Economics | From Russia with - what?

By Pierre Heistein

This article originally appeared in the Business Report Opinion & Analysis pages on 20 October 2011. To interact with Pierre, visit www.facebook.com/understandingeconomics.

Russia as a country is frequently mentioned in the news: its inclusion in BRICS, its disputes with the US, its bully tactic politics across Eastern Europe. Yet despite this, very little is actually said about Russia. What makes it such a powerful global player?

Russia, more accurately called the Russian Federation, is no longer the communist fear of the West. Since 1991 and the fall of the Soviet Union, it has been, officially at least, a democratic state supported by a free-market economy. Just how free it is remains debatable as the state still exercises significant power over political institutions and the media. Russia’s natural gas producer, the largest in the world, is a state-owned monopoly and many of its other industries remain under state or monopoly control.

With the largest landmass of any country in the world, Russia is rich in natural resources – boasting the world’s largest natural gas reserves, second-largest coal reserves, and an abundance of oil and other minerals. Oil, gas, timber and metals together account for over 80% of its exports, with production in chemicals and military equipment adding significantly to its remaining GDP. 

Being well endowed in resources is only half the challenge, but one that Russia has risen to successfully. It slid into recession in 1998 due to its vulnerability to the export commodity prices, but since then it has boasted consistent growth except for a short dip after the 2008 financial crisis. Between 2000 and 2008, GDP per capita growth averaged around 7% per year. This was not just a boost for the wealthy; it was coupled with decreasing poverty driven by rising employment and a growing middle class.

The stability in the Russian economy over this period is largely accredited to the Minister of Finance of the time, Alexei Kudrin. Learning from the mistakes of 1998, Kudrin put the Stabilization Fund in place to buffer the economy against global fluctuations. The fund charges exporters of oil a 90% tax on all crude oil sold at prices higher than $28 per barrel. The funds raised are invested offshore and are used to stabilise the economy in times of highly volatile or dropping commodity prices. The fund has also been used to settle outstanding public debt and balance the fiscal budget.

Currently, the Russian economy is boasting very impressive figures. The fiscal budget is all but balanced, Russia holds one of the world’s largest stocks of foreign exchange (worth just over $500 billion), and its public debt is less than 10% of GDP, brought down by Kudrin from 160% in 2000.

The big giant has a weak spot, however. Currently, its balanced budget is only sustainable if oil prices remain higher than around $120 per barrel. Any drop in world demand and the price of oil could send Russia’s fiscus spiralling into a deficit. Inflation in Russia is also far higher than in other leading world economies and is currently hovering around 8%, although it is expected to come down slightly before the end of the year. This is at a time when government has promised increased spending for the much-needed upgrade of the economy’s infrastructure, bringing further inflationary pressure.

Despite their potential for destabilising the economy, these problems are likely to just be teething pains along the way to strong growth. Russia has all the right ingredients for a strong economy: an abundance of resources, financial wealth, advanced technologies, a growing middle class, and an increasing internal demand and use of services. As long as its politics remain stable, there is no reason why Russia will not grow from strength to strength – and South Africa is wise to be investigating economic and political ties with the eastern giant.

This article is published under the Creative Commons Attribution license.