How to reform the Russian economy By Sergei Guriev ★ Although the Russian economy is recovering from its 2009 recession, big challenges loom in the medium to long term. With its state-dominated industries, raw material dependence and weak institutions, Russia will not be able to catch up with the richer developed countries. ★ If Russia wants to avoid the kind of stagnation that plagued the Brezhnev era, it will have to improve the protection of property rights, allow for stronger competition and reform its legal system. However, Russia does not have enough private businesses to lobby for such improvements. The best way to create a pro-reform constituency would be to privatise state-owned companies and make it easier for small businesses to grow. Russia would also benefit from an outside anchor for reforms. ★ However, Russia’s ruling elites gain handsomely from the current opaque and skewed economic environment; they have little interest in radical change. In the medium term, Russia’s economic performance is therefore likely to resemble that of Latin America’s commodity exporters in the 20th century: slow growth interrupted by bouts of macro-economic instability.
In 2009, Russian GDP contracted by 8 per cent – the worst recession among the G20 countries and among the big commodity exporters. Some observers thought that the economic crisis would encourage the Russian leadership to implement long-overdue economic reforms. However, the economic downturn was too short and shallow to trigger radical change in Moscow. Partly thanks to the government’s fiscal stimulus programme, the economy quickly returned to growth in 2010. Unemployment remained under control. No big banks went bankrupt. The loss in foreign currency reserves was manageable. The government’s approval ratings remained solid. However, the government’s fiscal stimulus spending contributed to a massive deterioration in Russia’s public finances. As recently as 2006, Russia boasted a consolidated budget surplus amounting to over 8 per cent of GDP; in 2009, it ran a deficit of over 6 per cent of GDP – a turnaround of over 14 per cent of GDP in three years. For 2010, the authorities expect a deficit of 5 or 6 per cent of GDP although oil prices have recovered to $70-80 per barrel. Until 2008, the government would have expected to run a surplus with oil prices at this level.
Centre for European Reform 14 Great College Street London SW1P 3RX UK
Russia needs a new growth model For now, Russia can afford to run such big government deficits: its overall debt is low, the world economy is growing again and its foreign exchange reserves are still the third biggest in the world. In the longer run, however, the outlook for the Russian economy is not good. All the factors that contributed to Russia’s rapid economic expansion before the crisis are exhausted: ★ Rising oil prices accounted for about half of GDP growth in the 1998-2008 period. Rising oil prices resulted in higher government revenue and cheaper credit, thus fuelling both consumption and investment. While oil prices appear to have stabilised at a high level of $70-80 per barrel, they are unlikely to increase further in the near future. Hence they cannot make a substantial contribution to economic growth in the coming years. ★ In the years following the 1998 rouble devaluation, Russian industry expanded rapidly on the back of massive spare capacity. For the last couple of years, the Russian economy has been running at full capacity. Further growth will
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