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Resurgence of Russian Economy

Prof. Nivedita Das Kundu, Ph.D, Teaches at York University, Toronto, Canada, also President, Academic & International Collaboration, Liaison College, Brampton, Ontario, Canada.
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  • July 10, 2006

    With its economy in a resurgent mode, Russia seems set to regain its traditional influence and power. But in tune with the popular Russian saying that "the bear is still licking its wounds," Russia has to overcome a number of obstacles to sustain its economic growth. Russia's economic resurgence has been made possible by a combination of factors: strong leadership and firm handling of the transition to a free market economy, integration into the world economy, the growth in oil and gas production and increasing oil revenues due to rising prices. The main objective of Russia's efforts is to raise the standard of living of its citizens and bring the country's position at par with other major powers.

    An analysis of Russia's economic performance during the past few years shows satisfactory results and steady growth. There was also an effective rate of rouble appreciation by an estimated 2.1 per cent in January 2006 compared to previous years. Its gross domestic product (GDP) registered a 6.4 per cent growth last year and has averaged 7 per cent over the past five years. The gold and hard currency reserves also indicate satisfactory increases. Russia in fact has started paying off its foreign debts much ahead of schedule. Its overall economic condition in 2005 was also characterised by a lower inflation rate.

    Nevertheless, one major problem the country is facing today is a decline in the demographic profile. According to the State Statistics Committee, within the next 10 years Russia's population would decline to around 130 million from 143 million at present. In addition, the Russian population is also ageing. Low birth rate in the last few decades is mainly responsible for this situation. As a result, the average age is increasing and the working age population is structurally declining. Russia is now facing the challenge of reversing unfavourable demographic trends so as to sustain its growth.

    Another serious hurdle that has emerged in recent years is the huge outflow of local population from Russia's Far East and Eastern Siberia. In this context, there is a need to redistribute the country's population and take-up other related measures like giving relaxation in tax, tariff, customs and the provision of facilities for ensuring continued flow of investment into the region and thus prevent outward migration. The severe demographic imbalance that exists in Russia's Far Eastern region bordering China could disrupt not only the socio-economic growth in the region but could also pose a severe security threat for Russia in the near future.

    Another major hurdle is the high level of corruption. Observers feel that corruption is increasing so fast in Russia that bribe rates have grown even faster than oil prices! Any form of corruption can cause harm to the growth of a country. Hence, drastic measures are needed to control the growing corruption in Russia. Likewise, unlawful activities, prevalent in certain sectors, need to be strictly curbed to ensure smooth progress.

    The resurgence of the Russian economy has ramifications for India. Indian business houses have started realising that Russia is the market for future investment, with tremendous opportunities and potential. Indian business analysts have calculated that Russia now has a huge capacity for growth in the field of financial services as well as in consumer durables. Mahindra & Mahindra has already planned to set up its first overseas factory in Russia by the end of this year to manufacture Sports Utility Vehicles and expand its sale throughout Central and Eastern Europe. Further, it has also planned to form a joint venture with a local Russian partner to set up units that will assemble kits sent from its Indian factory. European and Chinese automobile companies are also investing heavily in Russia. Other than automobiles and pharmaceutical companies, Indian IT (Information Technology) companies are also investing heavily in Russia and formulating partnerships to expand their business further to Europe jointly.

    However, despite the heavy boom in the Russian market, Indian investors and business groups are sceptical about the longevity of this consumer explosion in Russia. Since the expropriation of Yukos, the Russian State has concentrated on taking over the energy sector and pushing the oligarchs out of this sphere. This strategy was further confirmed by the purchase of Sibneft by Gazprom, and the transformation of Gazprom into an international company backed by the state. This strategy of the Russian government, as well as the Yukos case, has generated scepticism among Indian business houses that the Kremlin might think of expropriating other private sector firms in the future. There is also a fear that since Russian economic resurgence is closely connected to global oil prices, a sudden downfall in oil prices might lead to a crash in the Russian market, thus causing heavy losses to the Indian investors - something that happened fifteen years back due to the sudden collapse of the Soviet Union.

    Nonetheless, over the last few years, the Russian economy is in the resurgent mode. Domestic demand and the investment climate seem to have shown positive signs and foreign direct investment in Russia has also increased reasonably. Of late, Moscow has also approved a legal amendment for lifting currency restrictions, paving the way for making the Rouble a fully convertible currency from July 1, 2006. To make the process easier, it has gradually eased restrictions on capital flow as well as currency export operations. However, till January 1, 2007 the Central Bank would have the right to impose certain restrictions on capital transactions. This new development would make the investment climate in the country much healthier in coming years.

    Some economic forecasts even suggest that given the way Russia is heading now and regaining its influence and economic power, it is bound to emerge soon as a global power. There is also a prediction that by 2025 Russia could become the world's eighth-largest economy with a per capita income of US$ 45,000. The unemployment rate in Russia has also declined from 8.1 to 7.1 per cent over the last few years and there has been a substantial reduction in poverty rates. The fiscal surplus is quite high and a stabilization fund has been established to buffer government revenues from variations in oil prices. Interest rates remain quite low (around 10 per cent). There is an improvement for small business sectors and the continuous expansion of entrepreneurship contributed for the continuous development of the middle class, which seems to be emerging fast. Interestingly, attitudes towards entrepreneurs and entrepreneurship in Russia are also changing significantly in a positive direction. All these indicate that the prospects are indeed bright for Russian's economic growth. And more importantly, they point towards a resurgent Russia.