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. <>.

PAKISTAN makes the headlines again.......for all the wrong reasons

A state of emergency was declared in Pakistan on 3rd November 2007 resulting in total suspension of the constitution. Hundreds of anti-government activists, lawyers and leaders of the opposition parties are being clapped up in jails and all private news channels in the country are being barred from airing. Not only is this having adverse effects on the political, judicial and media sectors of Pakistan, it is also harming the economy. Already, as an aftermath of the declaration of emergency, prices of basic commodities like wheat(staple food) and ghee(oil) have shot up and further inflation is being predicted by business men and economists.

“Whenever emergencies are imposed in the country, it results in price hike, uncertainty prevails and illegal trade flourishes,” Farooq Azam Khawaja, an eminent importer is quoted to have said.

The emergency is also predicted to cause a rise in price of imports and adversely affect export industry while deterring foreign investment inflow in to the country. This is precisely what the country doesn’t need right now; an economical slowdown on top of its chaotic political troubles.

Tangents wonder:

• To what extent is Musharraf willing to go to retain power?
• To what extent will the people of Pakistan put up with Musharraf's high-handedness?
• And perhaps most importantly, to what extent will America continue to support Musharraf in view of him being 'their man' and keeping an eye on the country's nukes?

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pic from flickr again with some rights reserved(attribution etc)

Mugabenomics: Zimbabwe's predicament

Zimbabwe’s economy is collapsing under the weight of its fiscal deficits, hyper-inflation and economic policies controlled by political agenda. It is really not a matter of whether it is going to buckle; it’s a matter of when. So how did the economy plummet in to a dysfunctional, broken down state? And more importantly, what can be done to save it from crumbling?

For two decades, the fate of Zimbabwe has been solely in the hands of Robert Mugabe, the once popular liberation leader now known as a human rights abusing dictator in the west. During this period, the country has undergone many structural changes in its socio-cultural, political ,and economic fields. Its international image and foreign relations with its immediate neighbours as well as world community at large have suffered badly due to the high handed policies of Mugabe in utter disregard of the world opinion. All these changes are inevitably reflected in its economy.

From being a thriving economy relying largely on its agricultural sector, it has come to the brink of a collapse. Once it produced enough to feed the nation and be a potential bread basket for its neighbours, was the second largest producer of tobacco, and the grower of best cotton in the world . However it is now facing an economic meltdown described by world bank as the worst ever outside a war zone. The agricultural productivity for 2006-2007 is nearly 30% lower than what it was in 2000 which has left millions starving due to severe food shortages and over 80% of the population unemployed. Inflation has risen from 133% in 2004 to somewhere between 7600 %(gov. sources) and 15000% (independent sources) making basic commodities of life unaffordable for the common man in Zimbabwe. Four out of five of the 12 million people live under the poverty line and many rely on grain handouts for survival. It is estimated that about a quarter of the population has emigrated. HIV/AIDS is prevalent in 20.1% of its adult population thus further reducing the active work force while at the same time increasing the economic burden on the economy.

The cause of this economic crisis is predominantly attributed to the chaotic and violent land reforms involving seizures of farms owned mostly by minority white farmers for the so-called ‘ benefit of the general public of Zimbabwe', implemented by a corrupt government. These farms have been handed over to landless members of the black community . They have generally found their way in to the hands of veterans and supporters of Mugabe. This has been a transfer from willing, skilled and resourced farmers to those who either lack the will and have sold infrastructure, irrigation pumps and other agri machinery etc for quick liquidity and economic gains, or those who have the will but not the skills or do not have collateral resources. This has led to decreased capacity utilization aggravated by the monetary policies of the government.

But that is not the sole cause of the crisis. Economically incorrect decisions like the handing out of unbudgeted awards to the veterans of the independence struggle by Mugabe due to political expediency and the decision to send troops to republic of Congo from 1998-2002 have struck a severe blow to the economy. It is estimated that Zimbabwe spent around 13 million dollars per month on this war. The inability of the government to repay loans and hence defaulting on IMF loans means that Zimbabwe is no longer eligible for further loan. Human rights abuses and repression of people by violent means has resulted in isolation of the country and indifference of the international community. Over and above all this are the limited sanctions imposed by the US government and the EU.

Severe shortages of fuel, food and other essential goods have resulted in skyrocketing inflation. However the government refuses to devalue its currency realistically and by enough to control the escalating prices of inputs. This in turn has led to manufacturing debacle as more businesses are being shut down due to shortages of inputs and the high cost of imported inputs that are available.

Instead, the government has resorted to administrative measures to control spiralling inflation. However the price ceilings imposed by the government are economically inefficient and practically ineffective .These have led to further aggravation of the situation as firms now have to buy from alternative black markets at even higher prices. The subsidies provided by the government on fuel and other inputs to the farmers are exploited as many do not use subsidised items for production but sell them in the black market at substantial prices making immediate profits.

The official foreign exchange rate is ridiculously high and foreign exchange reserves of the country badly depleted. The current official foreign exchange rate has increased to 15 000 Zimbabwe dollars to one US dollar ,as compared to 1 Zimbabwe dollar to 1 US dollar in 2003. The demand for foreign currency is so high and its supply so limited ,that the black market traders are selling it to the highest bidder at rates like Z$300,000 to one US dollar! With the central bank now buying at the illegal market rates to pay its mounting debts for power and fuel utilities, it is increasing everyday. Thus prices of imported inputs which are already very high are ever increasing and with the price control on products introduced by the governments, more and more businesses are shutting down. This has resulted in the lowering of productive capacity utilisation from 60% to 25%which is expected to decline further. This in turn is fuelling further poverty and unemployment and emigration leading to further brain drain of much needed skilled workers in Zimbabwe.

To top it all the government has warned of a possible electric supply collapse and breakdown of water supply .Absence of clean drinking water has led to another break out of the water transmitted disease I-e cholera. The country is plummeting fast and the economy is in a nose dive with living standards hitting rock bottom. Zimbabwe is in dire need of international aid and relief to have any chance of economic survival.

So what should the government do? Or simply, what can the government do? It should first of all drop price control. Again, it should pragmatically devalue its currency and bring black market operations to a close by essentially letting the market do its job and determine the price of goods and the exchange rate.

Mineral resources are enormous potential wealth for Zimbabwe with large deposits of gold, nickel, platinum, coal and methane gas. But to exploit these and to increase the productive capacity, international investment of capital is essential. However it is unlikely to be forthcoming in view of the present unfriendly policies of the government and unstable political environment.
Another historically strong sector is the tourism industry which is suffering right now due to the violence, chaos, and human rights abuses etc attributed to this regime. Unless a better image of Zimbabwe is portrayed in this world, foreign currency inflows through this sector cannot be obtained.

Zimbabwe can not survive any longer without international support and aid. The Zanu-PF under Mugabe should co-operate with the SADC led by the South African president and undertake reforms to ensure free and fair elections. Such reforms will end the international isolation of Zimbabwe and help in providing the much needed economic assistance ,food aid and other relief to the starving population. The west also needs to lift its sanctions on food and humanitarian aid ,and subject to acceptance of the terms of SADC provide financial assistance to start the process of reconstruction.

But for some people, the most important and the only solution to this milieu is for Mugabe to go. According to economist Robert Nelson : ‘… the Zimbabwe economy will continue to go down the tubes until they get some political stability and, as long as Mugabe is there, that's not going to happen.’ That might not happen because the opposition is still disunited amongst itself and despite allegations of rigging against Mugabe in 2005 elections, his party is still in control. However, in the words of a Harare based analyst, ‘the big problem about Zimbabwe is that the one thing you can’t rig is the economy. When it fails, it fails. And that can have unpredictable effects.”
*Sources for quoted statistics: CIA fact book, BBC website, Zimbabwe Independent, and New York Times.

Show me the money!

On the 5th of November, members of the Writers Guild of America (WGA), which represents 12,000 screenwriters, went on strike. The walkout occurred after negotiations between the union and the Alliance of Motion Picture and Television Producers (AMPTP), which represents the studios, collapsed.

The walkout is largely due to deadlock over an agreement on higher fees for writers from sales of DVDs and contents streamed over the Internet. At the time of writing, the WGA and the AMPTP have agreed to reopen negotiations on 28th November, but the strike is expected to last a while longer.

Although many shows have stockpiled on scripts in anticipation of production delays from the strike, many daily talk shows (such as The Daily Show, and the Late Show with David Letterman) which rely on writers for topical jokes have shut down. Shows such as Heroes have also been affected, as writers are not able to do last-minute rewrites. The new season of 24 has been delayed for the foreseeable future, and Lost may see the same fate. Similarly, production on the 2008-2009 blockbusters such as Angels and Demons and Harry Potter and the Deathly Hallows may have to be pushed back.

The last WGA strike took place in 1988 and lasted five months, costing over US$500 million. The current strike is expected to result in about US$1 billion of losses.

Tangent’s take:

• (can someone knowledgeable in labour economics please comment?)
• There has been a show of solidarity across the industry, with many 'writers-producers' / show-runners (basically the head writer/ boss) joining the strikes. What would happen if these show-runners decide to go back to work...?
• If the WGA's strike is successful in getting the AMPTP back to the negotiation table, would other guilds, like the Screen Actors' Guild or the Directors' Guild of America, likely follow suit?
• Why? Why Lost???

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Picture again from flickr, here. Again, nonderiv, attrib license.

Rules of the game

The Nobel Prize in Economic Sciences this year went to the American economists Leonid Hurwicz, Eric S. Maskin and Roger B. Myerson for “having laid the foundations of mechanism design theory”.

Mechanism design theory provides a framework to design rules of a game to achieve specific outcomes, even though players may be self-interested. A simple example of such ‘rules’, provided by BBC’s Evan Davis at Evanomics, is how a mother lets one child divide a cake in two, and the other to choose first which half of the cake to have. Apart from dividing cakes, mechanism design theory allows for the analysis of allocation mechanisms such as regulations, market prices and management, focusing on problems associated with private information and incentives.

Tangent’s take:

• Keep a look out for Economic Society’s own (albeit amateur) experiments in this area—with pizzas!

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Please add or edit as you see fit.

Lovely picture of pie taken from here. It's an Attrib-NonDeriv license, which means you would need a link to the pic if you use it. But the picture's not really necessary -- I'm hungry, that's all.

Dollars aren't a girl's best friend?

It has been widely reported that the world’s best paid supermodel, Gisele Bündchen, has stipulated that companies are to pay her in euros instead of US dollars over fears of the latter’s shrinking value. According to the reports, Ms Bündchen demanded to be paid in euros to represent Pantene hair products for Procter & Gamble Co., and similarly for her contract with Dolce & Gabbana to promote it’s The One perfume. The dollar has lost 34% of its value since 2001, and dollar reached its lowest level against the sterling since 1981 in early November.

Ms Bündchen’s agent has denied the stories, but even if they were true, her client would not have been the first prominent public figure to bet against the dollar—Warren Buffet has been vocally bearish on the dollar in October, albeit under much less attention from the press.

Tangent’s take:

• Does it make any economic sense for someone based in NYC to not accept US dollars?

• If everyone is betting against the US dollar, does it really matter that it’s value keeps on sliding?

• If everyone is betting against the US dollar, shouldn’t it have weakened to the point it can’t get any weaker?

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Amazingly, picture is available on Wiki Commons. ie. free to use.

And the Oscar--er, Nobel goes to...

The Nobel Peace Prize was shared by Al Gore and the UN’s Intergovernmental Panel on Climate Change (IPCC) for their efforts to raise awareness on climate change.

The IPCC was established in 1988, by the World Meteorological Organization and the United Nations Environment Programme. It is tasked with evaluating the risk of climate change due to human activity. Mr Gore’s film on global warming, ‘An Inconvenient Truth’, won an Oscar earlier this year, and was a box-office hit. It had also seen the headlines recently when a British judge criticised it for being alarmist and containing errors.

In related news, Mr Gore’s fund management company set up with David Blood – Generation Investment Management – has agreed to cooperate with Kleiner Perkins Caufield & Byers, a venture capital firm, to invest in areas such as alternative energy companies. This is seen as a further attempt to combat climate change.

Tangent’s take:

• A Nobel for being famous for talking about climate change? Really?

• Although governments have been touting the importance of fighting climate change, much of the investments needed has been left to the private sector. Perhaps Blood and Gore (a much better name for a fund, in Tangent’s view) may start a new trend in directing private investments towards green industries?

• Even thought there is still debate on the exact scientific consequences of climate change, the economic effects are real – see Tayyibah Arif’s piece on pasta price fluctuations

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Please add or edit as you see fit, especially with the 'Tangent's Take' section.

Picture of earth is in the public domain. Pictures of the Nobel Prize are NOT, hence, why the earth. And also because it's prettier.