UNUnited Nations Economic Commission for Europe

Press Release


Geneva, 2 May 2002


Russia: an engine of growth for the CIS

UNECE releases its Economic Survey of Europe, 2002 No. 1

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 and internationally.

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 this period.

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 GDP.

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






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Ref: ECE/GEN/02/10