10 Russia Current


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10 Russia Current

  1. 1. The Economist forecast for Russia Russia Today: Current Issues Key indicators 2008 2009 2010 2011 2012 2013 Real GDP growth (%) 5.6 -3.0 2.0 4.0 4.4 4.6 Consumer price inflation (av; %) 14.1 13.5 10.4 8.5 7.4 7.0 Budget balance (% of GDP) 3.6 -8.0 -3.0 -1.3 -0.8 -0.7 Current-account balance (% of GDP) 5.9 -2.2 -0.6 -0.5 -1.0 -1.5 Central bank refinancing rate (end-period; %) 13.0 12.0 11.0 9.0 8.5 8.0 Exchange rate Rb:US$ (av) 24.9 36.0 36.7 36.8 36.9 37.1 Exchange rate Rb:€(av) 36.5 48.1 50.8 52.1 53.4 54.5
  2. 2. Real Currency Appreciation <ul><li>Productivity growth in exporting sector (oil) leads to </li></ul><ul><li>higher wages in the whole economy and to higher prices for non-tradables (hair-dressers)  inflation </li></ul><ul><li>2) Diffusion of rents from productivity gains in exporting sector to the rest of economy  higher living standards </li></ul><ul><li>( Balassa-Samuelson effect ) </li></ul><ul><li>Real appreciation of ruble 2000-08: </li></ul><ul><ul><li>Ruble inflation 12% </li></ul></ul><ul><ul><li>Dollar inflation 3% </li></ul></ul><ul><ul><li>Stable exchange rate, Rb 28 = $1 till 2008 </li></ul></ul><ul><li>Consequences: </li></ul><ul><ul><li>Imported goods more affordable </li></ul></ul><ul><ul><li>Export industries hurt by </li></ul></ul><ul><ul><li>lower international demand </li></ul></ul><ul><ul><li>Loss of terms-of-trade advantage </li></ul></ul><ul><ul><li>May slow down economic growth </li></ul></ul>
  3. 3. “ After the big bang” by Hoff and Stiglitz <ul><li>“ Rule of law”: </li></ul><ul><li>enforcement of property rights in a reasonably neutral and predictable way </li></ul><ul><li>In 6 economies where property rights are most insecure, official GDP contracted by > 30% </li></ul>
  4. 4. How to Exploit Energy <ul><li>Energy (and resources) key to Russia’s role </li></ul><ul><ul><li>Russia should focus on its abundance, but how? </li></ul></ul><ul><li>Two approaches </li></ul><ul><ul><li>Top-down </li></ul></ul><ul><ul><ul><li>Oil is a strategic asset </li></ul></ul></ul><ul><ul><ul><li>Secrecy, government direction, control of pipelines </li></ul></ul></ul><ul><ul><ul><li>View of energy as rent to be exploited </li></ul></ul></ul><ul><ul><ul><li>Energy as foreign policy resource </li></ul></ul></ul><ul><ul><ul><li>Useful for propping up dinosaurs </li></ul></ul></ul><ul><ul><li>Bottom Up </li></ul></ul><ul><ul><ul><li>Market driven, private ownership </li></ul></ul></ul><ul><ul><ul><li>Maximize number of actors involved </li></ul></ul></ul><ul><ul><ul><li>Competition </li></ul></ul></ul><ul><ul><ul><li>Share in world technology </li></ul></ul></ul><ul><ul><ul><li>Develop complementary industries </li></ul></ul></ul><ul><ul><ul><li>Rule of law, functioning institutions, less corruption </li></ul></ul></ul>
  5. 5. Russia’s Future Role in the World Economy <ul><li>Strong commodity demand is good for Russia </li></ul><ul><li>Russia needs FDI to exploit its energy resources </li></ul><ul><ul><li>But political uncertainty needs to be reduced </li></ul></ul><ul><li>Russia needs to choose the correct approach </li></ul><ul><li>Putin’s dilemma </li></ul><ul><ul><li>State control of energy provides state power </li></ul></ul><ul><ul><li>Market control can double GDP </li></ul></ul>
  6. 6. Legal system <ul><li>Democratic market-oriented laws exist </li></ul><ul><li>Institutions to enforce them are weak </li></ul><ul><ul><li>No good guarantees of ownership </li></ul></ul><ul><ul><ul><li>1990s: contracts enforced by thugs with guns </li></ul></ul></ul><ul><ul><ul><li>2000s: more businesses turn to courts to resolve disputes </li></ul></ul></ul><ul><ul><li>Police: under-funded, under-staffed, corrupt </li></ul></ul><ul><ul><li>Crime and corruption is costly for businesses </li></ul></ul><ul><ul><li>Inhibits investment, domestic & foreign </li></ul></ul><ul><li>Judges and lawyers </li></ul><ul><ul><li>poorly paid, vulnerable to corruption </li></ul></ul><ul><ul><li>no independent judiciary system - prosecutor's office, courts & police are subordinate to Kremlin </li></ul></ul><ul><li>Merger of businesses and authorities </li></ul><ul><ul><li>Every bureaucrat represents business interests </li></ul></ul><ul><li>No public control over secret services and law enforcement </li></ul><ul><li>http://www.transparency.org/news_room/in_focus/2008/cpi2008/cpi_2008_table </li></ul>Russia’s 2005 corruption ranking by Transparency International: 126 of 159 countries
  7. 7. Russian Trade Share of CIS countries in trade: 17% Share of EU in trade: 52% Main exports 2007      % of total        Main imports 2007        % of total    Oil, fuel&gas    65.2        Machinery&equipment       43.9    Metals    13.5        Chemicals        12.0    Chemicals    5.5        Food/agricul prod       11.7    Machinery/equipment    5.0        Metals        6.6    Major markets 2007    % of total        Major suppliers 2007        % of total    Netherlands    12.1        Germany        11.9    Germany    9.6        China        10.9    Italy    7.8        Ukraine        6.0    China    5.0        US        4.2 
  8. 8. <ul><li>Factors that restrain demand for imports: </li></ul><ul><ul><li>import duties , 18% value-added tax and excise taxes on automobiles, alcoholic beverages, aircraft </li></ul></ul><ul><ul><li>import licensing regime (alcohol) </li></ul></ul><ul><ul><li>frequent unpredictable changes in customs regulations </li></ul></ul><ul><ul><li>unofficial transit payments </li></ul></ul><ul><ul><li>Getting a lorry-load of goods from Armenia to Russia means paying $2,000 for “security”. </li></ul></ul><ul><ul><li>Half of the price of shipping a container from Rotterdam to Georgia = unofficial transit payments through Georgia. </li></ul></ul><ul><ul><li>Clearing customs in Tajikistan requires 18 bits of paper from different government agencies. </li></ul></ul>
  9. 9. &quot;BRIC“ emerging markets <ul><li>preferred markets for growth in the 21st century </li></ul><ul><ul><li>meant to grow faster </li></ul></ul><ul><ul><li>turned out to be more volatile, less liquid, dangerous </li></ul></ul><ul><li>250 Russian stocks are listed locally or abroad </li></ul><ul><ul><li>significant premiums for the country political risk, corporate governance, size and </li></ul></ul><ul><ul><li>currency risks </li></ul></ul><ul><ul><li>http://www.rts.ru/en/ </li></ul></ul><ul><li>IPOs: Russian companies prefer to list in London </li></ul><ul><ul><li>insurance against political risks or unauthorized claims from state officials </li></ul></ul><ul><ul><ul><li>authorities less willing to pursue companies with foreign investors </li></ul></ul></ul><ul><ul><li>hard to raise more than $500m in Russia </li></ul></ul><ul><ul><ul><li>shortage of institutional investors, - private pension funds & insurance companies - able and willing to buy long-term instruments </li></ul></ul></ul><ul><ul><ul><li>savings rate among Russians 13% of income </li></ul></ul></ul><ul><ul><li>greater recognition and visibility </li></ul></ul><ul><ul><li>desire obtain a market valuation of their worth </li></ul></ul>
  10. 11. 20% starting 2009
  11. 13. Intellectual property rights <ul><li>Copyrights </li></ul><ul><ul><li>Pirated are 80% DVDs, 60% of CDs </li></ul></ul><ul><ul><li>2008: allofMP3.com shut down, US companies dropped charges </li></ul></ul><ul><li>Trade mark violations </li></ul><ul><li>Counterfeiting </li></ul><ul><ul><li>Consumer goods, tobacco, alcohol </li></ul></ul><ul><ul><ul><li>Smirnoff vodka owned by US United Distillers and Vintners </li></ul></ul></ul><ul><ul><ul><li>Phillip Morris </li></ul></ul></ul><ul><ul><li>>25% products are counterfeits </li></ul></ul>
  12. 14. Intellectual property rights <ul><li>http://www.wipo.int </li></ul><ul><li>http://www.cipr.org </li></ul><ul><li>“ Underrated public policy priority” </li></ul><ul><ul><li>Weak laws and penalties, no criminal convictions </li></ul></ul><ul><ul><li>Need stricter standards for WTO membership </li></ul></ul><ul><li>Deliberate inaction by Russian government </li></ul><ul><ul><li>Crackdown is costly </li></ul></ul><ul><ul><li>Benefits? </li></ul></ul><ul><ul><li>who is hurt? </li></ul></ul><ul><ul><ul><li>foreign firms, Russian firms, consumers, government? </li></ul></ul></ul>
  13. 15. Demographic Crisis <ul><li>Fertility rate </li></ul><ul><ul><li>1986-7: 2.19 births per woman </li></ul></ul><ul><ul><li>2001-2: 1.3 births per woman </li></ul></ul><ul><li>1981 – 2001: </li></ul><ul><ul><li>30% drop in marriage rates </li></ul></ul><ul><ul><li>30% increase in divorce rates </li></ul></ul><ul><li>Challenge of shrinking population: </li></ul><ul><ul><li>post-war “baby boom” generation retires - workforce drops – firms need employers – GDP falls </li></ul></ul><ul><li>Measures: plan $140bn spending over 20 years on </li></ul><ul><ul><li>financial support for families with > 1 child </li></ul></ul><ul><ul><li>education programs to reduce abortions and alcohol-induced deaths, car accidents and unhealthy lifestyles </li></ul></ul><ul><li>Low life expectancy </li></ul><ul><ul><li>Tobacco, vodka, poor diet </li></ul></ul><ul><ul><li>Environmental pollution </li></ul></ul><ul><ul><li>HIV/Aids </li></ul></ul><ul><ul><li>Poor health care </li></ul></ul><ul><ul><li>Stress of transition – unemployment, loss of status </li></ul></ul><ul><ul><li>Road accidents </li></ul></ul>
  14. 16. Male Life Expectancy: Russia vs LDC’s
  15. 17. Moscow vs. Rest: Life Expectancy
  16. 18. Foreign Direct Investment in Russian Industry
  17. 19. Investment <ul><li>FDI in Russia $16.7 bn in 2005, 3% of GDP </li></ul><ul><ul><li>Poland: 5% of GDP </li></ul></ul><ul><ul><li>Coca-Cola: purchased St.Petesburg juice company for $600 mil </li></ul></ul><ul><ul><li>Heineken: purchased Russian companies, $750 mil </li></ul></ul><ul><ul><li>Toyota and Volkswagen </li></ul></ul><ul><ul><li>Nestle, total investment in Russia $500 mil </li></ul></ul><ul><li>Russian companies increased foreign investments </li></ul><ul><ul><li>Lukoil owns >2,000 gasoline outlets in US </li></ul></ul><ul><li>2005: net capital inflow $300 mil </li></ul><ul><ul><li>Net outflow by individuals and private non-financial companies </li></ul></ul><ul><ul><li>Inflow by banks and state-owned companies </li></ul></ul><ul><li>Domestic investment financed not through bank loans but from retained profits  slower investment growth </li></ul><ul><ul><li>Problem: Weak banking system </li></ul></ul>
  18. 20. Problems foreign direct investors in Russia <ul><li>Starting with the most pressing: </li></ul><ul><li>Inadequate and ever changing tax law </li></ul><ul><li>Property and creditor rights </li></ul><ul><li>Customs </li></ul><ul><li>Risk of political change </li></ul><ul><li>Macroeconomic instability </li></ul><ul><li>Weak banking sector </li></ul><ul><li>Russian accounting system </li></ul><ul><li>Corruption </li></ul><ul><li>Risk of expropriation </li></ul><ul><li>Harassment from federal and local government </li></ul><ul><li>Payment arrears from clients </li></ul><ul><li>Problems with workforce or management </li></ul><ul><li>Russian suppliers </li></ul><ul><li>Crime, racket </li></ul><ul><li>Barter </li></ul>
  19. 21. Investment Rates in Selected Economies, International Prices
  20. 22. <ul><li>Chechnya: separatist rebellion, 1994-2006 </li></ul><ul><ul><li>Putin’s tough line popular among Russians </li></ul></ul><ul><li>Support US-led campaign against international terrorism </li></ul><ul><li>Opposed US action against Iraq and Iran </li></ul><ul><li>Xenophobic nationalism </li></ul><ul><ul><li>Racism against Caucasians, Central Asians and Africans </li></ul></ul>Other Concerns
  21. 23. Climate Change <ul><li>Rising Sea Levels </li></ul><ul><li>Melting Permafrost </li></ul><ul><li>Increased Precipitation </li></ul><ul><li>Rising Sea Levels </li></ul><ul><li>Russia’s total coastline = 37,653km </li></ul><ul><li>Northeast corner of Russia is losing 15 – 18km a year. </li></ul><ul><li>Will require villages and settlements to move. </li></ul>
  22. 24. Impact of Climate Change: Melting Permafrost <ul><li>More than ½ permafrost area can thaw by 2050 </li></ul><ul><li>Melting permafrost released methane and greenhouse gases. </li></ul><ul><li>Houses and building collapse </li></ul><ul><li>Roads and infrastructure more expensive to maintain. </li></ul><ul><li>Arctic </li></ul><ul><ul><li>Permafrost boundary will move north. May have big implications for oil, gas, and other investment projects. </li></ul></ul><ul><li>Tundra </li></ul><ul><ul><li>Tundra will gradually shrink. As a result, millions of animals will loose up to 50% of their habitat. </li></ul></ul><ul><li>Taiga </li></ul><ul><ul><li>Warmer. Less energy costs for habitants. </li></ul></ul>
  23. 25. Impact of Climate Change: More Precipitation <ul><li>20% increase in the winter. </li></ul><ul><li>10% increase in the summer. </li></ul><ul><li>Floods could happen </li></ul><ul><li>Greater climate instability will cause more rains near Caspian deserts, and more drought years strong winds and dust storms. </li></ul>
  24. 26. Climate Impacts Industries - Oil <ul><li>Pros </li></ul><ul><li>Easier to drill for oil with melting permafrost. </li></ul><ul><li>Cons </li></ul><ul><li>Expensive underpinning of refineries. </li></ul><ul><li>Increase costs of pipeline construction because extensive trenching needed to combat the effects of coastal instability and erosion. </li></ul><ul><li>Increase costs of oil extraction. </li></ul>
  25. 27. Industries - Timber <ul><li>Pros </li></ul><ul><li>Easier to get to forests with warming temperatures. </li></ul><ul><li>Extended seasons will allow for additional harvesting. </li></ul><ul><li>Cons </li></ul><ul><li>Ecosystems will not have time to adapt to the changes causing outbursts of forest diseases. </li></ul>
  26. 28. Services - Transportation <ul><li>Pros </li></ul><ul><li>Melting of the Arctic will prolong both the Northern Sea and Siberian river navigation seasons. </li></ul><ul><li>New opportunities for shipping of resources. </li></ul><ul><li>Cons </li></ul><ul><li>Improved navigational aids will be needed. </li></ul><ul><li>Harbor facilities will have to be developed. </li></ul><ul><li>New road infrastructure will need to be constructed. </li></ul><ul><li>Maritime laws will need to be adapted to increased shipping. </li></ul>
  27. 29. Services - Tourism <ul><li>Pros </li></ul><ul><li>With the increase in temperatures Russia could see an 30% increase in tourists. </li></ul><ul><li>Cons </li></ul><ul><li>Will require adequate infrastructure to be developed. </li></ul><ul><ul><li>Runways </li></ul></ul><ul><ul><li>Roads </li></ul></ul><ul><ul><li>Buildings </li></ul></ul>
  28. 30. Regional Income Disparities Real Incomes in Some Russian Regions
  29. 31. Internal Migration in Russia and the U.S. Percentage of total population that moved from one oblast/state to another each year <ul><li>Problem is lack of labor mobility </li></ul><ul><ul><li>Too much industry in the wrong places </li></ul></ul><ul><ul><li>Very important due to lack of capital mobility </li></ul></ul>
  30. 32. Economic Priorities <ul><li>Vulnerable to swings in world prices of oil, natural gas, metals, timber </li></ul><ul><ul><li>High-technology & consumer goods = small part of economy </li></ul></ul><ul><ul><li>Diversifying the economy away from commodity dependence </li></ul></ul><ul><ul><li>Innovation </li></ul></ul><ul><li>Need more investment </li></ul><ul><ul><li>Massive lending of foreign banks to large oil and gas companies </li></ul></ul><ul><ul><li>Smaller companies and other industries short of cash </li></ul></ul><ul><li>Poor infrastructure in regions </li></ul><ul><ul><li>South Russia has better climate but high corruption </li></ul></ul><ul><ul><li>Poor medical care </li></ul></ul><ul><ul><li>Bad roads </li></ul></ul><ul><li>International business </li></ul><ul><ul><li>Forbes Best Countries for Business Rank </li></ul></ul><ul><ul><li>Reducing political uncertainty </li></ul></ul><ul><ul><li>Reducing the state's role in the economy </li></ul></ul><ul><li>Travel restrictions for foreigners </li></ul><ul><li>Poverty: 20% of population </li></ul><ul><ul><li>monthly income under 1,000 rubles ($35) </li></ul></ul>