Is Russia a new Economic Miracle or just another Petro-state?

Written by Andre Tartar

In 2003 the investment bank Goldman Sachs came out with a report that established a new acronym, BRIC, that has fundamentally transformed how most people think of the global economy. It stands for Brazil, Russia, India, and China, the new behemoths on the block which can also be thought of as the world’s “big, rapidly industrializing countries”. These four giants represent a hefty portion of the world’s landmass, population, and economic potential. To this effect, the past decade has seen them embracing global capitalism like never before and reaping the benefits of the boom. China has experienced double-digit growth fueled by a billion-strong consumer class, India has witnessed the birth of the world’s newest batch of billionaires and IT champions, and Brazil leads the world on sustainable resource use. So how did Russia make it into this club?

Unlike the other three, Russia has already once been an economic powerhouse, a global superpower. So this is ostensibly its second chance to make prosperity stick. The last time around command-and-control politics and central-planning economics led to grossly inefficient allocation of resources and knowledge. The Soviet Union poured billions into military research but none into commercial research. As a result it had many fighter jets but few cars. In the Soviet model, a central-planning committee normally set a (high) production quota and a (low) price, in order to spread the benefits of production to the people (the mantra of the Communist Revolution). What normally resulted were chronic shortages of most goods, with producers unable to meet their quotas because of loss-inducing low prices.

This time around Russia does have a freer economy, relying on the market mechanism to allocate resources more efficiently. The theory here is that by allowing producers to compete on price for consumer demand, the price of goods should end up reflecting the true cost of producing the good and not exceed consumers’ willingness to pay for it. It is not hard to see where this has born fruit: Russian supermarkets are actually stocked with consumer goods and people are free to buy and sell virtually anything they desire. But is this freeing up of the consumer market really what is fuelling Russia’s boom?

With annual growth rates of between 4,7% and 10% for several years running [1], Russia’s GDP has tripled from less than that of the Netherlands in 2001 to nearly $1 trillion in 2006 [2]. Simultaneously average wages in the country have more than doubled form what they were a decade ago [3]. And so much wealth has poured into Moscow that it has surpassed London as the most expensive city in the world. Clearly Russians are richer than ever. But a closer look at the numbers will suggest a very different story, one closely intertwined with Russia’s emergence as a major energy player.

According to the US Department of Energy, Russia has the largest natural gas reserves and eighth largest oil reserves in the world. No surprise, then, that it is the world’s largest exporter of gas but it also happens to be the second largest oil exporter. This means that its economy is more sensitive to oil prices than virtually any other. The DOE estimates that for every $1 increase in the price of a barrel of oil, Russia’s government revenues increase by 0,35% of GDP [4]. Just imagine the boom to the overall economy from that $1 increase. Given that the price of oil was under $25 in 2003 and currently pushing $100, this translates into truly staggering growth.

But real per capita incomes may not be benefiting as much from this boom as some might think. Just factor in the double-digit inflation rates caused by skyrocketing wages [2]. Then consider that much of this newfound mineral wealth has either ended up overseas in Russia’s engorged foreign reserves, worth $447 billion by the Bank of Russia [5], or in its stabilization fund, now valued at $80 billion [4].

Oil is certainly a major ingredient in the Russian economic mix. There can be no doubt on that point. Take Russia’s enormous trade surplus, second largest in the world after Saudi Arabia, the leading oil exporter. They have surpassed $160bn by some estimates, up from a mere $40bn in 2000 [3]. Crude figurations show that most of this windfall comes from oil receipts.

Yet progress can be seen in some of the economy’s fundamentals. Investment currently stands at 18% of GDP, similar to the investment rates that have seen China through it’s growth spurt [3]. And manufacturing has been growing at a steady clip [3]. So there has definitely been growth in the economy outside the oil and gas sectors. But is it enough to propel Russia upwards through a post-oil future? At the moment, I would have to argue in the negative.

On the one hand Russia must prepare itself for a smaller population; its population declined by about 2 million people since 2001 [3]. Therefore it must invest more in a knowledge-based, service-centered economy. At present Russia is a net importer of services [3]. Secondly, Russia must insure that its companies are globally competitive. As I have tried to show, Russia’s economy is heavily skewed toward the energy sector. Only its main government-controlled energy companies, Gazprom and Rosneft, operate on an international level. And that’s solely because they are Europe’s main energy providers, not because of any inherent competitiveness. Too much government intervention and slow-moving regulatory bureaucracies are holding the rest of the country’s industrial complex back.

For the moment, then, it seems that Russia’s boom is more the result of realigning itself as a petro-state than a true economic miracle. For this proud nation to embrace its global economic potential, the Kremlin must relax its involvement in the economy. Russia must instead focus on unleashing its competitive strengths, much like China has.


[1] World Bank. Data and Statistics for the Russian Federation. May 2006.
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[2] World Bank. Russian Federation Data Profile. April 2007.
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[3] OECD Statistics: Russian Federation.
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[4] Energy Information Administration: Country Analysis Briefs: Russia. US Department of Energy. April 2007. .

[5] Bank of Russia. 2007. <>.