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Sunday, January 14, 2007

Russia's Economic Transition

The combination of good news and bad news about Russia's economic transition leads to an uncertain future:

Charles Wolf Commentary, Project Syndicate: ...Throughout the presidencies of Boris Yeltsin in the 1990s and today that of Vladimir Putin, Russia has opened its doors to international trade, investment, tourism, the media, and the Internet. In sharp contrast to the Soviet Union, Russia now publishes voluminous (if not always reliable) economic, social, and demographic information.

Among the many economies labeled "transitional," Russia's is the second largest, with a GDP about one fifth that of China, but double in per capita terms. But it is unclear where Russia lies on the spectrum of "transition." Is it headed toward market-driven, decentralized decision-making and resource allocation or state-controlled, centralized decision-making and resource allocation? Or is it oscillating between the two? ...

In fact, a heated debate is currently under way within Russia concerning the direction of its economic transition, which reflects the sharply different emphasis that the opposing sides place on "good news" pointing toward market-oriented change or "bad news" pointing in the opposite direction. The debate also highlights disagreement about the reliability of official data.

Since 1991, Russia's real GDP growth rate has been more than twice the unweighted average of the other G-8 members... During Putin's tenure since 2000, ... its foreign debt has been reduced from 50 percent of GDP to less than 30 percent, and its $3.3 billion debt to the International Monetary Fund was repaid ahead of schedule in 2005. Of the $40 billion owed to its creditors in the Paris Club, Russia has paid $15 billion ahead of schedule, and its foreign-exchange reserves have more than tripled, to more than $250 billion.

Optimists also cite evidence that the number of privately owned enterprises more than doubled in the past decade, to nearly 80 percent of all enterprises, while the share of state-owned enterprises shrank from 14 percent to less than 4 percent. .... Indeed, optimists contend that official data on private-sector growth may actually understate the pace and magnitude of Russia's move toward private ownership...

A final "good news" indicator, reflecting both external influences (oil and gas prices) and internal developments, is the major ratings agencies' recent boost of Russia's sovereign debt rating from "junk" to investment-grade. ...

But, while there is ample good economic news, there is plenty of bad news as well. Inflation continues to hover around 10 percent, and capital flight - an indicator of weakened confidence in the Russian economy - was more than $9 billion in 2004, and increased further in 2005.

Furthermore, the pessimists dispute the picture of private-sector growth represented by official data. The level of state ownership, production, and employment in the Russian economy is at least as high now as it was in 2003, when ... the state seized Yukos' assets, along with those of several other privately owned companies.

Moreover, a key question about the "good news" is how much of it should properly be attributed to the windfall of higher oil and natural-gas prices (hence, to factors not under Russia's control), rather than to improved economic policies and reform.

Recent empirical work at the RAND Corporation ... highlights Russia's heavy dependence on fossil fuels. Increased oil and natural-gas prices explain between one third and two fifths of the economy's growth over the period from 1993 to 2005. ... The buildup of Russian foreign-exchange reserves is a further illustration of this dependence.

Where is the Russian economy heading? Toward decentralized resource allocation by competitive markets, or backward toward decision-making by the state and its bureaucracies? The answer remains highly uncertain. ...

    Posted by on Sunday, January 14, 2007 at 08:04 PM in Economics | Permalink  TrackBack (0)  Comments (14)


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