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Last Updated: Sep 5, 2008 - 10:45:34 AM |
Russia's attack on its small democratic neighbor was bad enough, but
its recognition of two conquered protectorates as independent states
has been supported only by Hamas, Belarus, Venezuela and Cuba. Putin is
turning Russia into a rogue state.
Russia has gone through a grand economic recovery, but its strength
must not be exaggerated. In current dollars, its gross domestic product
has increased almost ninefold in nine years, but even so, it accounts
for only 2.8 percent of global GDP. At present, its per capita GDP of
$12,000 is a quarter of the U.S. level. While this is impressive, much
of its catch-up potential has been exhausted.
The official government target is to reach half the U.S per capita GDP
by 2020. It is possible to achieve that goal, but it would require
carrying out extensive economic reforms during the next 12 years. The
problem, however, is that Russia's foreign aggression has strengthened
the authoritarian regime, and this has ended all hopes for substantial
reforms at a time when they are needed the most.
To understand Russia's economic dilemma, we need to consider the causes
of the country's growth over the last decade and the current
challenges. The dominant cause of growth has been European or
capitalist convergence, which Russia has enjoyed thanks to Boris
Yeltsin's hard-fought introduction of a market economy, privatization
and international integration. The country's short economic history can
be summed up as: All good comes from private enterprise. The
government's contribution has been to keep the budget in surplus and
reduce taxation.
A second cause of the high growth has been the huge free capacity in
production, infrastructure and human capital after the collapse of
communism. The recovery was also coupled with remonetization, as Russia
has enjoyed one of the greatest credit booms of all time. With the rise
of the new capitalist service sector, a huge structural change has
spurred growth. Together, the systemic and structural changes amount to
a gigantic catch-up effect that all post-Communist reform countries
have experienced. The average annual real growth in former Soviet
states from 2000 to 2007 was 9 percent, but it reached only 7 percent
in Russia.
The third factor behind Russia's growth is the most spurious -- namely
the oil price windfall since 2004. While it has boosted the country's
budget surplus, current account balance and currency reserves, it is
likely to have damaged its policy badly, as the elite focused on the
distribution of oil rents rather than on the improvement of policy. As
a consequence, Russia has seen no economic or social reforms worth
mentioning for the past six years.
Moscow's current economic dilemma is that the old sources of growth
will soon be exhausted. Undoubtedly, some capitalist convergence will
continue, but it is bound to slow down.
Unfortunately, it is easy to compile 10 reasons why Russia is likely to
have lower growth in the near future than it has had for the last nine
years.
1. Internationally, one of the greatest booms of all times is finally
coming to an end. Demand is falling throughout the world, and soon
Russia will also be hit. This factor alone has brought the Western
world to stagnation.
2. Russia's main problem is its enormous corruption. According to
Transparency International, only Equatorial Guinea is richer than
Russia and more corrupt. Since the main culprit behind Russia's
aggravated corruption is Putin, no improvement is likely as long as he
persists.
3. Infrastructure, especially roads, has become an extraordinary
bottleneck, and the sad fact is that Russia is unable to carry out
major infrastructure projects. When Putin came to power in 2000, Russia
had 754,000 kilometers of paved road. Incredibly, by 2006 this figure
has increased by only 0.1 percent, and the little that is built costs
at least three times as much as in the West. Public administration is
simply too incompetent and corrupt to develop major projects.
4. Renationalization is continuing and leading to a decline in economic
efficiency. When Putin publicly attacked Mechel, investors presumed
that he had decided to nationalize the company. Thus, they rushed to
dump their stock in Mechel, having seen what happened to Yukos,
Russneft, United Heavy Machineries and VSMP-Avisma, to name a few. In a
note to investors, UBS explains diplomatically that an old paradigm of
higher political risk has returned to Russia, so it has reduced its
price targets by an average of 20 percent, or a market value of $300
billion. Unpredictable economic crime is bad for growth.
5. The most successful transition countries have investment ratios
exceeding 30 percent of GDP, as is also the case in East Asia. But in
Russia, it is only 20 percent of GDP, and it is likely to fall in the
current business environment. That means that bottlenecks will grow
worse.
6. An immediate consequence of Russia's transformation into a rogue
state is that membership in the World Trade Organization is out of
reach. World Bank and Economic Development Ministry assessments have
put the value of WTO membership at an additional growth of 0.5 to 1
percentage points a year for the next five years. Now, a similar
deterioration is likely because of increased protectionism, especially
in agriculture and finance.
7. Minimal reforms in law enforcement, education and health care have
been undertaken, and no new attempt is likely. The malfunctioning
public services will become an even greater drag on economic growth.
8. Oil and commodity prices can only go down, and energy production is
stagnant, which means that Russia's external accounts are bound to
deteriorate quickly.
9. Because Russia's banking system is dominated by five state banks, it
is inefficient and unreliable, and the national cost of a poor banking
system rises over time.
10. Inflation is now 15 percent because of a poor exchange rate and
monetary policies, though the current capital outflow may ease that
problem.
In short, Russia is set for a sudden and sharp fall in its economic
growth. It is difficult to assess the impact of each of these 10
factors, but they are all potent and negative. A sudden, zero growth
would not be surprising, and leaders like Putin are not prepared to
face reality. Russia's economic situation looks ugly. For how long can
Russia afford such an expensive prime minister?
Source:Ocnus.net 2008
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