18.05.2005
Russia’s Place in the Global Economy
№2 2005 April/June
Leonid Grigoriev

Leonid Grigoriev is chief advisor to the head of the Analysis Center under the Government of the Russian Federation, Head of the World Economy Chair of the World Economy and International Affairs Department of the National Research University–Higher School of Economics.

The global economy is a huge organism living according to its
own laws, and Russia is an important element in it. In 2004,
according to estimates of the International Monetary Fund, the
World Gross Product in current prices and at current exchange rates
reached $40 trillion, or $53 trillion if based on purchasing power
parity. Of this sum, the United States accounts for about $11
trillion, while Europe has a comparable figure. China’s Gross
Domestic Product is $1.25 trillion, and its GDP based on purchasing
power parity is twice as large.

All developed countries belong to the Organization for Economic
Cooperation and Development (OECD), which accounts for about 80
percent of the World Gross Product. China and India account for the
bulk of the remaining part. Russia’s GDP at current exchange
rates  is about $400 billion, and its GDP based on purchasing
power parity is three times larger. These figures are the starting
point for any analysis of Russia’s position in the contemporary
world.

Issues involving the development and modernization of the
Russian economy came to the forefront of public debate as Russia
recorded its fifth consecutive year of economic growth. One of the
problems is the low savings rate in Russia (21 percent of the GDP)
despite the high economic growth rate over the five years. The
savings rate in Russia is lower than in any of its neighbors, and
much less than any in other post-Communist states.

Accelerated growth per se can be achieved through different
models of economic development, at least in the short term. The
growth of GDP has become a topic of discussion amongst
non-economists as well, largely because the Russian government uses
this index to evaluate the growth rate of the Russian
economy.
Many politicians tend to confuse the growth of the GDP – the result
of an increase in employment and productivity – with production
growth. A per capita GDP is an actual indicator of productivity and
economic efficiency: the nation that produces much over a year is
economically developed.

There also exists the notion of purchasing power parity (PPP),
which shows the difference in the standards of living. For example,
if we calculate the cost of the consumer properties of Russian
education, healthcare and housing, it appears that Russians have
consumed almost three times more than the amount calculated in
current prices. According to the IMF’s estimates for 2002, Russia’s
GDP in current prices stood at about $2,500 per capita, but the
same GDP based on PPP reached almost $8,000 a year. In China,
consumption calculated at current exchange rates is $1,000 per
capita, whereas based on PPP it is twice as much – $2,000. In the
United States, the two indices actually coincide, reaching
$36,000.

Of the approximately 180 member countries of the United Nations,
about 70 are very poor. This group of countries is characterized by
the following three criteria: a per capita income of less than $800
a year; high infant mortality and low education standards (social
index); and an unstable economy with problems such as, for example,
single-industry dependence. The Maldives, which has a per capita
income of $2,000, provides a classic example of such a country. At
first glance, it would seem this is a rich country. All its wealth,
however, was based only on the tourist business, which was
undermined first by the war in Iraq and then by the catastrophic
tsunami that struck the region on December 26, 2004. This is what
is called single-industry dependence. For example, a country might
have a quota for tuna fishing, but once it is denied this quota,
its GDP will immediately fall, and the country will find itself
amongst the underdeveloped states.

More than half of all countries in the world (including China
and India) are poor, that is, they have an average per capita
income of less than $1,000. This should not be confused with
absolute poverty when daily per capita income does not exceed one
dollar. Of this sum, 80 cents is spent on consumption. Countries
with a GDP of $300-400 (the same one dollar per day) spend all
their income on food; they must constantly struggle against
poverty. The development of these countries depends on foreign
aid.

The GDP of poor countries ranges from $1,000 to 3,000. Russia’s
GDP, estimated at current exchange rates, could well place it among
the poor countries had it not been for the low ruble rate as
compared with the ruble’s real internal purchasing power.

As for the other post-Soviet countries grouped in the
Commonwealth of Independent States, almost all of them rank amongst
the poor countries, as well as being single-industry dependent.
Using the criteria of the UN Committee for Development Policy,
their per capita GDP is below $800. At the same time, if we take
social indicators (high infant mortality and low educational
standards), the CIS countries do not meet the UN poverty criteria:
they still boast fairly sound public health and secondary education
services inherited from Soviet times.

The GDP of medium-developed countries ranges from $5,000 to
$10,000-12,000. Several post-Soviet countries, many of the Latin
American states and some countries in Africa and Asia have a GDP of
$3,000 to $5,000. The GDP in the East European countries which have
joined the European Union and NATO – Poland, Hungary and the Czech
Republic – stands at $8,000 to $12,000. Slovenia is the richest
East European country with a GDP of $15,000, which puts it on a par
with the medium-developed Spain and Portugal.

The developed countries of Western Europe have an average per
capita GDP of $20,000 to $25,000, that is, ten times more than in
Russia at current exchange rates. Some countries have even higher
GDPs – $35,000 to $40,000.

Also of much importance is the way incomes are distributed
within a society. Any country with a relatively long history will
inevitably have rich elite. In developed countries, the top richest
10 percent of the population account for about 25 percent of
incomes. As a reference point and as a norm, let us take incomes
distribution ratio of 20:40:40, that is, 20 percent of the richest
people, 40 percent of middle-income people, and 40 percent of
relatively poor people. In the developed countries, incomes
distribution ratio is 40:40:20, that is, the richest 20 percent of
the population receive 40 percent of incomes; the 40 percent of
middle-income people receive 40 percent of incomes; and the 40
percent of poor people receive only 20 percent. The lower 10
percent of the population around the world are poor – they account
for a mere two to three percent of all incomes.

The incomes distribution in Russia conforms to the Latin
American model. Instead of the European 20:40:40 ratio, the Russian
population receives incomes at a ratio of 50:35:15. The top 20
percent of the population account for 50 percent of all incomes;
the 40 percent of middle-income people receive 35 percent of
incomes; and the lower 40 percent have only 15 percent of incomes.
Obviously, this is not the best possible social structure.
Moreover, the top 10 percent of the Russian population accounts for
35 percent of all incomes – as much as the top 10 percent of the
population in Argentina or Brazil. This is an alarming analogy,
especially when we consider that the countries of Latin America
with skewed incomes distribution are prone to military coups,
unstable democracies and numerous social problems.
Russia has the Latin American structure of incomes distribution,
although it is located in Europe, enjoys the status of a great
nuclear-armed power, a permanent member of the UN Security Council
and a member of the Group of Eight leading industrialized nations.
Yet Russia’s GDP on average is ten times less at current exchange
rates than that of the developed countries, or is about four times
less if estimated on the basis of the population’s purchasing
capacity. Certainly, Russia is much better off with its $8,000 of
an actual GDP than poor countries in Africa; it is on a level with
Latin America and Eastern Europe. Brazil is the country most
similar to Russia as regards its development level and economic
structure, not to mention the inconvenience of its constitution.
Take any data on Brazil, replace its name with Russia, and there is
almost no difference.

Yet there is a major difference between the two countries – the
lower 40 percent of the Brazilian population are uneducated, and
there is no simple and inexpensive way to change this situation;
therefore, illiteracy and poverty in Brazil are constantly
reproduced. Thus, Russia is closer to Latin America in terms of its
social structure and to Europe in cultural traditions, whereas as
regards its political status, Russia – as the successor to the
Soviet Union which invested huge funds and efforts in the
development of a military arsenal – is a great power and a member
of the UN Security Council.

The gap between wealthy and poor countries of the world is 40 to
60 times. The gap between wealthy and poor regions in Russia is
almost the same, which consequently results in many political,
economic and other challenges to the country. Moscow has already
caught up with Portugal in terms of its Gross Regional Product,
while Russia’s Samara Region is on par with Poland. Meanwhile, the
economies of many other Russian regions are developing very slowly
and are dependent on redistribution from other regions. The
leveling of regional economies cannot be achieved by simply
leveling regional budgets; this can be done by creating conditions
that are conducive to fast growth in the leading regions, which
would then spur growth in other territories. An even regional
development across the board is simply impossible.

The structure of the Russian economy was built in Soviet times
to meet – figuratively speaking – the needs of theoretical World
War IIs, because economists, like generals, always prepare for wars
that are already history. For half a century, from the 1930s to the
1980s, the Soviet economy was focused on building up heavy industry
in anticipation of a global confrontation. Besides, the Soviet
Union produced numerous missiles and – useless – tanks, which
required a huge amount of titanium and aluminum. In addition,
Russia extensively built railroads since it has always been easier
to transport cargoes and people across its vast distances by rail
rather than road. And although Russia now prefers automobiles, the
simple inertia prevents it from constructing highways.

The Soviet Union once controlled (politically) a large economic
“camp” which comprised Eastern Europe, then underdeveloped China,
Vietnam, some countries of Africa and even Latin America. Even if
we do not consider China, the population of the “camp” reached some
600 to 700 million people. The Soviet Union provided subsidies to
these nations, gave them patents, trained their specialists, and so
on. Those countries purchased Soviet equipment, and Moscow
subsidized those purchases in different ways. The entire Soviet
machine-building industry worked to supply that large group of
relatively undeveloped countries. Before the Communist camp was
formed, those countries had been supplied with machinery and
consumer goods largely from developed European countries.

Between the 1950s and the 1990s, the Soviet Union, together with
Czechoslovakia and East Germany, formed the industrial center of a
large political bloc, and supplied the periphery of this bloc with
cheap oil (another form of subsidization, albeit a concealed one),
weapons, machinery and equipment. When this political system
collapsed, Russia’s heavy engineering and metal-working industries
lost their politically controlled markets. Since then, the entire
machine-building sector (besides automobile production) has never
overcome the crisis of the transition period. Although the last
three years have seen a significant growth rate in this sector
(10-15 percent), this increase began from an extremely low level.
Whereas the car-making industry has remained at a high level (70-80
percent of the pre-crisis output), production in the other
machine-building and metal-working industries has decreased by five
to six times. Perhaps, Russia could have retained some of its
former markets where customers were accustomed to using Soviet
equipment. But that goal presupposed the implementation of sensible
industrial and export policies by Russia in the 1990s, including
export financing and crediting (for nuclear power plants, for
example), together with efficient corporate management. No such
program, however, was ever activated.

Now that the Soviet Union has vanished, we live in a more
compact country. Moreover, Russia inherited about 80 percent of the
Soviet Union’s former territory and the larger part of its natural
resources. Apart from Russia, only Kazakhstan possesses extensive
natural resources, while Turkmenistan and Uzbekistan possess gas
fields. The other natural resources are of an insignificant scale.
Russia inherited about 60 percent of Soviet equipment and physical
assets; other industrial production was formerly concentrated in
Ukraine, Belarus, Armenia and, on a much smaller scale, in the
Baltic republics. Latvia shut down three notable Soviet
enterprises, which could have been a lucrative source of revenue;
these were the Riga-based electric train plant, the factory which
manufactured the famous Spidola radio sets, and the plant which
built RAF minibuses, which now would be in strong demand.

To sum up, Russia has received 80 percent of the Soviet
territory, 60 percent of assets, 60-65 percent of industrial
facilities, about 50 percent of agriculture – yet only 51 percent
of the population! The other half of the former Soviet citizens
have remained largely in Central Asia and Ukraine. These two
factors – an expansive territory with a relatively small population
– explain the present-day large-scale migration to Russia. This is
a classical type of migration of an active labor force to
economically active regions, which has been occurring in America
since the late 19th century and in Europe since the end of World
War II.

Censuses conducted in the post-Soviet countries estimate that
about two million immigrants have arrived in Russia from other
parts of the former Soviet Union. This number is not very
significant. In the U.S., for example, there are some 10 to 12
million illegal immigrants alone, while Europe has several million
Turks and approximately the same number of Serbs. In France, there
are several million Algerians, while Belgium is home to about one
million Kurds and half a million Arabs.
There are about 250,000 Chinese in Russia now, but this cannot be
described as a large-scale immigration. In the U.S., by comparison,
half a million Chinese live in a compact community in the suburbs
of San Francisco alone. They do not speak English since they do not
associate with native Americans, nor do they need to know English
in order to find a job or get married. Enclaves, like those in
France, are not compact settlements, and people living in enclaves
adapt to life in their new country. In contrast, immigrants living
in compact settlements do not feel the need to learn the local
language, and live their own life according to their native
customs.
In Russia, there are probably several more million permanent or
seasonal migrants who have not been covered by censuses. These are
comprised of Georgians, Azerbaijanis, Armenians, Belarusians, and
Tajiks who have fled conflicts in their native country, as well as
many Ukrainians. Thus, it is obvious that much of the active labor
force from the CIS has found work in Russia. This country exports
highly educated people to the developed countries and imports
inexpensive labor for low-paid jobs; this is a generally accepted
practice.

Migrants in Russia create certain problems, of course, but these
problems are of a different kind than, for example, the problems
that arose in Germany in previous years. Immigrants to Germany were
mostly comprised of Turks, Kurds and Serbs who did not speak the
German language and did not know German customs. In contrast,
migrants coming to Russia know the Russian language; many grew up
in the Soviet Union and graduated from Soviet schools. As a result,
they adapt to life in Russia very quickly. During the first few
years after the Soviet Union’s breakup, very many people with a
higher education came to Russia to do unskilled labor. Later, many
of them settled in this country and started a business – here or in
their own country. These are already different models of
adaptation.

Migrants from the former Soviet republics now working in Russia
transfer their earnings – about $10 billion a year – to their home
countries. At the same time, Russia continues supplying those
countries with cheap natural gas. Presently, only three countries
in the world attract such a large labor force from abroad – the
U.S., Saudi Arabia and Russia. Migrants annually export $30 billion
from the U.S., and $16 billion from Saudi Arabia. In this respect,
Russia is in good company.

This seems to be a normal state of affairs and this is how
things stand in the whole world. The per capita GDP of Ukraine, for
example, is $600 a year, while Russia stands at $2,500 – a
four-fold difference in the living standards between the two
countries. How can one stop a man from crossing an open border in
order to earn four times more? Migrants in Russia earn much less
than the native population, while most of the new arrivals are
denied equal rights with Russians on the labor market. Migrants are
inexpensive, and Russian businesses make profits from their labor.
The main problem involving migrants in any country is the
legalization of their economic activity, their registration, and
the levying of taxes on them and their employers. A recently passed
law on migrants permits migrants to stay in Russia without a
registration for up to 90 days. This was a step in the right
direction, but it is also very important that the federal tax
inspectorate find all the foreign workers.

It is good that migrants to Russia export a portion of the money
they earn, because Russia is interested in the development of the
CIS as a market for it goods. If foreign workers produce or build
something in Russia, if they earn and then export money, they will
later purchase something in Russia – be it goods or services. More
importantly, however, the migrants should produce more than they
export, as is the case with, for example, the U.S. or Saudi Arabia.
Such a scenario conforms to the logic of labor migration.

It is bad that the labor market is splitting. No Muscovite would
agree to work as a street-cleaner or an oil industry worker in
Tyumen, for example. Russians complain that migrants, who agree to
less pay for their labor, take jobs from native-born workers. At
the same time, however, Muscovites do not want to accept hard jobs,
even if these jobs pay much. There is an obvious tendency toward
substituting native Russians with Russian-speaking migrants. There
have emerged large segments on the labor market where only skilled
migrants work. In Moscow, for example, the drivers of buses and
trolleybuses are mostly Belarusians and Ukrainians. This is
competition in action. Migrants agree to less attractive terms of
employment, and businessmen hire those whose labor costs less.
Thus, both the business community and Russia gain from migrant
labor.

Now let’s see how Russia is involved in the global economy. It
ranks second in the world – between the U.S. and France – in the
export of armaments. Russia has always been good at making
armaments because the Russian empire developed as a military power.
Russian artillery has been the best in Europe since the times of
Catherine the Great and this explains why Russia has retained solid
positions on the global arms market, despite low funding from the
state. Russia has begun to lose ground, however, in other related
fields which it could have held, such as the production of nuclear
reactors and electric power plants. No one would buy a reactor for
cash, as it would be too expensive. The construction of nuclear
power plants must be credited; in this way Russia could support
exports from its competitive industries. However, Russia has never
built an export finance system.

Another aspect of Russia’s involvement in the global economy is
its human resources. The most active labor force in Russia prefers
to migrate abroad. There are now about two million migrants from
the former Soviet Union in Germany, and about a million in the U.S.
They are all described as Russians there, irrespective of their
nationality.

At the Russian universities, the number of applicants for the
departments of physics, biology, mechanics and mathematics has once
again increased. These professions open good career prospects upon
graduation: people who have received a high-quality education in
Russia are welcome in other countries since Russians have proven
themselves to be competitive workers.

Biological scientific institutions in an average U.S. state use
migrant labor, including young Russian scientists. At the same
time, Russian professors continue to teach people ‘for export.’
Economists are another kind of specialists that leave Russia every
year. In this way, Russia has exported a large part of its middle
class.
On average, educational standards in Russia are higher than
international statistics, but in terms of scientific research they
have been decreasing due to the lack of scientific equipment. In
the last three years, the number of people admitted to Russian
institutions of higher learning has equaled the number of high
school graduates. In this aspect, Russia has even outclassed
American standards. On the other hand, why does Russia need so many
educated specialists when it does not create enough jobs for
them?

Nevertheless, young Russians want to receive an education, and
they cannot be denied this opportunity. In the 1990s, the country
reacted to the economic crisis not by degrading educational
standards but by adapting them to the new economic situation. The
demand for education in Russia has increased, which inspires hope
for the future. In the long run, economic and political problems
will be solved, and the country, having ceased to be the center of
a huge political system, will adapt, even though with much
difficulty, to its new role on the international scene.

Energy makes up the third aspect of Russia’s involvement in the
global economy. However, Russia’s energy potential is based solely
on oil from Tyumen and Sakhalin, and on the export of aluminum
(cheap electric power) and chemicals (cheap gas). The Gross
Regional Product (GRP) of Moscow better corresponds with world oil
prices than the GRP of Tyumen. In other words, a significant amount
of the funds that derive from the regions which produce oil and raw
material are invested in other regions – specifically in Moscow.
Thus, if we divide Moscow’s GRP by the number of people employed in
the city, we will have a value that will be four times the average
figure for the Central Federal District (excluding Moscow).

Obviously, productivity cannot be four times different on either
side of Moscow’s borders. The explanation is that Moscow’s GRP also
features incomes earned in other regions, above all, in the
oil-bearing areas. The dimension of this capital flow can be judged
by the dynamics of housing construction: in 1995, the Moscow area
accounted for 12 percent of newly built housing in the country, and
in 2002, it already accounted for over 27 percent. Now more than 25
percent of all new housing in Russia is built in the Moscow
area.

Russia’s wellbeing is hinged on the energy sector for one simple
reason: this is the only sphere of the economy where Russia is
guaranteed steady future incomes. During the years of its economic
growth, Russia has not introduced a single new manufactured product
on the world market. Russia produces few products that can compete
with European, American or Chinese goods. Science-intensive goods
are almost non-existent in the structure of Russian exports.

As a result, Russia simultaneously exports oil, oil revenues and
educated people. Russian biologists, who in Russia earn $5,000 a
year at most, move to the U.S. where they stand to earn
$50,000-100,000. By encouraging its educated citizens to move
abroad, Russia increases the effectiveness of the global economy,
but does very little for its domestic economy. Russia has two major
kinds of resources – human capital and natural resources, but it
only really employs the latter.
Russia exports more than half of its oil, one-third of its natural
gas, a huge amount of timber and paper, and much of its nonferrous
and ferrous metals, largely because the domestic economy does not
need all these resources. Russia is unable to change its place in
the global economy – that of a raw-material supplier. Nothing of
what Russia produced in the 1980s was accepted by the world market
at free prices; since then, this country has produced nothing new
since it has had “more important” things on its mind. This is one
of the tragedies of the transitional period – Russia has solved
many problems, but not the problem concerning its economic
modernization. This problem will have to be solved by the next
generation.

In 2004, Russia took the lead in global oil production, leaving
behind Saudi Arabia. Additionally, Russia remains a major producer
of natural gas and is the largest gas exporter in the world. It
must be noted that when Russia exports chemicals, fertilizers,
ferrous and nonferrous metals, in reality it also exports energy.
The production of metals in Russia is the “packing” of cheap
electric power in iron and copper. Considering also oil, gas, coal
and electric power “packed” in aluminum and chemicals, Russia is
the main source of energy resources in the world – now and,
possibly, in the future. Russia can retain its leading positions in
the world economy if it continues exporting energy within
reasonable limits.

During the 15 years of Russia’s transitional period, the
position it has now assumed in the global economy is not fantastic,
while the last five years of its economic growth have served to
consolidate rather than improve this place. Russia’s economic
programs do not look far enough into the future and do not look for
solutions to difficult development problems. The historic task of
the present generation is to find a way to reinvest revenues from
the export of raw materials and energy in machine-building,
metal-working and science-intensive products. It is necessary to
create new production facilities that would be competitive on the
world market, while corresponding at the same time to Russia’s high
educational levels.

The main challenge that the next generation in Russia will have
to address is to determine where and in what industries it should
create jobs from revenues from raw-material exports. All
present-day discussions of the economic policy boil down to this
question: How to reinvest revenues from oil, gas, metals and
fertilizers in the creation of normal jobs inside the country?

Russia has extensive resources but few variants for using them.
One of them is to continue increasing consumption, modernizing the
army and boosting the country’s military-political prestige. All
this can be easily done with petrodollars while oil prices are
still high. Another variant is to try and get out of the track into
which this country slid after the 1917 Bolshevik revolution. This
will not be an easy task, but if it is not achieved Russia will
remain where it is now.

Sources: State Statistics Committee, Bank of Russia, Ministry of
Finance.
* Estimation.