International Politics
Investment woes. Russia stands uniquely among most world economies for its fast rate of growth, averaging 6.6% annually for the last seven years. For Russia, however, this high rate of growth can only be seen as a qualified success for three reasons. First, this growth comes after years of depression. By the end of 2005, Russia was still under its 1991 wealth level. This is significant, because other countries have not stood still during the last 15 years. Had Russia gone on at a slow 1.5% annual growth rate, as experienced during the last few Soviet years, the GDP would have been today at 123% its 1991 level against an actual 95%. Second, the current growth qualitative content is not without its own problems. The Russian economy’s investment rate was, and is, much too low by any standard. Modernization has been delayed considerably by the investment slump between 1992 and 1998. More disquieting is the fact that growth dynamics changed after 2002. With the fast increase in global oil and gas prices, hydrocarbons have taken the lead in the economic process. The trade balance has improved considerably, but the export surplus has pushed up the actual rate of change faster than what the Russian economy can swallow. Third, the combination of problems accumulated during the tragic 1992-1998 economic slump, and by growth imbalances since 2002, raises a very serious regional development problem. Russia is neither the only, nor the first country to face such a problem. But Russia’s situation is highly specific. This country is still the largest, physically, in the world, with wide cultural and development differences among its population. Managing the geographical space – economic development relation in Russia is a problem in its own class. The main issue revolves around investments. By 1991, investments for the Russian Federation were (in 2003 money) 5,905 billion roubles. One can certainly argue that the Soviet system was geared to over-investment and that part of this money was grossly misallocated. One can, however, put the normal yearly investment level at 4,000 billion roubles (in 2003 money). Actual investment sank quickly with the transition, from 3,500 billion roubles in 1992 to 1,460 billion in 1998. Even with the quick, post-1998 surge, already, by 2003, investment was at 2,218 billion roubles, or 16.8% of GDP. This is far too low. The average industrial, fixed capital age was, in 1990, twice as high in Russia as in European Union countries. The early 1990s investment slump considerably worsened the situation. In 1991, 27% of Russian industrial capital stock was older than 15 years. In 1996, that share reached 41%. In 1991, 27% of industrial capital stock was less than 3 years old, but that figure was only 9% in 1996. Even if the situation stabilized and then slightly improved after 1998, the picture is still very bleak. This explains why utilities are frequently frail and expensive to maintain, and why industrial accidents are so frequent in Russia. A massive investment shortage has accumulated into the Russian economy since 1992. The best case shows a gap of 3,946 billion roubles, or US$141 billion (at 2003 prices and exchange rates). The worst case shows an accumulated gap of 15,270 billion roubles, or US$545 billion. Energy effects. This is why the current hydrocarbon-based growth is not sustainable. Russia is a poor energy user. This is not so much a problem of household consumption, but one of old industrial processes. It is not an issue revolving around bad habits linked to low energy prices, but one revolving around the decayed state of the national capital stock, be it industrial or the housing sector. If a Russian plant needs three times the energy to produce one ton of steel as do French, German or Belgium plants, then this is because its equipment is old, representative of older technology that frequently is badly maintained. If 60% of heat provided to a Muscovite family is dissipated in the air, it is not because this family doesn’t care about energy prices, but because the whole heating system is inadequate and obsolete. Just raising energy prices as advocated by liberal thinkers would not help, because, due to technical reasons, the demand is not elastic to prices. On the other hand, if nothing is done, by 2015 Russia will not export any more oil or gas. Everything would be consumed by internal demand. The very fact that the cold wave of late January 2006 has pushed Gazprom to reduce exports is proof that Russia’s energy sector is not sustainable without massive investment. There is no mid-term energy security for Russia and European countries without major improvement in Russia’s energy efficiency. A turn toward a much more pro-active economic policy, with greater emphasis on structural elements and less on classical macroeconomic stabilization, is now obvious. The Russian government seems to be aware of this situation. There is now a turn in economic policy, which is more estranged from the thinking of Russian liberals. Competition for funds. The four “National Projects” announced last fall, which include education, health, development of the agro-industrial sector and a housing program, are clearly a positive step. The four targets are all relevant sectors. They can have a strong impact on the Russia’s growth. The National Projects policy was not the only change announced. The use of large government-controlled enterprises, Gazprom and RosOboronexport, to take over important manufacturing companies is not a bad idea. Inter-corporate lending is an important part of investment funding in Russia, as well as self-financing and public subsidies. The current actual exchange rate is severely constraining profits in the industrial sector (for the raw material sector). This curtails investment. If the state budget actively supports the National Projects, it will not be possible to use it to boost industrial investment. Thus, inter-corporate lending will be extremely important, at least until more effective financial institutions can be developed in Russia. Those government-controlled giants have liquidities that are needed for investment. Using these companies to rationalize enterprise-to-enterprise lending, and to promote some priorities, is certainly a step in the right direction.
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