Putin once again Tsar?

November 30, 2007
Russia attracts investors despite its image
By Konstantin Rozhnov
Business reporter, BBC News

As Russia enters a period of political transition, with President Putin's two terms in office coming to an end, is it on track to achieve his goal of doubling the size of the economy?

The world's leading gas exporter and one of its largest oil exporters, Russia has become one of the most attractive emerging markets in the world.

But at the same time, there's a risk of a future serious shortage of workers in Russia with migration barriers in place and male life expectancy being less than the retirement age.

Besides, some surveys and reports paint a grim picture of a lack of competitiveness and difficulty in doing business in the country.

Mr Putin's supporters say economic stability is one of the most important achievements of his presidency.

And it looks like foreign investors tend to agree with that point of view as they keep heading to Russia in increasing numbers, despite the country's negative image of suppressing businesses and democracy.

Yaroslav Lissovolik, chief economist at Deutsche Bank in Russia, says that around $50bn (�23bn) will be invested in Russia by international businesses in 2007.

It represents almost 5% of Russia's gross domestic product, which is quite a good figure for emerging markets, he says.

Turnaround

Russian's economy was a mess in the first half of 1990s: gross domestic product and industrial output were declining rapidly and prices were galloping at an enormous speed.

But after the 1998 Russian financial crisis, when the Russian government defaulted on foreign debts and the national currency collapsed, the country has seen its economy expanding steadily, largely due to an improved global economic situation.

In his first term in office President Putin declared a task of doubling Russia's GDP in 10 years.

Despite the fact that is highly unlikely to happen, the Russia's economic performance looks impressive.

It grew by 6.3% in 2006 and is expected to expand more than by 7% this year.

Consumer prices increased by less than 10% last year, for the first time in post-Soviet times, though this year inflation is expected to be back in double digits mostly because of food prices jumping.

The value of exports climbed to $302bn (�150bn) in 2006 from $78.2bn in 1995 with imports expanding to $137.5bn from $46.7bn in the same period.

Russia 's international reserves have more than doubled since the beginning of the year, exceeding $450bn.

The developments have allowed the World Bank to declare that the Russian economy had achieved "unprecedented macroeconomic stability".

Oil revenues

There are those, though, who question the sustainability of Russia's economic expansion as, they argue, it is based mostly on rising oil prices and strong global demand for fuel.

Russia's exports are clearly dominated by mineral resources and fuels.

Critics warn that oil revenues have prevented the Russian government from implementing painful but necessary reforms to diversify the economy.

But Deutsche Bank's Mr Lissovolik says the economic expansion has been driven largely by non-fuel sectors as the huge oil revenues have been locked in a so called "stabilization fund" - in case of future economic difficulties.

Telecoms, banking, insurance, foods and some other sectors have been expanding fast as consumer and investment spending has become a significant factor in Russia's economic growth.

Uncertainty

But some experts think that while foreign investments keep growing rapidly, the situation with domestic investments isn't too bright.

Maxim Kashulinsky, editor of Forbes' Russian edition, believes there is a potential for much greater expansion of Russian businesses but it is restrained by uncertainty caused by a number of factors such as weak property rights enforcement, bureaucracy, corruption and a lack of competitiveness in some sectors.

He says that the whole Russian business system is not set up to help businesses expand.

Only those who are brave enough or have an opportunity to take the risks succeed in making money in Russia, he adds.

A World Bank report put Russia in 106th place in the world for ease of doing business, while the country was ranked 58th in the recent Global Competitiveness Report published by the World Economic Forum.

But at the same time, a Foreign Investment Advisory Council survey found that 82% of existing investors in Russia were moderately or highly satisfied.

Even the fact that Russian monopoly Gazprom recently gained control of huge projects from international companies such as Shell and TNK-BP has not put foreign firms off investing in Russia's fuel and energy sector which gets more than half of all foreign investment .

Mr Lissovolik thinks that the attraction of investing in Russia comes partly from the country's workforce being well-educated and inexpensive.

But Russia's population has been declining steadily and it does not seem the situation is set to improve.

Life expectancy for Russian men is less than the retirement age of 60 years. Besides, AIDS and TB growth figures are among the highest in the world.

Experts warn that some sectors have already started experiencing a shortage of labour, making it one of the most significant long-term risks for Russian economic expansion.

International organizations have called on Moscow to lift barriers to immigration to provide the basis for sustained economic growth.

Mr Lissovolik says there is no other way for the Russian government but to open its labour market to migrants.

He thinks the problem will be addressed after the election season.

Trust issue

With state control over the Russian economy having increased significantly, it looks like the recipe for sustained economic growth in Russia is a trust-based relationship between the state and private sectors.

Russian businessmen are beware of getting involved in politics after Mikhail Khodorkovsky, former head of the Yukos oil company, was convicted on tax and fraud charges and imprisoned in a Siberian penal colony while the company was dismantled.

But Forbes' Mr Kashulinsky says businessmen must participate in public administration.

"Maybe it will make authorities more sensitive to businesses' problems", he says.

Most likely, the coming parliamentary and presidential elections will only slightly influence the country's business climate due to the political stability achieved under Mr Putin.

But most experts believe that for the Russian economy's long-term expansion to be sustained it must become a tradition that property rights are considered sacred.