INVESTING
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1/24/2013 @ 7:00AM |39,297 views
Russia's Three Biggest Problems
The Russian bear is back to hibernating.
The World Economic Forum released a 52 page report Wednesday outlining what hundreds of business leaders in the country feel to be the biggest challenges in the years ahead.
As the sixth largest economy in the world (as measured in purchasing power parity), a member of the G8, G20 and UNSecurity Council, Russia is justly confident in its development ambitions. It wants to be taken seriously around the world. The impact of the global financial crisis, however, highlighted the vulnerabilities in the economy’s reliance on energy exports, while presidential elections in 2012 raised important discussions about the country’s future economic policies and brewing social unrest.
See: Scenarios For The Russian Federation –World Economic Forum
“Russia is not going to be the next big thing,” Frances Hudson, Global Thematic Strategist at Standard Life Investments in Edinburgh, said in an interview with Forbes. “There is a corporate governance issue and an over-reliance on oil and gas at a time when they may lose their pricing power in Europe once U.S. starts exporting natural gas.”
According to the report, there are three key uncertainties hanging over Russia.
1. Global Energy Landscape
Russia’s economy relies heavily on its energy sector for economic growth, with an extremely tight correlation between oil prices and the country’s GDP.
In the coming decades, Russia will face at least three challenges emanating from a changing global energy landscape. The first will be increased supplies of oil from sources ranging from the United States to Iraq. The second challenge for Russia will be turning the threat of unconventional gas resources into an opportunity, given the potential of shale to undermine Russia’s hold on its traditional and prospective gas importers. The third shift Russia will need to master is in response to a changing demand landscape where, according to all major projections, non-OECD economies will account for the largest share of future fossil fuel demand. Finally, it remains to be seen whether Russia can lead a changing global market structure or whether it merely trails along. While the country could be at the helm of an OPEC-style organization to regulate gas supplies and prices, for example, it could also lose out to strong competition in the liquefied natural gas (LNG) sector and elsewhere.”
2. Weak Institutions
Russia’s institutional environment ranking 133 out of 144 countries in the World Economic Forum’s Global Competitiveness Index 2012–2013, the development of the country’s institutions represents one of its key challenges.
Many of the inefficiencies in the government apparatus can be attributed to high levels of corruption. Russia is characterized by much higher levels of corruption than other countries with similar levels of development. While Russia is the sixth largest economy worldwide in GDP, corruption levels are higher than in countries such as Togo or Uganda, according to Transparency International…. Some argue that corruption has become engrained in the country’s system of wealth creation and distribution. In this perspective, corruption may be seen by some as a necessary evil to maintain stability and control over productive processes in the economy.”
3. Social Cohesion
Trust within society and towards institutions and decision-makers is a key indicator of a society’s ability to fully develop its productive potential. On all of these fronts, there are signs Russia faces significant uncertainties.
The number of professionals seeking to leave Russia exceeds 50% in certain segments. This not only reduces the creative potential to support economic development in the country, but accentuates capital flight and reduces domestic consumption. The same conditions also affect the country’s ability to attract foreign talent, which could play an additional role in the next stage of developing the Russian economy. The situation has grown so acute that some participants in this project expressed despair at the fact that Russia has, alongside its better-known role as energy exporter, become a full-blown exporter of financial and human capital….(A rise in) wealth has been accompanied in recent years by a rise in diverse forms of popular discontent, including frustrations with the delivery of public services, perceived impediments to pursuing professional aspirations and restraints on political freedoms.”
The report concludes that while there are many positives occurring in the Russian economy, overall it has grown fragile. Russia’s weakness is linked to two related dynamics. First, due to its strong reliance on energy exports, Russia is more affected than other countries by fluctuations in the global economy. Any slowdown in global demand or change in the global energy landscape directly affects Russia’s check book. Second, the complex interactions between the inflow of energy revenues, the quality of its domestic institutions and the dynamics of social cohesion have created barriers in the quest to fully develop the country’s physical and human resources. This combination could be a key impediment to Russia’s future economic development given that these resources are the country’s most important assets.
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Under the second point in this article, Weak Institutions, the following sentence is clearly incomplete:
“Some argue that corruption has become [??] in the country’s system of wealth creation and distribution.”
What appears to be meant is that corruption has become an essential part of the current political-economic system.
If that is the case, then the existing system must be extremely fragile. Among other things, corruption is almost certainly making a major contribution to serious distortions in the allocation of resources.
For example, I have seen reports that indicate that a substantial percentage of bright young people–a very important human resource–want to get positions in Russian government and not in private enterprise. (The current Russian bureaucracy is reportedly several times larger than was the Soviet bureaucracy.) This is reportedly because, thanks to corruption, a government position is seen as providing a much better opportunity to acquire wealth than working in the private sector.
But it is private enterprise that is most likely to make the major contribution to the diversification and expansion of the Russian economy.
Among other things, government bureaucrats are much more likely to be risk adverse than entrepreneurial.
Something has got to give….
- Called-out comment
- AuthorKenneth Rapoza, Contributor
Nothing missing. PUt another way…some people say that corruption is the main contributor to wealth creation and income distribution. In other words, its so entrenched in the system. Those pull quotes from the article were copied verbatim from the report. Yes, the report, a long one, says the same thing…something’s gotta give. Read it. Its linked to in the story.
- Called-out comment
- AuthorKenneth Rapoza, Contributor
I must have deleted that word, then, when formatting. Its back in. Here is the report: http://www3.weforum.org/docs/WEF_Scenarios_RussianFederation_Report_2013.pdf
- Called-out comment
- AuthorKenneth Rapoza, Contributor
I did read it. I must have deleted engrained when formatting the text in block quotes.
- Called-out comment
The statement that Russians want to leave the country is incorrect. If they want to leave, why don’t they? Russian statistics bureau, Rosstat, shows that the net immigration from Russia to the West is negligible, much less than 10K hundreds times less than from most European countries experiencing crisis. Rapoza put out a naive and cheap propaganda trash piece.
- Called-out comment
- AuthorKenneth Rapoza, Contributor
No, I put out a piece by the WEF that interviewed over 300 Russian businessmen. And the report did not say that Russians were DEFINITELY leaving, it said there was a perception that there was a brain drain. And I have reported here before on Rosstat’s numbers about net immigration.
- Called-out comment
Is there not a problem with using ‘perceptions’ rather than hard facts, especially when the latter are so easily available?
- Called-out comment
- AuthorKenneth Rapoza, Contributor
No, I dont think there is a problem at all. Eventually, though, those perceptions will have to be backed by hard facts. One can perceive money is flowing out of Russia, but if it is not, then it means your perception was wrong. For example.
- Called-out comment
- AuthorKenneth Rapoza, Contributor
No problem. Everyone is always in fifth gear these days. Myself included. Ease off the Four Hour Energy, man!
- Called-out comment
Reporting “perceptions” which contradict hard facts about Russia is irresponsible tabloid journalism. Your perceptions reporting based on opinions vs. hard statistics which shows absolutely no migration of Russians to the West, is to put it mildly, a propaganda trick. Russia has independent media and the one in US is consolidated, you guys are paid to lie about Russia because it won’t be your banana republic like the rest of Europe.
Your country is responsible for at least 2 mln deaths in the Middle East due to US aggression. To distract from this fact, US media reports innouendos about Russia. Congratulations, Goebbels would be proud of you.- Called-out comment
