The recent strong recovery in the Russian economy raises the question as to
whether and to what extent it can serve as a growth engine for the other economies
in the region: in the first place, for the neighbouring CIS countries, but
also for some of the other transition economies*. This is one of the questions
addressed in the release of the United Nations Economic Commission for Europe
(UNECE) first issue of the 2002 Economic Survey of Europe.
The Russian economy has the potential to be a regional growth engine
An economy's potential as a regional growth engine is determined by two main
factors: its relative size and the intensity of its trade links with the other
economies in the region. In terms of its size, as reflected in the absolute
level of GDP measured at purchasing power parities, Russia's economy is about
double the size of the rest of the CIS taken as a whole and about equal to
the aggregate of eastern Europe (including the Baltic states). The size of
Russia's economy is sufficiently large for it to exert a perceptible external
effect on the rest of the transition economies.
Russia's economic links with the rest of the CIS are important and for some
of these countries it is the largest trading partner. The recovery in Russia's
domestic demand in 2000-2001 has been mirrored by an even stronger growth
of intra-CIS trade. The surge in exports to Russia has been an important factor
for the acceleration of growth in many of its neighbouring countries. Although
eastern Europe's trade links with Russia have weakened, it still exerts a
considerable influence on some of these economies, as demonstrated by the
strong aftershocks of the 1998 crisis.
. and is growing strongly thanks to booming oil exports .
In less than four years after a devastating financial crisis, Russia's economy
has changed dramatically for the better. Three years of strong growth (in
1999-2001 GDP grew at an average annual rate of 6.5 per cent) have improved
the welfare of the population and boosted public confidence, both domestically
There is now a broad understanding that this period of growth was largely
driven by two main factors: the sharp real depreciation of the rouble after
the August 1998 financial collapse (which triggered import substitution, giving
a boost to local producers) and the windfall gain in export revenue due to
the upturn in world commodity prices and, especially, of oil.
Crude oil is Russia's major export item: in recent years its share in the
value of total exports has ranged between 17 and 24 per cent. Between 1998
and 2000, Russia's monthly revenue (in dollars) from oil exports roughly tripled,
largely thanks to the upturn in oil prices but also to a rise in export volumes
(chart 3.1.10). Increasing the volume of exports was an important element
in Russia's strategy to profit from the favourable external environment in
The development of "real revenue from oil exports" in the period
1996-2001 (Chart 3.1.11) expressed in constant domestic prices of January
1995 (deflated by CPI) reveals the significant gains for Russia in the period
after 1998. If the real revenue from oil exports in the period 1999-2001 are
compared with the average annual real oil revenue during 1996-1998, the extra
real oil revenue in 1999 amounted to approximately 2.7 per cent of GDP; in
2000 it was roughly 6.3 per cent of GDP; and in 2001 around 4 per cent of
The real revenue from oil exports is determined by three main variables:
the volume of exports, the international price of oil and the real exchange
rate. In 1999, the increase in revenue was due in almost equal proportions
to the rise in oil prices and the change (depreciation) in the real exchange
rate. In 2000, the strongest boost to real oil revenue came from the surge
in oil prices. But the situation changed in 2001: oil revenue decreased in
real terms from 2000 and it was only the increase in export volume that made
a positive contribution.
. and the acceleration of reforms.
The positive changes in the Russian economy are reflected not only in the
strength of the current recovery but also in the government's effort to break
with the stop-go policies of the past and to accelerate systemic transformation
and market reforms.
Probably more sweeping and comprehensive legislative and regulatory reforms
were introduced in Russia in 2001 than in any other year since the start of
economic transformation. The changes in the tax code reduce the level of taxation
and seek more transparency and uniform treatment of taxpayers. The pension
reform aims to transform the present pay-as-you-go into a three-pillar system.
The long-awaited Land Code allows the free sale of land in residential areas.
Many administrative procedures were simplified thus reducing bureaucratic
intervention in the economy. A new customs code was introduced in preparation
for WTO accession. The new labour code envisages further liberalization of
the labour. The bankruptcy law streamlines court procedures, providing better
protection of creditors' rights. A special law to combat money laundering
was also voted by the legislature.
Most of these reforms are marked by the spirit of economic liberalization:
they are aimed at fostering entrepreneurship and developing the infrastructure
of the market economy in Russia. It can be expected that they will contribute
to higher levels of economic activity in the future.
But strong reliance on oil export is a mixed blessing .
The strong impact of oil revenue on Russia's macroeconomic performance is
illustrated in charts 3.1.13 and 3.1.14. According to different estimates,
ceteris paribus, a change in world oil prices by one dollar is likely to be
associated with a 0.4 to 0.6 percentage point change in Russia's GDP and with
a change in fiscal revenue amounting to $0.8-$0.9 billion.
The heavy reliance on oil exports, however, is a mixed blessing for the Russian
economy. In times of boom, as seen during the past three years, it may provide
a welcome boost to the economy; but things may go into reverse when both prices
and demand weaken. On the other hand, long booms based on oil exports carry
risks due to the dangers of the "Dutch" disease.
If Russia is to follow the path of industrial modernization, it will have
to aim to gradually reduce its reliance on oil exports. However, the short-term
outlook still heavily depends on the performance of the oil sector. On balance,
given the current trends, real oil revenue in 2002 is likely to remain sufficiently
high to continue to provide a positive impulse to the economy.
. so further reforms are needed to strengthen the Russian economy.
Russia's growth prospects in the short to medium run appear to be moderately
favourable, provided that it follows prudent macroeconomic policies and continues
with its programme of reform. Given the large current account surplus, the
external balance does not seem to be a constraint even if domestic absorption
grows faster than output for some time to come. Thus, there are good prospects
for Russia continuing to be a regional engine of growth despite a likely slowdown
in 2002. As for the longer run, the prospects for growth will depend on the
successful restructuring of the Russian economy, and especially on the success
or failure of efforts to transform it into a knowledge-based economy whose
exports are not dominated by primary commodities but by technology intensive,
high value added manufactured goods.
* Eastern Europe: Albania, Bosnia and Herzegovina, Bulgaria , Croatia, Czech
Republic, Hungary, Poland, Romania , Slovakia, Slovenia, The former Yugoslav
Republic of Macedonia, Yugoslavia, Baltic states: Estonia, Latvia, Lithuania,
CIS : Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Republic
of Moldova, Russian Federation, Tajikistan, Turkmenistan, Ukraine, Uzbekistan
For further information please contact:
UNECE Economic Analysis Division
Palais des Nations
CH - 1211 Geneva 10, Switzerland
Tel: +41(0)22 917 24 79
Fax: +41(0)22 917 03 09
Web site: http://www.unece.org/ead/ead_h.htm