Pipeliners

05-07-2008 - MOSCOW. (RIA Novosti economic commentator Oleg Mityayev) - Russia's new president, Dmitry Medvedev, has inherited many economic problems, such as Russia's dependence on raw materials, monopolies, red tape and corruption, which are spurring prices and hindering economic development. On the other hand, he has a powerful instrument of tackling these problems, oil prices, which have soared to $120 per barrel. But Medvedev will also have to deal with other, no less formidable economic challenges.
Inflation Russia seems to have been developing quite well despite this chronic problem. However, the growth of prices accelerated last year and reached nearly 12% compared with 9% in 2006 and the planned 8.5% in 2007. The Russian government and Central Bank hope to stop inflation at 10% in 2008, although it has already reached 6.3% in the first four months. Experts predict yearend inflation at between 12% and 18%, which will discourage investment. Vladimir Putin pointed to a decrease in the fund for reforming the housing and utilities sector because of growing inflation, but the problem is much more serious. Investments are difficult to plan and make when prices keep rising. The outgoing government failed to draft a comprehensive anti-inflation program, but on May 6, its last day, it approved a schedule for a rapid growth of natural monopolies' tariffs until 2011, which will further stimulate inflation.
Commodities dependence Oil prices have soared to $120 per barrel and are unlikely to fall very low, even though economic growth in the United States and Europe has slowed down, reducing the demand for energy. Under a pessimistic scenario, the stagnation of the U.S. economy would last two years and spread to Europe, bringing oil prices down. However, the Russian government's economic advisers point to long-term macroeconomic stability in Russia, referring mainly to "safety bags" created mostly with export revenues, notably the Central Bank's international reserves and the reserve and national welfare funds. But if oil prices plummet, although this is highly unlikely, these safety bags will suffice only for a year or two. After that, the ruble will start losing weight, along with people's real incomes. Worse still, Russia's manufacturing sector will lose contracts because investment programs will be curtailed due to a fall in export revenues. In this event, the Russian economy will first overheat and then its growth will almost come to a standstill.
Banking crisis Unlike the hypothetical decline in oil prices, the likelihood of a banking crisis is growing quickly because Russia is linked to the global economy not only through commodities prices, but also through capital flows. In the past few fat years, Russian banks have taken out a huge amount of relatively cheap loans in the West. But the banking crisis currently underway there and subsequent increase in commercial interest on loans have greatly complicated Russian banks' ability to refinance debts. They are now denied loans abroad, or offered them at a high interest. Short-term loans are refinanced by the Central Bank's financial injections, but long-term refinancing will already become a serious problem this year. The Central Bank is helping banks by injecting money into the market, but it is also complicating their life by increasing its refinance rate. The Russian banking community has already proposed using the National Welfare Fund, even if partially, to solve the long-term refinancing problem.
Demographic problem The shortage of workforce is becoming a huge problem in Russia. Industries lack qualified personnel, and the number of agricultural workers is plummeting because people are moving to the cities. At the same time, prices of agricultural products have been growing rapidly, spurring inflation in 2007 and 2008. Russia can no longer offer cheap labor, which had been its advantage over industrialized countries, because people's incomes are growing. Therefore, a key task for the government is to train personnel and attract skilled labor migrants.
Modernization There is a remedy for the chronic disease of the Russian economy and a way to reply to global challenges. The country must invest petrodollars in new technologies and transportation infrastructure to ease its dependence on raw materials and stop the fear of a fall in oil prices. With high technologies and reliable infrastructure, Russia will be able to maintain high GDP growth rates even despite a relatively small, compared with Asian countries, but skilled and economically active population. Workers in high-tech sectors will receive high wages, but gains will be also immense because of high labor productivity. The successful development of high-tech sectors is impossible without increasing competition. Therefore, the government and state officials must give up their excessive economic functions and powers. Competition is the main anti-inflation tool in a market economy. Russia has created the initial conditions for attaining these goals. It has set up development institutions, such as the Russian Venture Company and the Bank for Development, and has been working for over a year on a concept of socio-economic development until 2020, which provides for innovation-driven progress. However, the development institutions are not yet working to capacity, and the outgoing government has not presented the final wording for the Concept 2020. Dmitry Medvedev's economic policy spotlights four I's - institutions, infrastructure, innovation and investment. This gives hope that the new president will see the challenges facing Russia better than the outgoing administration and government.