Politics & Markets
Russia -- which way? (Issue: 1)
The death of former Russian KGB/FSB agent in London has brought Russia into limelight; once again for wrong reasons. Russia?s heavy handed attitude towards dissidents including former Soviet members and its growing influence in world politics has caused ripples in some quarters.
Its less than accommodating attitude towards the west has made Russia almost a matter of concern, bringing back the memories of Soviet Union era. Some sceptics are even predicting the renaissance of cold war, perhaps in a different form. Is new Russia really a threat?
Generally, the real threat from politics in an influential country depends on two factors; the ability to sustain its policies and political aspirations of the leadership. Economic prosperity determines the former. The history explains the latter.
Buoyed by its vast hydrocarbon resources together with the oil windfall, the Russian economy has actually performed well. The World Bank in its December report expects the annual GDP growth to reach 7% in 2006. Russia has well and truly embraced free market economic policies and is staunchly capitalistic now.
Despite rhetoric, the authorities are conscious of Russia?s needs in capital and modernisation and expect much of it to come from Foreign Direct Investments (FDI). FDI inflow during the first three quarters of 2006 has increased 55% to reach US$10.3 billion, with the energy sector claiming the lion share. The government is keen to maintain FDI growth and is even keener to attract FDI to sectors other than oil. Russia is well aware of the deterrent effect of a cold war towards FDI.
Russia?s new-found vigour is almost entirely due to oil. As indicated by a narrowed current account surplus in 3Q2006 in the face of weaker energy prices, Russia remains precariously dependent on oil. Unlike Soviet Union days, imports are uncontrollable and are rising (29.4% Year-on-Year during the first nine months of 2006). Unless oil prices strengthen, Russia would witness a steady decline in its current account surplus. A sharp fall in oil prices would in fact push Russia to record a balance of payment deficit.
Even at the best of foreign policies, Russia faces challenges in attracting FDI to the level we have seen in China and India. Russia is unable to satisfy demands of highly integrated production networks in the world, which demands real time co-ordination between buyers and suppliers. Russia is also unable to match the competitive advantage China and India enjoy due to their low labour costs as Russian labour remains relatively more expensive.
Meanwhile, Russia has other woes such as inadequate health services, a shrinking population and high poverty. An estimated 14% of the economically active population live below the subsistence minimum according to Russian official statistics. Measures to raise the minimum wage to a subsistence level are currently under consideration. Similar to many emerging former Soviet Union republics, a demographic crisis is looming over Russia that prevents Mr. Putin from implementing unfavourable economic or regulatory environment.
This brings our focus to the aspirations of the Russian leadership. A closer look at the Russian foreign policy reveals that Mr. Putin?s heavy-handed approach towards new independent states has not spilled over to the west. Perhaps collaboration is hardly the word but the policy has not been entirely hostile. It is too early to conclude Russia?s less than co-operative attitude towards the west as an early warning of another Soviet Union era!
Much of Russia?s recent belligerence is to assure its absolute sovereignty and the justifiable desire to reinforce itself as a global super power. That naturally demands certain measures such as the preservation of its military might including the nuclear arsenal, continuation of its influence over key sectors such as energy and rallying the support from nations that are likely to help Russia on ongoing basis. In that respect, Mr. Putin is not doing anything different to other leaders in the west.
It is clear that Russian authorities are keen to ensure economic growth and are desperate to attract foreign investors. It is equally clear that Russia plays an important role not only in geo-politics but also in the energy equation. While investment dynamics are considerably different from those of China, Russia remains an attractive market not only in energy and mining sectors but also in other sectors.
It is undeniable that Russia under Mr. Putin has progressed and it is important that he continues. While Mr. Litvinko?s death is most regrettable, it is unlikely to trigger a mass exodus of investors in fear of another Soviet era. High energy prices, strong ruble and robust domestic consumption continue to make Russia too attractive an investment destination. Russia has had its fair share of Socialism and unlike Comrade Chavez et al in Latin America, is not about to experiment with it once again!
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