International Economics in Russia - Research Paper Example

International Economics: Russia s Submitted by s: Contents Executive summary 3 Introduction 4 Currency and central bank 5 Russia’s economic sectors 6 Russia’s GDP for the past ten years 8 Russia’s trade partners 8 How the global economic crisis affected Russia 10 Effect of Ukraine annexation of Russia’s economy 12 Future prospects 14 Conclusion 15 Bibliography 17 Executive summary The plummeting of the price of oil, economic sanctions from the west after the annexation of Ukraine as well as the consequent collapse of Russia’s currency has led to decimation of the economy of Russia. At the moment, the Gross Domestic Product of Russia has experienced huge shrinkage and it has stopped being the eighth largest economy in the globe. Based on some opinions, Russia under Putin can now be equated to Spain in terms of economic weight. Previously the globes eighth biggest economy, Russia lost its ranking since the economy shrank in only nine months to become mid-sized player in the same league as Spain and Korea from a 2.1 trillion dollar petro-giant. Introduction The economy of Russia can be defined as a mixed high-income economy, with the critical areas being owned by the state (Aswathappa, 2010, p. 305). Reforms to the market that took place in the nineties led to privatization of a huge part of the industries as well as agricultural sector in Russia, but noteworthy exceptions were in the energy and defence sectors. Russia has some peculiarity among the main economies in the manner in which it depends on energy revenues as the main drivers of its growth. The nation has numerous natural resources that include oil, natural gas as well as precious metals that constitute a huge percentage of the country’s exports (McColl, 2005, p. 778). By 2012, the oil and gas industry of the economy amounted to almost sixteen percent of the GDP, in excess of fifty percent of income of the federal budget and around seventy percent of all the exports from the country. The arms industry in Russia is expansive and sophisticated with the capability coming up with designs and manufacturing high tech military equipment like the fifth-generation fighter jets (Wenger, Perović and Orttung, 2006, p. 12). Russia’s arms exports were valued at more than fifteen billion dollars by 2013, which was second to the US with the main military exports from the nation including combat planes, submarines and ships among others. By PPP, the economy of Russia is the sixth largest in the entire globe and boasts of living standards that grew exponentially between 2000 and 2012 as a result of energy exports. During this time, the real disposal incomes of the country rose by more than one hundred and sixty percent. In terms of dollar denominations, this could be equated to an increase of more than seven times in disposable incomes of the country since 2000. Nonetheless, these gains have not been distributed equitably as it was discovered that the 110 wealthiest people in the country owned thirty five percent of all the financial assets that were held by the Russian households (Rubinfeld, 2009, p. 309). Consequently, Moscow has been named severally as the billionaire’s capital of the globe with inadequate governance meaning that Russia has the second-biggest volume of illegal money outflows, since it has lost almost one trillion dollars between 2002 and 2011. Additionally, Russia fell into recession from the start of 2014 predominantly as a consequence of military intervention in Ukraine along with the ensuing capital fight, but regardless of these occurrences, the GDP maintained at 0.6 percent. Currency and central bank Russia’s currency is called the ruble, which is also used as the currency in other areas such as Abkhazia and South Ossetia (Allen, 2009, p. 443). The Bank of Russia, which was founded in July 1990 as the State Bank, is responsible for the management of the monetary system. When the USSR disintegrated in 1991, the Bank assumed the role of the central bank and based on the constitution, the Bank of Russia is an autonomous entity with its main role being to protect the stability of the country’s currency (Flandreau, 2003, p. 149). It also regulates and is the lender of last resort for Russia’s banking industry under the governance of board of directors, as well as a governor who is chosen by Russia’s president. Between 2000 and 2008, huge surpluses in current accounts led to rapid appreciation of Russia’s currency and the Bank of Russia tried to deal with this trend through an aggressive accumulation of foreign currency reserves. This was among the main contributing factors that resulted in comparatively high inflation rates during this time. After the global financial crisis, the policies of the central bank changed and rather than seeking fixed exchange rates against the euro and the dollar, the Bank of Russia concentrated on inflation targeting (DeBardeleben and Viju, 2012, p. 247). By April 2012, the inflation is Russia had gone down to 3.6 percent, which was a record low rate. The central bank in Russia has been making plans to free float its currency while broadening the currency’s trading band while expecting that it will become wholly free floating by 2015. Nonetheless, Russia’s legal tender has fallen considerably from 2013 after the central bank made an announcement of future plans. According to the central bank, Russian banks have an ability to weather a devaluation of between twenty-five and thirty percent. In the last few years, inflation in Russia continued to grow together with a quick depreciation of the nation’s currency and by 2012, inflation was at its deepest after the collapse of the UUSR at 3.6 percent, but it was stated to reach eight percent towards the end of 2014. Russia’s economic sectors The main sections of Russia’s economy are agronomy and industry where petroleum, wood, precious metals and natural gases among others constitute this sector (Westernhagen, 2002, p. 87). Conversely, sugar beets, meat, sunflower seeds and dairy produce among other produce constitute the agronomic sector. A complete variety of manufactures, especially motor vehicles, agricultural equipment, aircraft and other machines and equipment for various industries are the main sections that constitute manufacturing and industry. Typically, trade exports focus of petroleum and other products, natural gases, metals and chemicals with its main markets including the EU, former soviet nations, Japan and China along with some nations in the Middle East (Peimani, 2009, p. 238). Conversely, Russia’s imports include machines and tools, consumer commodities, sugar and numerous half-finished metal goods. Russia’s main import trading partners are similar to its export partners (Terterov, 2005, p. 320). The economy of the Soviet had created to distorted policies while at the same time reducing the interest from organizations and people to utilize natural resources in a careful manner. The expensive and damaging conservational legacy associated with USSR’s economy can still be seen in Russia and a high possibility exists of environmental incidents along with disasters. The environmental policies at the federal and regional level have not often been dependable and direct and the enforcement of the regulations meant to safeguard the environment is typically the responsibility of the organizations that are the source of the issues. The integration of the autonomous environmental agency to become part of the Natural Resources ministry in 1999 led to increased concerns in regards to the possible conflicts of interest associated with the involved institutions. Of all the former Soviet nations, Russia is the most industrialized, but a huge part of its industry is outmoded and greatly unproductive (McCray, 2006, p. 94). Apart from its industries that are based in resources, Russia has developed huge manufacturing capabilities especially as far as machine is concerned (Blank and Rubinstein, 1997, p. 234). Majority of the industrial foundation of USSR was inherited by Russia and there have been attempts with limited achievement in the few years that have passed towards the conversion of defence industries to be used for civilian purposes. Majority of the main industry sectors demonstrated an increase in outputs in 1999 compared to 1998 (Gaĭdar, 2003, p. 641). Nonetheless, it did not apply for agroindustry as well as energy and fuel industries that demonstrated developments over 1998, but drops in comparison to 1997. Subsectors that showed declines in regard to outputs in 1999 compared to 1998 include machine tools, the production of sausages and television among others. Regardless of the all-inclusive improvements instigated by the Russian government in the recent years, numerous enterprises in the country continue to remain collegial. Additionally, output in 2000 continued declining in both medium and large enterprises in Russia, while the small companies along with joint ventures were responsible for escalated outputs. Russia’s GDP for the past ten years Year 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 % GDP 7.2 6.4 8.2 8.5 5.2 -7.8 4.5 4.3 3.4 1.3 0.6 Russia’s trade partners Russia is closely tied economically to the UK as well as the rest of the EU and thus trade and financial sanctions have likelihood of hurting the two sides (Eskelinen, Liikanen and Scott, 2012, p. 49). The EU is ranked as the biggest trading partner for Russia with almost forty one percent of all the trade, and with the trading between the two economies posting steady growths that reached record high levels in 2012 (Johnson and Robinson, 2005, p. 21). The commodities that the EU exports to Russia predominantly consist of chemicals, transport equipment and equipment as well as agronomic tools and medicines. The single major importer of gas and oil that is exported from Russia is Germany while UK imports almost six percent of gas produced in Russia. Additionally, the US is also a crucial trading partner for Russia with the total value of its imports being about twenty seven billion dollars in 2013, which was almost twice the value of its exports and about five percent of all the oil produced in Russia is imported by the US (Hopf, 2008, p. 69). Russia’s trade with other former members of the Soviet predominantly deals with energy and industrial products and in most of the cases has been done through barter trade until fairly recently (Fernández Jilberto and Mommen, 2002, p, 75: Kaufman and Hardt, 1993, p. 452). Throughout 1998, Russia’s trade surpluses dwindled and imported commodities rose by approximately ten to fifteen percent yearly from 1995 to 1997 since the buyers profited from a currency that was appreciating as well as a rising average wage. During the same time, export revenues kept decreasing as a consequence of the suddenly lower oil and gas prices that accounted about forty three percent of the exports in 1997 (Klein and Pomer, 2001, p. 320). Furthermore, the exported that were manufactured in Russia competed poorly on the global market, particularly since Asian commodities have developed to become less expensive as a result of steep devaluations in the currency. The ruble’s devaluation as well as difficulties in the completion of dealings done by the banking industry decreased imports considerably and recurrent variations in the regulation of customs also led to difficulties for both international and local traders and investors. Russia became a member of WTO only in 2012 and this was its indication of its complete and final acceptance into the global trade system. On the part of the US and other members of WTO, the benefits of Russia’s entry were instantaneous as they currently have more access to the Russia market while being able to depend on acknowledged rules and procedures in order to deal with future disputes. Conversely, Russia remained predominantly pessimistic concerning benefits of joining WTO, particularly in the process of its initial transition era. How the global economic crisis affected Russia All global economic crises affect various nations in differing ways, but some countries face the most painful aspects of the crisis (Peters, Shane and Torgerson, 2009, p. 2). Russia is being confronted by all the negative aspects of the crisis that is currently on going with effects including sharply declining export earnings from metals and energy as well as corporate balance sheets that have been over-leveraged, banking failures, a bursting real estate bubble and unavoidable devaluation pressures among others. The 1998 financial crisis led to economic calamities in Russia along with a political crisis, which defined the lowest moment for the then president, Boris Yeltsin. This crisis toppled the administration and led to the end of political careers for some key liberal policymakers while bringing the communists back to the helm. Further, it offered a protectionist demands a hearing as they sought to have the country insulate itself from the fluctuations seen in the global economy. It also revived talks concerning the need to cut to the collectivist traditions of Russia, instead of alienating the ideas from the west concerning markets and the primacy of individuals. After a decade that was marked with high growth, increasing real incomes and a reduction in the rate of poverty, the global crisis harshly affected poverty, growth and employment in Russia (Böhme, 2011, p. 173). The effects of the crisis all over the world proved to be deeper and wider than it had previously been thought while the impact it had on Russia were escalated by the structural vulnerabilities of the nation, overdependence on the gas and oil sectors, a constricted industrial base as well as a small and medium enterprise sector that is limited. Consequently, early labour markets as well as the effects of poverty were severe and as a result, the GDP of Russia was -7.8 percent while unemployment rose by the end of the year. This was a huge deceleration from the growth that had been achieved in 2008 in regard to full employment, and even though huge fiscal reserves and low debts could assist the government in financing its fiscal deficits, a fiscal space for additional support to the economy was quickly decreasing. The early fiscal policy response instigated by Russia focused on providing support for the financial sector as well as enterprises with very little support for the households (Gevorkyan, 2011, p. 220). The overall fiscal cost measures that were executed in 2008 and set aside for 2009 amounted to almost three trillion ruble, which accounted for almost seven percent of the country’s GDP. This was bigger than the degree that was applied in majority of the other G20 nations with the implemented processes seeking to strengthen the fiscal industry and at the same time provide economic support for enterprises. With the progression of the crisis from the fiscal sector towards the real economy, affecting the domestic demand, unemployment and development, the focus of the policy started shifting in this direction. Most of the measures that were taken sought to provide fiscal support to various organizations through lowering the tax burden and directly supporting the main industries that were of strategic significance (Sakwa, 2004, p. 189). Russia’s government published a list of 295 strategically and more than one thousand regionally significant organizations that were principally eligible for being supported directly by the state. Effect of Ukraine annexation of Russia’s economy Prior to the annexation of Ukraine, the economy of Russia was ranked at number eight in the globe and Moscow had membership in the G8 group of countries. When Russia decided to annex a section Ukraine, the US as well as the EU reacted by issuing sanctions along with travel advisories and asset freezes against Russia and its businessmen who were viewed to have close connections with the Russian President. Additionally, Moscow’s membership to the G8 was revoked escalating further the effects that were being experienced as a result of the sanctions. From this time, the West has increasingly expanded these actions targeting Russian entities, key businesspersons and sections of the finance, energy and military industries of Russia. As a result of the sanctions, financial institutions stopped providing Russia with financing and thus the country faced economic trouble that were highlighted by the oil prices that continue to plunge. The financial sanctions further reinforced the other aspects that had led to the economic troubles that Russia was facing. The main cause of economic troubles for Russia was corruption and poor economic policies pursued by president Putin that have to the stagnation of the economy. Further economic troubles were as a result of the plunging prices of oil as the prices lowered to the point that the total export revenues were almost seventy percent what they have been previously. The effect of the sanctions after Russia annexed Ukraine was that the nation could not lessen the economic troubles it is facing through borrowing money. Under normal circumstances, Russia credit-worthy as it has a public debt that is ten percent of its GDP, but its lack of access to financial markets makes it difficult for the nation to borrow money. The main consequence of this sanction has been the exponential increase in the prices of basic foodstuffs. The falling exchange rate has also resulted in consumer panic largely as a result of prices of oil fuelled by the sanctions. Future prospects The growth model of Russia is founded on energy exports that are supported by considerable oil price rises since 2000 along with the utilization of spare capacity in its economy. With the stabilization of prices of oil and the exhaustion of additional capacity, the development of Russia’s economy has decelerated considerably. In actual fact, the whole economic aspect has been affected by capacity constraints in 2011 as demonstrated during the start of the economic slowdown, but inflation maintained their elevated levels. Additionally, geopolitical indecisions after the action of Russia in Crimea have further depressed the economy further with a predominant negative impact on investment. Russia can implement various policies in order to enhance its growth prospects, as it requires more and better investment approaches (Gavrilenkov, Welfens and Wiegert, 2004, p. 28). This needs various problems to be addressed including issues of governance, corruption and regulation as well as barriers to administration. Even though the country has already come up with policies meant to address the situation, a lot more needs to be done and sustained attempts at international integration are also required in order to attract investors along with foreign technology. Other sectors where enhancements are needed include the reinvigoration of the privatization agenda, improvement of competition, increase in the size and efficacy of the banking industry and reduction of price distortions, particularly utility prices. Conclusion Russia has gone through a lot of changes since the Soviet Union collapsed enabling it to move from an internationally-isolated and centrally planned economy to become a more market-oriented and internationally-integrated economy (Weigl, 2008, p. 133). Nevertheless, it has stalled as a partly reformed and statist economy attributed by an increased concentration of wealth under the control of officials. Most of the industries went through privatization in the nineties as a result of economic restructurings, but there were some exclusions including industries associated with energy. Russia’s safeguarding of property rights remains feeble while the private sector continues to be subjected to a lot of interferences by the state. Russia is among the main countries that produce oil and gas in the globe and is a key exporter of metals like steel and primary aluminium (Inkpen and Moffett, 2011, p. 545). Russia’s dependence on commodity exports has brought a vulnerability to boom and bust cycles influenced by the volatile swings in international prices and the economy that posted an average of seven percent growth between 1998 and 2008 as a result of the rapid increase in oil prices, was among the ones that were hit hardest by the economy crisis. This is because the global economic crisis resulted in oil prices plummeting and drying up of the foreign credits that banks in Russia as well as other organizations depended on. The decline in prices of oil over the past few years as well as challenges in attracting FDI have greatly contributed to a clear slowdown in growth rates of Russia’s GDP. Bibliography Allen, L. 2009, The encyclopedia of money, ABC-CLIO, Santa Barbara, Calif. Aswathappa, K. 2010, International business, Tata McGraw Hill Education, New Delhi. Blank, S. and Rubinstein, A. 1997, Imperial decline, Duke University Press, Durham, NC. Böhme, D. 2011, EU-Russia energy relations, Universitätsverlag Potsdam, Potsdam. DeBardeleben, J. and Viju, C. 2013, Economic crisis in Europe, Palgrave Macmillan, New York. Eskelinen, H., Liikanen, I. and Scott, J. 2012, The EU-Russia borderland, Taylor and Francis, Hoboken. 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