Resurgent Russia: An Economy in Transition, Dysfunctional but Intact

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Last Updated: 7, June 2013

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Russia has no shortage of talent, technology or resources. The country’s top managers and functionaries are well accustomed to navigating their way through political and bureaucratic storms, and the sheer size of the country and natural endowments of oil and gas cement Moscow’s position in economic and diplomatic spheres. So why is their economy in such a state of dysfunction?

There is no shortage of intelligence in Russia. From chess grandmasters to super scientists, Russians have proved again and again that they love tough intellectual challenges. Their S-400 anti aircraft and anti ballistic missile systems have highly sophisticated radar control technologies that can track large numbers of incoming targets and engage a goodly number simultaneously (exactly how many the Russians, understandably, are not saying). Their top managers and functionaries are well accustomed to navigating their way through political and bureaucratic labyrinths that would leave most advanced market CEOs in danger of stroking out.

So why, oh why, is their economy in such a shambles? The answer, in a word, is that Russia is in transition, as we all know, from a totally dysfunctional socialist system teetering on the edge of bankruptcy to modern capitalism, via the twisted road of grab-as-grab-can, anything-goes individualism that often seems to confuse what’s right with what’s-right-for-me.

Moreover, there are no guarantees that this twisted road will actually lead Russia out of the maze, as opposed to spiralling inward to disaster. This is why many commentators on Russia’s economy end up concluding that the whole thing is about to implode momentarily – which then leaves them looking bemused when the Russian economy not only keeps on trucking, but does so on a debt to GDP ratio that most Western economies would die for.

“It’s a commodity economy, and the oil and gas won’t last forever,” they say – which is a rather different argument, but certainly a dynamic worth contemplating.

You could find many parallel examples of graft and corruption in the EU or the US, but what these economies have that Russia lacks, is a commitment to private property and the rule of law that Russia’s top politicians seem not to be entirely sure that they want.

Vladimir Putin joking (allegedly) that the jailed Russian oil magnates Mikhail Khodorkovski and Platon Lebedev, former directors of the Russian oil company Yukos, “will have to slurp gruel for a while yet,” despite world condemnation of the show trial that sent the Yukos two to jail is, for me at least, a shining example of how not to run a country. Yet Russian opinion polls show that the Russian’s continue to love a strong leader and couldn’t give a fig about how well that leader adheres to the niceties of the rule of law.

[quote] “Democracy? We don’t need it!” is a fairly common utterance. [/quote]

Writing in Forbes, Mark Adomantis presents a thoughtful account of why the Russian economy is a lot more resilient than many in the Western media believe. For a start, Russia’s foreign reserves are huge, among the biggest in the world, and currently stand at close to $500 billion (excluding gold). Moreover, if you look at a graph of oil prices over time and at a graph of Russia’s reserves over time, they are virtually a perfect fit, which means that provided the price of oil stays relatively stable or increases, Russia’s foreign reserves pool is going to continue to be extremely healthy, even if the Kremlin spends fairly freely.

This is not just a nice-to-have factor. A deep foreign reserves pool provides a great cushion against external shocks – such as a sudden crash in the price of oil. So even if that happened, the Russian economy wouldn’t collapse overnight. Second, in 2012 the Russian government ran a budget surplus of around 1.4 percent, down on the 2011 figure of 3.2 percent, but still a surplus, whereas most Western governments are running growing deficits.

Russia is spending a great deal modernising its military systems – which were desperately in need of modernisation – but the vast bulk of government spending goes elsewhere, on social policy, education, healthcare and the like. And then there is the unemployment figure, which, at around 6 percent is way better than the European average. The non-oil economy in Russia needs work, that’s for sure, but collapse is not just round the corner, and the media needs to take this fact on board, Adomantis argues.

By Anthony Harrington

Anthony Harrington is an award-winning business and energy journalist, writing regularly for the Scotsman newspaper, the Glasgow Herald newspaper, Financial Director magazine, Pensions Insight magazine, CA Magazine, and a number of other publications. He won Business Finance Journalist of the Year 2006, Institute of Financial Accountants, and Journalist of the Year, State Street 2006 Institutional Press Awards, and was runner up in 2007 and 2008.

Russia’s economy – dysfunctional but intact! is republished with permission from the QFinance Blog. Get the QFinance Dictionary of Business and Finance iOS app for a comprehensive guide to financial terms and expressions.

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