Russian Economic Situational Analysis
Russian Economic Analysis
In 1991 the Soviet Union underwent a massive overhaul of their way of life, beliefs, customs, and culture. No longer would the Soviet Union endorse communism and a centrally-planned market system, nor would it embrace the oppression of free enterprise among its citizenry or from foreign investments.
It hasn’t been an easy transition for Russia over the years. Among immense budget deficits and the lagging of legislators, Russia has already seen the deep valleys of negative economic development and has yet to see anything resembling a peak. Russia saw its economy contract for five years, as the executive and legislature dithered over the implementation of many of the basic foundations of what a market system requires. They did, however, achieve a slight recovery in 1997, but the government's stubborn budget deficits and the country's poor business climate made it vulnerable when the global financial crisis swept through in 1998.
The outlook seems a bit brighter than the present situation regarding economic trends. With a weak Ruble coupled with high oil prices (Russia is the world’s leading oil producer as of 2002) the Gross Domestic Product is on a steady climb. The recent Venezuela oil strikes have also lifted the oil production and sales and have landed some much needed FDI. The United States remains Russia’s largest proponent of FDI, but the level of U.S. dollars in foreign investment in Russia are equal to the U.S.’s foreign investment in Costa Rica.
GDP/Capita
By mid 2001 Russia showed strong signs of continuing its economic growth for the third consecutive year. GDP for 2000 was around $251 billion, and official estimates cite GDP growth of 3-4 percent for 2001. Although down from 2000's 8.3 percent surge, a 3 or 4 percent growth rate appears to be somewhat sustainable through 2002 and into the calendar year of 2003. These rates compare favorably with negative growth rates experienced throughout most of the 1990's.
While high oil prices have played a significant role, the broader economy is accounting for an increasing part of GDP growth. Industrial output increased by a healthy 9 percent in 2000, up from 8.1 percent growth in 1999. It’s important to keep everything in perspective as we discuss the growth trend we are seeing in Russia because current GDP per capita is just $1,707, which is well below the potential of a country which boasts a highly educated population and an abundance of natural resources. Russia clearly still has a long way to go.
On the bottom of the page is a table of Russian domestic economic trends provided by: Russian State Statistics Committee (Goskomstat)/CBR/IMF/Russian Economic Trends. Trade data supplied by Russian State Customs Committee.
Purchasing Power Parity
The basis for PPP is the "law of one price". In the absence of transportation and other transaction costs, competitive markets will equalize the price of an identical good in two countries when the prices are expressed in the same currency.
The distribution of income is central to one of the most enduring issues in political economics. On one extreme are those who argue that all incomes should be the same, or as nearly so as possible, and that a principal function of government should be to redistribute income from the haves to the have-nots. On the other extreme are those who argue that any income redistribution by government is bad. Russia is transitioning from one extreme to the other as they will no longer be relying on the discernment of the government to decide who makes how much and how they make it!
There are a lot of aspects of purchasing power parity that one has to take into account when discussing this topic in reference to Russia. First of all, it has to be taken into account that this country is attempting a massive transition not easily undertaken. Second of all, it has to be noted that a whopping 40% of the population live under the poverty line! That statistic alone should be able to give a good feel for the purchasing power parity of this country. Almost one half of the citizens in Russia have barely enough money to survive, which is hard to comprehend for a lot of people…especially Americans.
Currently, purchasing power parity in Russia is $8,300 (2001 est.) and due in large part to the very low amount of personal disposable income. There are signs, however, that the disposable income level in Russia is rapidly rising, which is a good sign for businesses.
Distribution of Income
According to the Gini index found on the CIA website on Russian information it shows that the distribution of family income is near China’s distribution, yet worse than Taiwan’s. This could be due to the nature of Taiwanese economics and shows the disparity between the two even with a population and geography difference.
If income were distributed with perfect equality the index could be zero; with perfect inequality, 100.
Country Distribution of family income - Gini index
China 40 (2001)
Russia 39.9 (2000)
Taiwan 32.6 (2000)
Within the socioeconomic classes it is shown that in Russia, the wealthiest 10% account for more than one third of the nation’s consumption, while the poorest 10% consume less than three percent. This is on par when comparing it to the likes of China and shows a little bit of the trends of the wealthy compared to the poor in America.
Recent Trends in the Internal Economy and Future Expectations
The Russian economy is increasingly producing good news such as strong GDP growth, escalating foreign exchange reserves and trade surpluses. Inflation is moderate by earlier standards, the currency is stable, and the reform of the tax code is well advanced and beginning to show early positive results. The effects of the 1998 crisis are fading and there are signs of a sustained recovery, including in the regions.
By mid 2001 Russia showed strong signs of continuing its economic growth for the third consecutive year. Industrial output increased by a healthy 9 percent in 2000, up from 8.1 percent growth in 1999. In eyes of many economists throughout the world, the measurement of industrial growth is one of the largest key factors to determining the strength and future strength of a country’s economic health. There are, however, other factors that must be considered.
Inflation: By mid 2001, inflation was running at 23.7% year-on-year, well above the government's target rate of 14% for 2001, and continuing to hurt the competitiveness of the ruble. The intense devaluation of the ruble in 1998 had enhanced the competitiveness of Russian manufacturers, despite the relatively low level of operational efficiency of many.
Compared to other nations, the inflation rate in Russia looks absurd and even if you don’t compare it to other nations and simply look at the rate and try to understand it…it still looks absurd.
Unemployment: The unemployment level of Russia is becoming much better than in the past. By the end of year 2000, the unemployment rate was pushing 10% and in 1999 unemployment levels reached close to 15%! Currently, the unemployment rate is hovering at around 8.7%. Comparing this to previous years, the trend is showing that the rate is dropping and more Russians are finding work.
The sign of employment levels rising gives a positive outlook on a lot of economic factors inside of Russia. After all, they have been through a lot.
Interest Rates and Monetary System: The Central Bank of the Russian Federation (Bank of Russia) was founded on July 13, 1990, on the basis of the Russian Republic Bank of the State Bank of the USSR. Accountable to the Supreme Soviet of the RSFSR, it was originally called the State Bank of the RSFSR.
On December 2, 1990, the Supreme Soviet of the RSFSR passed the Law on the Central Bank of the RSFSR (Bank of Russia), which declared the Bank of Russia a legal entity and the main bank of the RSFSR, accountable to the Supreme Soviet of the RSFSR. The law specified the functions of the bank in organizing money circulation, monetary regulation, foreign economic activity and regulation of the activities of joint-stock and co-operative banks.
In the 1990s, Russia's financial sector, particularly its banking system, was one of the fastest changing elements of the economy. Although changes have moved clearly in the direction of market principles, in the mid-1990s much additional reform was necessary to achieve stability.
One of the most amazing things of the Russian economic/monetary transitions is the fluctuation of the interest rates. Ten years ago it would have been nearly impossible for a middle-class worker to finance a home through a bank in Russia because the interest rates were pushing 20%! A lot has transpired in the past decade regarding this issue, but interest rates are still high and still fluctuate fairly regularly. It is Russian monetary policy to intervene with the discount rate, but to allow some flexibility with the banking system.
The long-term goals of the continuing banking sector reform in Russia are to enhance stability of the banking system, improve the banking sector's performance in accumulating household savings and corporate funds and transforming them into loans and investments and prevent the use of credit institutions for unfair commercial purposes.
International Economic Status
Balance of Trade: Russia's trade turnover increased by 33 percent in 2000, led by a 25 percent increase in her exports. This growth in 2000 interrupts declines in both exports and imports for 1999 and 1998. The value of Russian exports in 2000 was, at $103 billion, the highest level achieved since the early 1990s, while the level of imports ($33.8 billion) remained lower than for each year from 1995 to 1998. Trade between Russia and the European Union totaled 58 billion euros in 2000, soaring 42.5 percent compared to 1999. Russian exports to the EU increased by 58.3 percent, while imports increased by only 14.9 percent. Oil, fuel and gas accounted for 54 percent of Russia's exports, followed by iron and steel, aluminum, precious metals and stones, and machinery/equipment. Russia's leading import was of machinery, followed by electrical equipment, inorganic chemicals and pharmaceuticals.
It is evident that one of the healthiest aspects of Russian economics is the fact that they have a trade surplus, due in large part to their oil production and metal/ore mining. Indeed, Russia is a very healthy country regarding earth’s fine natural resources and they are learning how to incorporate that absolute advantage into their nationalistic agenda.
Balance of Payments: Russia's current account balance in 2000 was $46.3 billion, a significant increase over 1999's $24.6 billion, itself a record for recent years. Estimates for 2001, indicate a decrease to $32.2 billion.
The balance of payments for the beginning part of the year 200 was characterized by a current account surplus and considerable increment in foreign exchange reserves. The factors behind the favorable state of the balance of payments were things such as the consolidation of the export potential of the Russian economy and the expansion of import substituting production capacities; a favorable foreign trade situation and high prices of fuel and energy in world markets (which obviously helps them since they are the world’s leading oil producer); and sensible monetary and foreign exchange policies that allowed the Bank of Russia to keep the Ruble’s exchange rate at a level that equally met the interests of Russian exporters and importers and to increase Russia’s official foreign exchange reserves.
Foreign Exchange Rates: Currently, the Russian Ruble is trading at: $1/31.57R
This exchange rate is current as of 4:50pm on Wednesday the 5th of March 2003. Over the past two years the Ruble has lost ground, but is showing signs of recovery against the world currencies. You can see the trends over the past two years by looking at the subsequent graph located on the next page.
The trend shows a steady devaluation of the Ruble over the two year period with areas of strength sneaking in for a very short period of time. The Ruble, as we know, was devalued in 1998 in such a way that only a recovery could be possible.
Economic Risk Assessment: Russia is still considered a hot bed for uncertainty. On one hand, we much commend them for their efforts and desires to roll with the tide instead of against it concerning economic and monetary issues, yet on the other hand we have to shake our head in dismay as they almost reluctantly do it. Maybe this is because for years upon years they have been under lock and key of their government to make decisions for them and to tell them which way was up. Now, with a global economy, Russia is unable to hide their weaknesses to their citizenry as well as to the rest of the world. Pride is a big issue for Russia, as it is for the rest of the world.
Risk is still a big part of investment when you talk about Russia, but all of the indications are showing that improvement is on the horizon. Russia is on the upcoming and showing strong signs of stabilizing their economy and monetary policies. Their Ruble is strengthening, but not strong; their level of trade is impressive as they carry a very prestigious trade surplus; they boast being one of the world’s leading producers of natural resources and have only recently begun developing that in a way suitable for world recognition; their government is learning how to make proper decisions even though many of them still drag their feet on certain issues; and unemployment is becoming manageable for the nation as jobs spring up from different sectors in the economy.
All in all, Russia is an improving nation with a lot to offer. Investing in Russia seems like a decent thing to do today.
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