Macroeconomic Analysis: Russia Essay

In 1992, 25% of Russia’s population was said to live at the poverty line. In addition, the life expectancy declined, birthrate decreased, and the Gross Domestic Product had split fifty-fifty. As an analysis, the post-Soviet period marked the worst condition of Russia. Poverty became the leading problem of the state. The previous conflicts against former constituents of Russia persisted to disturb and interfere on the attempts to restructure Russia (Wright, Pilot Film and Television Productions., & OverDrive Inc., 2005). Russia’s local and national government were unstable and its international relations were also dire. At present, the economy of Russia has started to get better significantly, caused by main investments and business expansion and also because of expensive costs of natural resources.

Policy changes in Russia that resulted in the current state of the economy nowadays started in 1999 wherein Vladimir Putin introduced measures that would curb down the severe crises in the economy of Post-Soviet Russia(Billington, 2004). What Putin did was to ensure that the most citizens have jobs. So what he did was to hire locals in the government concentrating in creating policies and strategies which would drive the economy’s performance in the next years. This particular investment paid off quite well.

One policy which stood out well was the reaction that Putin’s administration made in the aftermath of the Ruble crisis at the end of the previous decade. Upon his election as president in 2000, he has transformed Russian politics to work together towards their goal of development. Since then, the Duma has already been able to pass landmark legislations such as the Strategic Offensive Reductions Treaty which focused on an intensive tax collection scheme which gave additional income for the government (Billington, 2004). This in turn was used to finance government projects on education and public infrastructure. During those times, there were likely capital outflows from Russia. The Yeltsin administration was in shambles as the government try to figure out how to offset the fall of the Ruble. As a result, foreign investors sold their Russian stocks and then convert their rubles into dollars.  With a small amount of capital outflow going into the economy, the future was bleak. Russia placed the ruble in a crawling peg in July 1993 (Harvey, 1999). By July 1998, the ruble was under speculative pressure. The IMF assembled a rescue package of $23 billion. Despite the IMF loan, the ruble was allowed to float in August 1998. The Russian economy has continued to struggle. Russian GDP fell from $804 billion in 1991 to $282 billion in 1998 (Harvey, 1999). The budget deficit in 1998 was nearly 10 percent. As of April 2003, the Ruble partly recovered but Russia still owed the IMF more than $5 billion (Rumer & Wallander, 2003). Nonetheless, the emergency loan package provided by the IMF helped Russia under Putin’s strict management to cope up with the money supply needed by the economy.

Putin and the New Russia

Three words that very well describe the Russian economy under President Vladimir Putin: Stable, prosperous, and national-pride. Time magazine’s person of the year for 2007 may be considered blunt if not harsh in facing his critics both local and abroad. However, his strategies and tactics in reviving the ailing economy of Russia after the fall of the Soviet Union in the early 90’s have finally paid off in the past four years (Webber & Webber, 2004). This came amidst the allegations of cruelty especially in handling the situation in Chechnya as well as the controversy in Gazprom.

Probably the most notable policy which gave Putin his approval with the people was his ability to unite the two influential factors in Russian politics: the governors and the businessmen. He managed to make governors improve the quality of life in their respective provinces and at the same time keep the businessmen in the corporate world.

Strengths of the Russian Economy

The Russian economy has come a long way from the economic crises of the previous decade has rebounded significantly. For instance, in the aftermath of the Ruble crisis of 1998, Ruble lending among Russian banks led by the Bank of Russia accounts for 63% of total lending (Webber & Webber, 2004). Likewise, Russian banks have invested part of their reserves in gold putting in average of 10% of total reserves. Investment in gold has been a wise investment in recent years with the value of gold surpassing the $1000/ounce mark at the start of the year. This has added to the strength of the Russian economy.

Furthermore, another advantage of the country came not from above but what was below the surface. In recent years, natural gas which was abundant in the country has proven to be a cash cow for the country becoming its top export (Slezkine, 2004). This is one factor why the Russian GDP skyrocketed in just three years from $345bn in 2002 to $984bn in 2006. Sites such as Sakhalin has yielded more and more output as the demand for natural gas increases recently in the wake of declining output of crude oil (Rumer & Wallander, 2003). Exports of raw materials such as coal and steel are also picking up. Iron ore exports for example were up by 11.7% YoY at 25.50 million tones in 2007.

On the commercial side, Russian spending has also been picking up, giving Russians the feel that the economy indeed is improving. Evidence of this is the upsurge of retail spending by 13% in 2007 (Gavrilenkov, 2005). This rate according to BBC is even higher than the global rate of 8%. With the elite Russian spending above $1 million a year reaching about 15.5%, this creates a domino effect in the economy whereas consumer spending would fuel the creation of more jobs.  Year-on-year, the Russian economy is growing at a steady state of 7% compared to a %% growth in the previous years.

Since 2000, inflation rates were moderately low in single digits compared to a 16% posting on average in 2002 (Gavrilenkov, 2005). The Russian economy grew by 6.4 percent, 10 percent, 5 percent, and 4.3 percent in 1999, 2000, 2001, and 2002 alone (Gavrilenkov, 2005). This was spurred in by the rebound of the ruble through` interest rate cuts.

Such economic strengths also gave the government a renewed status as a comeback superpower. Through Russia’s oil pipeline systems, they support not only the local economy but the economies of some former Soviet economies as well such as Belarus and Ukraine (Rumer & Wallander, 2003). This happens as the pipelines intended to the European Union passes through these countries and are paid transit fees. Likewise, its importance in Europe is also felt in Asia as the Natural gas is also imported by China and Japan.

Weaknesses of the Russian Economy

The current upward trend of the Russian economy nowadays may be seen as a threat to the West. Noting the current cold relationship of Russia with the West, the former’s economic policies would still have to be on neutral ground in order to survive in a longer term. Russia heavily depends on its large natural reserves and exports it to other countries.

For instance, statistics show that 56% of all proven Natural Gas reserves can be found in Russia (Malia, 1999). This places the country’s importance in the energy sector in the coming years. However, as the world worries about supply of energy sources, Kremlin should be more worried of demand for their resources (Marks, 2003). Considering the current monopolistic policies of Russia under Vladimir Putin, countries may opt to look for other alternative sources of natural gas. Much worse, developed countries such as the United States, China, and Japan may opt to invest in technologies that would yield energy alternatives. An example of this is the recent Chinese effort to obtain energy from fecal matter (biogas) within its cities and use it in their energy-hungry industries. As of to date, 10% of China’s energy source comes from biogas and is projected to be developed within the next 10 to 20 years (Gavrilenkov, 2005). This could pose a threat to the sustainability of Russia’s position in the energy sector.

It may be for a fact that Russia under Putin has showed a great amount of political will in the past four years. It could well in fact be a great strength for their part especially in the macroeconomic level (Marks, 2003). However, such political will would not be necessarily good in the long run. Currently, Russia still does not have a strong market system will could create policies which could further broaden or improve the current economic status of the country. Such absence of market structures may still be an effect of the communist ideals that Russians have been accustomed to. A clear weakness of the economy here can be seen on how Russia could impart some capitalistic ideals such as profit-maximizing conditions without sacrificing its communist ideals such as government-centered control of resources.

On a different note, such absence of market institutions would create an imbalance in the overall economy of the country (Madslein, 2008). This would come as a clear contrast from the stability and progress that the Russian government wants to project to its people and the West. Furthermore, the political structure of Russia is also fragmental. Economic policies in Moscow may not necessarily be followed in Vladivostok on the eastern side of the country (Gavrilenkov, 2005). As a result, the local institutions tend to be corrupt in the absence of a truly centralized and efficient system which would monitor social indicators on a macroeconomic scale. Hence, social needs are unevenly distributed throughout the country which in turn creates a certain disparity among the rich elite and the poor Russians. Also, the as of now, the government may be able to provide basic services such as education and health services but may not always be assured with the quality of such services.

Another weakness in the Russian economy for the past four years is the inability of the private sector to fully take the opportunity to invest in the growth intensive state of the economy (Madslein, 2008). This sector includes several exporters especially in the metal and gas industries. There is also a question whether the government secretly subsidizes this industries in order for them to enjoy low costs of production locally while on the other hand enjoy lots of profits overseas. The effect of such subsidization comes with the outward flow of income which could further enhance the performance of the Russian economy.

 

Promises of the Russian Economy

According to the paper published by Goldman-Sachs in 2005, the Russian economy was in a steady pace compared to other emerging economies in the world. They have classified the economy along with those of Brazil, India, and China as the BRIC economies. These four economies as what was published are those to watch out for in the coming years as they are projected to continue posting significant growth in GDP.

 

References:

Billington, J. H. (2004). Russia in search of itself. xviii, 234 p.

Gavrilenkov, E. (2005). Post-crisis Economic Performance in Russia: Regional Aspects. Moscow: Higher School of Economics.

Harvey, M. (1999). Look what came from Russia. Look what came from series., 31 p.

Madslein, J. (2008). Russia’s Economic Might: spooky or soothing? London: British Broadcasting Corporation.

Malia, M. E. (1999). Russia under western eyes : from the Bronze Horseman to the Lenin Mausoleum. xii, 514 p.

Marks, S. G. (2003). How Russia shaped the modern world : from art to anti-semitism, ballet to Bolshevism. xii, 393 p.

Rumer, E., ; Wallander, C. (2003). Russia: Power in Weakness? Moscow: Moscow University Press.

Slezkine, Y. (2004). The Jewish century. x, 438 p.

Webber, S. L., ; Webber, T. (2004). World cultures : Russia. xi, 242 p.

Wright, I., Pilot Film and Television Productions., ; OverDrive Inc. (2005). Russia. from http://digitalbooks.cwmars.org/ContentDetails.htm?ID=E3654996-9EFA-444A-A3B6-5C23F6A8975A

http://excerpts.contentreserve.com/FormatType-35/1023-1/084577-Russia.wmv

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