Introduction

The evaluation of the current situation and prospects of the contemporary Russian economy in the Russian and Western economic literature and in the activities of the international economic organizations is complicated by two factors. First, Russian economic statistics remain unreliable. Second, the overwhelming majority of researchers make forecasts of Russian long-term economic development based on the results of the last few years, at the most of the past 10–20 years. Furthermore, these forecasts are based on purely economic factors, without taking account of the human potential and moral condition of the society.

My goal is to evaluate the prospects for Russian economic development on the basis of reliable economic statistics and on the main features of its economic development over the past three hundred years, for which period there are more or less reliable macroeconomic statistics. In the economic development of Russia in this period one can observe some regularities that enable one to forecast the future development of Russia and its economic policy. I attempt also, to the extent that is possible, to take account of the human potential and moral condition of contemporary Russian society.

Contemporary Russian Macroeconomic Statistics and the Need for Alternative Estimates of the State of the Russian Economy

Despite the fact that the Russian statistical service since the beginning of the 1990s has declared its transition to international statistical standards, Russian macroeconomic statistics remain unreliable.

Introduction

A growing body of empirical research suggests that countries endowed with great natural resource wealth tend to lag behind comparable countries in terms of long-run real GDP growth, a finding that has given rise to widespread debate about a so-called ‘resource curse’ or a ‘paradox of plenty’. Explanations of the resource curse focus on a wide range of economic and political factors. The most prominent lines of argument emphasize the impact of resource wealth on the competitiveness of other tradables (‘Dutch disease’); the impact of commodityprice volatility, particularly on fiscal revenues; the interaction of commodity-price volatility with financial market imperfections, which can lead to inefficient specialization; and the impact of resource wealth on the quality of institutions, political processes and governance. Significantly, the major economic explanations of resource-exporters' poor growth performance are all, at least in principle, treatable: governments have at their disposal policy tools to mitigate, if not eliminate, such economic hardships as ‘Dutch disease’. The fact that they so often fail to do so suggests that consistent policy failure lies at the root of the problem.

If this is indeed the case, then the most promising approaches to the resource curse are likely to be those relying on political economy explanations, for the key must lie in understanding why resource-based economies are more likely than others to suffer from bad policies. The answer must be that resource wealth somehow distorts their politics in such a way as to produce institutional and policy failures.

Given its economic structure, Russia is bound to remain a heavily hydrocarbondependent economy for some time to come. This reality largely defines the two most important challenges facing Russian policy-makers as they seek to create a framework for sustained growth. These are managing a resourcebased economy successfully and facilitating economic diversification over time. This chapter first looks at the policies and developments that have been underlying Russia's strong post-crisis growth performance, before setting out the policies that Russia—as a resource based economy—would have to follow in order to sustain high growth rates.

The Policies and Developments Underlying Growth

The most important economic policy choice underlying the expansion since 1998 was the adoption of a prudent fiscal stance—in sharp contrast to the pre-crisis period. From 2000 to 2004, federal budgets were drafted to aim for surpluses based on conservative oil price assumptions. This approach not only delivered sizeable surpluses but also a budget that was balanced over the oil price cycle. Simulations show that the federal budget would have remained in rough balance even with oil prices unchanged at USD 19/bl (Urals) throughout the period. Indeed, there would have been only a relatively moderate deficit, not exceeding 2 per cent of GDP, if oil prices had fallen to very low levels (Kwon 2003, Ahrend 2004a). To be sure, fiscal responsibility was facilitated by growing revenues due to favourable terms of trade and strong growth.

Russia is the world's second largest producer and exporter of oil. It is also the largest producer and exporter of natural gas. At times of low world market prices for oil and natural gas, such as 1986–88 (for natural gas 1987–89) and 1998, it experiences economic crises. The balance of payments crisis caused by the low energy prices during the first of these periods contributed to the failure of Gorbachev's perestroika and the collapse of the USSR. The second period of low energy prices was an element in the macroeconomic crisis of 1998 when the exchange rate fell sharply, the government defaulted on its internal debt and was forced to reschedule its external debt, many Russian entities defaulted on their external commitments, and real wages and living standards fell sharply. When prices are high, as in 2004–05, it enjoys a bonanza. The budget is in surplus, public sector salaries are increased and paid on time, there is an enormous surplus on the current account of the balance of payments, foreign exchange reserves shoot up, and living standards rise as the population consumes imported consumer goods and foreign holidays.

Any visitor to Moscow or St. Petersburg in 2005 might have taken it for granted that for Russia high world market prices for energy are an unmixed blessing.

Entrepreneurship and geography are both important factors of economic development. Both have been recognized as posing problems for the long-run growth of the Russian economy. This chapter looks at a possible connection between these two factors.

Stunted Entrepreneurship

Theoretical arguments about the importance of new business creation for economic growth are usually traced back to Josef Schumpeter, and have been further developed in the last 25 years in the context of models of industry evolution. Empirical evidence in support of this proposition has long remained fragmentary, as in Audretsch (2002, pp. 17–27). Comprehensive data on firm dynamics across many countries now make it possible to estimate the contribution of firm births and deaths to the growth of labor productivity, which turns out to be significant (Bartelsman, et al. 2004, pp. 32–44). Unlike the mature market economies, where the annual number of firm births closely matches that of deaths, the more successful Eastern European economies have seen explosive growth in the number of new firms in the 1990s (Bartelsman et al. 2004, pp. 15–17). Indeed, it is argued that their success was, in large part, a result of this growth (McMillan and Woodruff 2002).

Data on firm births and deaths in Russia are not available, and published data on the total number of firms appear to be deeply flawed (Kontorovich 2005, pp. 243–4).

The conjunction of oil and Russia's economic recovery in 1999–2004 links many themes. On 16 September 1998, the Central Bank of Russia mandated repatriation of 50 per cent of foreign exchange revenues. On 31 December 1998, it raised the mandated repatriation rate to 75 per cent. This rule affected primarily fuels and metals exports. In the next several years, world oil prices started to climb. The Central Bank of Russia subsequently reduced the mandated repatriation rate from 50 to 30 to 25 per cent of foreign exchange revenues. Rising oil prices both incited this reduction and compensated for it. Russia's economy shifted from the great contraction in 1992–98 to a partial recovery in 1999–2004. Tables 4.1 and 4.2 provide the background data.

This chapter explains these developments.1 It views Russia's economy as a new economic system that evolved from central planning after liberalization and privatization in 1992 and adapted to the policy shift in September–December 1998. We explore how, under this system, mandated repatriation of export revenues inadvertently became a quasi-fiscal policy, i.e., how it increased tax remittance and reduced subsidy extraction, which, in turn, shifted the economy from contraction to recovery. Oil and other tradeables, primarily natural resources, are important. Without their massive export, the issue of mandated repatriation of foreign exchange revenues would have been irrelevant. Oil on its own, however, was not the crucial factor.

Background

Russia's economy has made a clear and remarkably speedy recovery since the doldrums of 1998, having averaged growth of 6.8 per cent per year. As a result, in 1999–2005 the Russian economy grew by 57 per cent. In spite of the fact that the rate of growth slowed in mid-2004 and early 2005, largely due to a negative change in economic policy, growth numbers remained relatively strong (if not as high as they could be).

So, Russia continues to demonstrate a healthier macroeconomic performance than many other countries. Equally important, is the fact that Russia financed this growth mainly from its own sources, i.e., without any massive inflow of FDI or external borrowing (albeit the latter did increase substantially in 2003 and has kept growing since then). Russia for decades was a country that exported capital. Capital flight was not a phenomenon only of the 1990s. It also took place in earlier decades, although for different reasons and through different channels. From the macroeconomic point of view, continuous support of communist regimes all over the world can be treated as capital flight legitimized by the government. It also means that once Russia starts attracting more FDI, which will finance particular projects, growth rates may be high even in the absence of domestic financing. That said, the well-known task of doubling the GDP in 10 years, as was suggested by the Russian president in 2003, in principle looks achievable.

Earlier versions of most of the chapters in this book were presented at the VIIth World Congress of ICCEES (International Council for Central and East European Studies) in Berlin in July 2005. They have been revised and updated for this publication. It was decided to produce a book on this issue in view of its importance and topicality, the variety of opinions expressed by the authors, and the quality of their contribution to the debate. There are some minor discrepancies between the data cited by various contributors, e.g., for the value of oil and gas exports in particular years. This results from such factors as revision of official statistics as more data becomes available, differences between customs and balance of payments statistics, and the inclusion or otherwise of Belarus as an export destination. The official Russian statistical organization was known as Gosudarstvennii komitet po statistike (State Committee for Statistics – usually abbreviated to Goskomstat) until April 2004, when it was transformed into the Federal'naya sluzhba gosudarstvennoi statistike (Federal State Statistics Services – usually abbreviated to Rosstat). In this book it is generally referred to as Rosstat.

The Hypothesis of ‘Subsidies’ Caused by Price Differences

This chapter analyses some financial aspects of the Russian oil and gas industries under circumstances of a rapid increase in oil and gas export revenues (Table 3.1). It begins by considering the following hypothesis: domestic users of oil are receiving ‘subsidies’, because domestic oil prices have not risen sharply in comparison with world prices. Hence domestic non-energy producers are receiving assistance from the oil and gas industries which helps their international competitiveness and restricts the spread of the Dutch disease in contrast to the depression of the 1990s (Tabata, 2000).

The difference between world market prices and domestic purchasers' prices of crude oil increased from USD 5.2 per barrel in 1998 to USD17.2 per barrel in 2004 (Figure 3.1). We can therefore deduce that domestic users of crude oil received huge subsidies. Since domestic users of crude oil are limited to consumers in the oil-refining industry, prices of petroleum products are examined in the next section.

The Case of Petroleum Products

Curiously, we can see in Figures 3.2 and 3.3 that domestic purchasers' prices are higher than export prices in the case of gasoline and diesel fuel, while in the case of heavy fuel oil, export prices have been higher than purchasers' prices since 1998 (Figure 3.4). This is due to the domestic taxation on petroleum products. Value-added taxes (VAT) and excises have been levied on domestic purchases of petroleum products, while exports to non-CIS countries have been exempted from these taxes.

Abstract:

The IMF has a generally well-thought out governance structure and has been a relatively effective organization able to adopt and implement complex decisions in a cooperative and timely fashion. The constituency system allows reconciling the legitimacy of an almost universal membership with efficient decision-making and collegiality of a not-too-large Executive Board. Weighted voting based on relative economic strength gives confidence to creditor countries to commit financial resources to the IMF, while consensus decision-making confers some protection to the interests of minority groups, making weighted voting acceptable to debtor countries and may lead to better decisions that are easier to implement.

However, a number of important governance deficiencies need improvements. The influence of developing countries in decision-making is less than desirable, given the major role played by the IMF in these countries and the growing importance of such countries in the world economy. Conversely, there is excessive influence of a small group of large industrial countries and a large part of the membership does not actually participate in a meaningful way in the choice of the main officer of the institution.

The topics discussed in this paper to improve the governance of the IMF centre around increasing the independence and accountability of the Executive Board; moderately improving the aggregate voting share of developing countries; making the selection process of the Managing Director more open and transparent; nurturing the consensus decisionmaking approach; improving the efficacy and representation of the constituency system; and upgrading the IMF's role as the main forum for international economic policy cooperation.

Abstract:

The current realities of the global economy are far from being reflected in the Fund's quota structure, with EM economies accounting for the bulk of the under- representation. This paper explores the characteristics of the representation distortions using cross-section regression analysis and the results indicate that economic growth, population, credit rating and dummies for the United States and China explain most of them. To the extent that the faster growing countries are not recognized as such in their IMF quotas, the distortions will continue to increase. Eliminating such distortions requires adjusting the quota structure in line with the relative participation in global economic activity, but to the extent that individual quotas cannot be reduced, a large increase in total IMF quotas would be required. Simulations performed under the assumption that all over-represented advanced economies would accept to reduce their quotas indicate that only about one-half of the rate of increase in total quotas would be required. As an initial step towards the elimination of distortions in representation, rules for a professional IMF board are proposed, including that all Executive Directors (EDs) should be elected and be independent from the influence of a permanent employer, that all countries with a common currency be represented by the same ED and that each chair should represent at least three member countries and at most fifteen. In a scenario using these rules and attempting to preserve the existing regional representation, advanced economies would lose three chairs, emerging markets would gain two and developing countries would gain the remaining one.