From revolution to evolution
Published: 30 May 2010
Russia's economy is being redesigned in a long-term project
Profound changes have taken place in Russia's economy in the past decade. The government is trying to wean Russia off near-total dependence on commodity exports – in 2009 it was the largest exporter of natural gas, the second-largest oil exporter, third-largest exporter of steel and aluminium – and a leader in other commodities.
Boom-and-bust economic cycles in the rest of the world cause severe problems for Moscow, which is looking to a future blessed with exports of high-technology items far more than just the Soyuz satellite launchers, military aircraft and civil airliners of today.
A turnaround in agriculture has seen Russia become a net grain exporter instead of net importer, while an average 7 per cent annual GDP growth since Russia's 1998 economic crisis brought about the development of a middle class and a significant rise in disposable incomes. But the 2008-2009 world financial crisis hit hard. Russia's economy turned around in mid-2009 to record positive growth, though slower than before.
Alexander Morozov, HSBC Group Chief Economist for Russia and the Commonwealth of Independent States (CIS), said: "Recovery is going on. The first phase lasted two quarters last year and is now fading. The next phase will be much more subdued".
Growth so far is being driven by exports, particularly of ferrous and non-ferrous metals and chemicals.
It's hard to escape the pattern established by history, particularly the dependence on commodities, which are hugely vulnerable to price fluctuations outside the country. There has been progress, though. Mr Morozov says, "Growth so far is being driven by exports, particularly of ferrous and non-ferrous metals and chemicals. Production of electricity and transport has benefited from growth of exports as well as through production chains of export industries. There has been a modest recovery in wages and salaries, but these are still lower than before the economic crisis".
High-tech development is the right way to go, no question. The government has tried to push companies in this direction but more incentives are needed.
The potential problem is obvious. As Mr Morozov put it, "Unless the world economy grows so as to bring more demand for oil, economic growth in Russia will be only about 2 per cent to 4 per cent.
"Before the crisis, Russia increased expenditure in real terms, with both investment and public expenditure, but this is not sustainable. Growth will therefore have to be lower."
Finding funds is not the easiest task to accomplish. In the past decade the banking sector was the intermediary for foreign money, but Mr Morozov said the sector "is now struggling to resolve the problem of overdue loans". Lending would therefore be moderate, seeking growth of 15-20 per cent, far less than in the past 10 years.
Generating high-technology exports will not be easy, and Mr Morozov thought there would be no change in the structure of exports in the near term. Hydrocarbons account for two-thirds of exports, metals and other commodities for most of the rest, with only about 10 per cent of the total comprising high-value equipment (such as military materiel and rockets for foreign satellite launches), he said, adding, "Diversification is pretty demanding. It will take many years."
Given the sensitivity of Russia's balance of payments to external shocks, he said: "High-tech development is the right way to go, no question. The government has tried to push companies in this direction but more incentives are needed.
"There's a long way to go until businesses feel comfortable about investing in this area for the long term."
You can't change the business climate overnight, but it will get better.
There are other difficulties inevitable in such a dramatic shift in economic and social circumstances. For instance, corruption is a major problem, yet compared with other countries with similar levels of corruption, Russia's economy seems to be doing fairly well. But the country faces a stark choice: less corruption would mean an improved standard of living overall, while the same or higher levels of corruption would mean a lower standard of living.
In short, Mr Morozov said, there's plenty of room for optimism but Russia has not yet reached the turning point. "You can't change the business climate overnight, but it will get better," he said.
This article can also be accessed on the Global Banking and Markets public website at
http://www.hsbcnet.com/country/ru/evolution.html
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Alexander Morozov
Alexander Morozov joined HSBC in 2005 and has more than 20 years' experience working on post-Soviet economies in the academic and financial sectors, with a solid track record of successful macroeconomic, political and FX analyses and rate calls in relation to Russia, Kazakhstan and Ukraine. He holds a Diploma in Economics from the London School of Economics and a PhD in economics from the Russian Academy of Sciences.
Full reports are available at the Global Research website where you can log on using your e-mail address and password. You will find the report using the filter by author. If you are a first-time user, please contact your HSBC relationship manager to arrange access to the site.
Peter Hughan
Peter Hughan has 24 years of experience in HSBC, of which the last 13 have been in corporate banking. He has worked extensively in Asia, the Middle East, and North America covering a broad range of corporate customer groups and conglomerates in a variety of industries and sectors. He is currently head of the relationship coverage teams in Global Banking in Moscow, where he has worked since 2006.
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