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Can the Russian Economy Keep On Growing?

About the Author: Philip Hanson

Philip Hanson is Emeritus Professor at CREES, University of Birmingham, having recently been the Centre's Director. He has worked in universities and other organisations throughout the world. His career began in the Treasury. Hr later worked in the FCO as Senior Research Officer. He served as First Secretary in HM Embassy, Moscow in 1971.

His books include: Trade and Technology in Soviet-Western Relations, 1981; (with Keith Pavitt), The Comparative Economics of Research Development and Innovation in East and West: A Survey, 1987; Western Economic Statecraft in East-West Relations: Embargoes, Sanctions, Linkage, Economic Warfare, and DZtente, 1988; From Stagnation to Catastroika, 1992; (co-edited with Michael Bradshaw), Regional Economic Change in Russia, 2000; The Rise and Fall of the Soviet Economy, 2003. He has also published articles in Europe-Asia Studies, European Economic Review, Post-Communist Economies, Problemy prognozirovaniya, Economy and Society and elsewhere, as well as newspaper articles in the Financial Times, Independent, and Times.

His recent work has been on regional patterns of economic change in post-communist Russia and on the economic history of the Soviet Union 1945-91. He is currently working on Russia-EU economic relations and on contemporary Russian economic policy. Professor Hanson serves on the Editorial Board of the CRCE journal, Post-Communist Economies, and has taken part in several CRCE Conferences.

Read an extract from Can the Russian Economy Keep On Growing?:

I want to start by reminding you although I am sure you don't need reminding that in recent years things have changed very drastically in the Russian economy. Over approximately the past decade we had got very used to poor economic conditions in Russia. I always remember Yegor Gaidar's observation, back when he was Acting Prime Minister, leading the first reform team in the Russian government in the early 1990s. He was asked how things were going to be that year, to which he replied that it was going to be 'an average year worse than last year, better than next year'. That is the way things were at that time. But we have now seen four years of growth. And this is something which, right from the very beginning, some people have had problems interpreting. First of all, I want to say something about the background to that growth what it is that lies behind it - and then I want to look at the doubts that have been raised, particularly in the last six months or so, about the sustainability of that growth, before proceeding to some conclusions.

Compared with the better-performing ex-communist countries of Central Europe Poland, Hungary etc the Russian situation looked extremely depressing for almost a decade, as if the country was going nowhere. The official fall in output (more than 40% between 1989 and 1998) was certainly larger than the real fall in output, but there is no way of knowing the true dimensions of the fall: at all events, it was substantial.

The financial crisis in 1998 forced a massive devaluation, going very quickly from about 6 roubles to the dollar to about 25 to the dollar, then down a bit more and now hovering around 31 to the dollar. This was a massive devaluation that was forced, not a deliberate policy measure. It was followed fairly soon afterwards by a rise in world oil prices.

But those events, particularly the devaluation, really kick-started the recovery in the economy. What happened, of course, was that imports became massively expensive, and the dying sectors of the Russian economy the old manufacturing sectors, light industry, food processing, engineering, etc had a chance to produce import substitutes, which, to some people's surprise, they actually managed to do. So there was a recovery in other parts of the economy outside the natural resource sector in Russia's case, oil, gas and metals which had been coping even in the long, long decline that had been taking place. There was a general growth in incomes and a growth in profits, and these in turn fed through to the growth in consumption and the growth of investment in the economy that we have seen recently.

In the last couple of years, the drive in terms of demand was coming from consumption and investment. If you take the last four years, up to the end of last year, you have an average growth rate allowing for what I expect to be the final revision of last year's GDP growth figures, which I think will probably come out at 4.4 per cent allowing for that, there has been a 5.9 per cent average annual over the past four years, which is not bad going at all. Combined with a budget surplus in recent years not just in the federal budget but an overall government surplus balance, with inflation higher than intended but coming down consumer inflation was 15 per cent last year. At the same time, debt was reduced, so that public external debt is down to about 34 per cent of GDP, which is a low figure by past standards. Money supply has been reasonably well controlled, with a broad money supply growth that is not unreasonable. As far as the foreign exchange rate is concerned, there have been lots of worries about what would happen when the rouble appreciated against Western currencies in real terms that is, adjusting for inflation on both sides. People usually focused on the rouble rate against the dollar. But in fact, in the past year, according to some of the calculations I have seen, the weighted average of rouble exchange rates against both the dollar and the euro implies that the real exchange rate of the rouble has actually declined slightly, by just over two per cent.

In short, a lot of things are really going well.

Now, what's changed? Why such a change in performance? Obviously, the devaluation and the rise of oil prices both helped. Oil prices still matter enormously to the Russian economy. It is not too surprising that even recently, whenever there has been a brief dip in oil prices, the Russian economy as a whole stutters, but other things have changed as well. Many of these are too obvious to be worth much discussion, but let me just tick them off: Putin replacing Yeltsin as President has increased political stability; having a more or less compliant Duma has helped the process of reform legislation going through, and by almost universal consent there has been a change in the way that business is run. Obviously I do not talk to a representative sample of people doing business with and in Russia, but I do talk to a number, and in doing this, I hear a lot of the same sort of stories indicating that the way in which business is conducted in Russia has been changing, and changing for the better. That is something I shall come back to.

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