An Opportunity to Change the Structure of the Russian Economy

|Russia

On New Year’s Eve 2008, what were the thoughts of the people of Russia as they went into the New Year? According to opinion polls, in contrast to a year earlier where 25% of the people responded with an evaluation of the year as a good one, only 10% of the people had such a feeling.

With the turmoil after the collapse of the Soviet Union and the impact of the Asian Monetary Crisis, Russia, while it had experienced its economic nadir in 1998, achieved remarkable economic development in the subsequent ten years. The driving force behind this was President Putin’s appearance on the scene and the surge in resource and energy prices. Russia maintained an annual average of 7% for growth in GDP, repaid its large accumulated debt to Europe and the United States, and grew to the point of boasting the world’s third largest foreign currency reserves. The world paid attention to the resurgence of the colossus of Russia. The standard of living changed dramatically, not just in the urban areas of Moscow and the like, but also included the Russians living in the Russian Far East—though with a large disparity nonetheless.

Then the sudden economic malaise, having its origin in the United States and involving the entire world, came to have a serious impact on the Russian economy too, which, pushing the move to a market economy, had been demonstrating its presence as a member of global economic society. The Russian government took rapid-fire steps. They were: the provision of capital to the by-nature fragile financial markets; the taking over of the debt repayment of large companies which had received huge funds from overseas, armed with the surge in stock prices; the reduction of corporate tax; support buying in order to prevent a drop in the value of the ruble; and support for individual industrial sectors, such as automobiles. Recently, however, they have had no choice but to review the budget which was based on the assumption of an oil price of US$41, an exchange rate of 35 rubles to the dollar, and an inflation rate of 13%, and it appears that the falling into the red of public finances is unavoidable. Reports that predict some hard running for the Russian economy can even be seen.

But are we only able to detect a truly pessimistic aspect? Certainly for the next few years tough economic management will be inevitable. This crisis, however, is also a golden opportunity to convert the composition of the economy, which has been dependent on energy exports, toward a diversified structure—something that, with the contentment with the steep rise in the price of oil, has hitherto not gone beyond being called for. It is not a matter of thoroughly redistributing the assets of the major companies damaged in the financial crisis, but of genuinely raising innovational industry that involves small and medium-sized enterprises. The responsibility is also great for state-owned companies such as “Rostekhnologii” and “Rusnano” which have been charged with the promotion of industry.

The anticipating of future uncertainty in the business of importing used cars from Japan, moves to establish new business, and small and medium-sized enterprises attempting to bring industrial processing in China to Russia have also appeared in the Russian Far East. With measures being promoted on pensions and the unemployed to dispel public anxiety, and on corruption aimed at the elimination of the inefficiency from bureaucracy and wielding of position, isn’t it now the time to seriously tackle concrete support for small and medium-sized enterprises?

In global terms the unipolar dominion of the United States has come to an end, and we have gone from the G8 into the G20 era. If Russia plays the role of one pole of the global economy without lapsing into extreme protectionism or super-power ambitions, then it should continue to have a major presence, displaying its strength as a colossus with resources including energy, food, minerals and people.

At the cabinet meeting winding up 2008 which he personally attended at the end of last year, President Medvedev stressed the importance of the cohesion and stability of the powers of the Presidential Executive Office, the government and the State Duma, etc. The Russians are a people who by nature are good at handling crises. I hope that, in the background to political stability, they will consummately accomplish the revamping of the entire economy.

[Translated by ERINA]