this oil revenue will last, this industry will continue to exist and play a major role for decades to come. Moreover, this sector is strongly intertwined with the broader economy and no one can belittle the positive aspects of these bonds in the short- or medium term. What's worse, the Russian economy would fade away overnight without its oil sector wealth.
Third, policymakers should build on the reality: this sector is flourishing again and can still take a central position in any modern, revised growth strategy that is developed. Russia will continue to play a role both in Western Europe (despite the tensions between the EU and Russia over the EU's plans to liberalize the energy market by 2014) as well as in Asia.
Fourth, an agenda for sustainable economic growth could focus on beefing up several important sectors. Instead of squirreling away up to 10% of the country's GDP reserve fund, the country could save 5% of the reserve fund and mobilize the remaining funds for up-and-coming areas of the economy, such as the relationship between science and industry. There is ample evidence of positive linkages between intangible capital investments i.e. human capital, skills etc. and labor productivity growth.
Having said that, what really matters most is that the Russian leaders who are responsible for drawing up and implementing economic growth policies manage this oil money well, rather than simply overseeing a paradigm shift from "oil-growth" to "FDI-growth". Russia must act on the basis of a shared understanding of how best to handle resources, challenges, and opportunities in the context of the economic crisis' after-effects. Keys to this new course of action would be cutting the toxic practices of corruption and fraud that undermine the system's efficiency and channeling the country's massive oil revenue back into the economy and society. The hardest part of this new path is designing a dazzling growth plan, in which no oil-ruble is misspent. Russia's economic policy leaders should not think twice about drawing on the country's excellence and natural resources, simply said, without "waiting for Godot" to arrive from abroad, to ensure they don't leave the country trapped in a catch-22 situation with "no more oil" and "no modernity."
Everyone agrees that Russia's recent decade-long oil bonanza will end sometime in the future and that the country must look for a long-term, firmly-rooted economic and social improvement. And should Russia make headway with this ambitious development program, FDI would once again start flowing into the country, greatly adding to domestically sparked growth.
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