Looking Back at Trends in the Russian Economy in 2002

|Russia

What kind of year was 2002 for Russian economy? I am sure that there have been various verdicts, but in general, the majority of comments have been positive in tone, including “doing well” and “improved markedly”. In this situation, everyone is particularly interested in how the Russian economic environment has changed, and, based on these circumstances, how business between Japan and Russia should progress in the future. Consequently, I have ventured to outline my thoughts briefly, without fearing criticism by experts.

Of course, there are various data circulating that provide a general outline of the Russian economy, and I am sure that regular readers of ERINA’s homepage are very familiar with them, so, from the perspective of someone who actually lives in Russia, I would like to try to narrow the subject down to certain points that have occurred to me, including environmental changes and a slight sense that development is progressing.

Russia enters a stable phase

  • If we consider en masse the things that are the focus of attention nowadays, there can no longer be any doubt that the economy in Russia is on an upswing, buoyed by the calming of the political situation and the steady change in oil prices. As if to back this up, the turnover of the Moscow Interbank Currency Exchange (MICEX) has increased greatly recently and will grow further. Amid this favorable situation, Russia’s economy is definitely showing signs of further growth, rather than staying at the same level. I will not go into detail here, but, whichever indicators are considered – the surplus in the international balance of payments, the calming of inflation, or the level of foreign currency reserves (which, at 15.5%, are at one of their lowest levels since the collapse of the Soviet Union, second only to the 1997 level), all of which are improving steadily – there is no lack of evidence to show that the Russian economy has entered a phase of stable growth.
  • On the other hand, however, the fact that the economic growth rate has been decreasing since its peak in 2000 cannot be ignored. I do not consider this to be a serious factor at this point, but I cannot state positively that there would be no concern for the future, as it depends, for instance, upon the future course of international oil prices. The reality is that the economic growth rate decreased further on the previous year in 2002, barely sustaining a rate of 4%. (In fact, this is impressive compared with Europe, the U.S. and Japan, which, in addition to difficulties in relation to deflation, stock prices, corporation securities and currency exchange, have faced a continued slump in which their entire economies seem to have lost sight of the way out towards recovery. However, since it goes against the purport of this theory, I will not presume to make a comparison here.)

Positive phase in 2002

  • Returning to a general evaluation of 2002, it could, at any rate, be said that there were more than a few achievements during the year, in many respects. Of these, what had a particular impact was the recognition by the U.S. and the EU of Russia as a market economy. (Of course, I am aware that there were far-sighted political overtones to this move by the world’s two major economic blocs, because there are no actual standards for this in the EU or the U.S., nor were any carefully audited data or records published to justify this recognition.) In fact, it is neither the case that the Russian market economy has suddenly evolved, nor that the investment environment has improved. However, it is an indisputable fact that the world’s two strongest economic blocs having made this announcement with this kind of fanfare brought with it not a few collateral benefits for Russia. Let us look at the main examples.
    1) he pace of negotiations regarding Russia’s accession to the WTO has accelerated. Naturally, it goes without saying that this is due to the political intentions of EU and the U.S., rather than Russia’s own independent efforts.
    2) Leaving aside the issue of such underground energy resources as oil and gas, with regard to the Russian government’s long cherished desire to promote exports of various products, U.S. and EU restrictions have gradually eased and exports have been on the increase.
    3) Due to this general atmosphere, foreign investment has begun to show signs of increasing.
  • On the other hand, under circumstances in which the economy has achieved stable growth, the government of Russia has steadily promoted judicial reform, in addition to promulgating new laws to contribute directly to improving the business environment and developing existing laws to ensure that the western market economy can be run smoothly in Russia. The Civil Law, the New Bankruptcy Law and the Farm Trade Law are just some examples of these; in particular, the Ministry of Economic Development and Trade has been tackling the issue in earnest, and 46 economy-related laws were presented to parliament and passed in 2002 as a result. In addition, in terms of the development of the investment environment, the continuing progress with amendments aimed at ensuring that not only those involved in maintaining law and order, such as the police, but also those with a direct involvement in the administration of justice cannot arbitrarily make unfair rulings is most welcome.

Divergence between the center and regions, and the expansion of the gulf between rich and poor

  • As many visitors from abroad have already recorded their experiences of the steady increase of consumption, there is no need to repeat what they have said, but I would like to venture to express my impressions about Moscow, which is where I live. Looking at the buildings in the city and the people making expensive purchases at fashionable stores, I am almost enveloped by the illusion that Japan has already been left behind in terms of spending power. Due to the limitations of space, I will not go into detail here, but when I see working women going to expensive sushi bars that put restaurants in Japan to shame (although, with a few exceptions, so inferior is the flavor of the food that it cannot even be compared with that available in Japan; they do not seem to care about this, however. Given that they do not in fact know how the real thing tastes, they cannot really be blamed for this) or elegant ladies coming and going casually along a street famous for its boutiques selling all sorts of luxury brands and the gigantic western supermarkets that stand side by side, I can hardly believe that this is a country that only took down the sign advertising itself as a socialist economy when the socialist structure collapsed 11 years ago.
  • However, this kind of opulence in such megalopoli as Moscow and Saint Petersburg, is first and foremost the exception rather than the rule, and could even be described as an aberration. When I go to provincial cities, I have been confronted with the disparity between the center of the country and its regions to an unpleasant degree, while the gulf between rich and poor is not shrinking but, on the contrary, is widening further. Advocating an understanding of local administrations, as well as the necessity of improving the economic environment, President Putin created a system of seven administrative regions and sent his own representatives to them; however, at the end of the day, the system focuses on monitoring and controlling the situation in order to prevent rebels from emerging in this vast country, so the reality is that the issue of improving the economies of Siberia and the Far North and East of Russia is beyond the powers of the government’s finances and administrative ability at present.

Investment Environment

  • As far as the investment environment is concerned, all that can be said is that it is still inadequate. As I mentioned earlier, the economic growth rate in Russia has decreased gradually since 2000 and depends on the future course of direct investment: whether it will keep sliding and amplify concern about the future, or reverse its course and start rising again. Fortunately, foreign direct investment is increasing (total foreign investment from January to September 2002 was $2.6 billion, which accounts for 22% of external investment), but it still falls well short of the level needed to renew aging facilities and get them in working order again. Another investment-related problem is that, by the nature of these things, investment is most inadequate in the places where the need for it is the greatest. There is an obvious disparity both between regions and between the industries targeted, and in general, it would be most desirable were the Russian Government to implement policies to redress these disparities. On the other hand, Russian investment in foreign countries reached $16.3 billion between January and September 2002, and as long as this is the case, I would have to say that there is no prospect of real economic development in Russia. The Russian government explains that it is short-term foreign investment by the country, which will not be hoarded overseas for long. In other words, it seems that the country would like to claim that the money is reinvested in Russia relatively soon, but this is not the complete truth. There is undoubtedly cause for concern that Russian investors, who know the Russian market better than anyone else, are not investing in their own country but plowing money overseas to an extent that overwhelmingly exceeds the amount Russia receives from foreign investors.
  • Going into detail, Russia’s large-scale heavy steel industries and chemical industries, which have barely managed to survive since the Soviet era, are hungry for investment, as you are undoubtedly aware, but the reality is that there is absolutely no sign of their being rescued. Russia’s economic situation is as follows: 1) it is supported by the ascendant oil industry, upon which the government relies; 2) it is also shored up by the manufacturing and service sectors, mainly focusing on food, with the major consumer regions being metropolitan areas, including Moscow and Saint Petersburg; 3) whilst it still could not be described as sufficient, the progress of reforms in the automobile industry, assisted by the introduction of capital and demand from the West, means that the future of the industry looks hopeful; 4) the once-prosperous aircraft industry now seems like a dying swan that can no longer take flight under its own steam, but there is a faint hope that the government is about to launch a full-blown rescue effort led by Russia’s Economic Development and Trade Minister German Gref. I have high hopes for the results that this will yield in several years time.

The importance of nurturing small and medium-sized companies

  • From a comprehensive perspective, in order to establish the foundations for economic development, I think that the most important issue facing present-day Russia is the cultivation of small and medium-sized companies. The Japanese business world has been pondering which sector of the Russian economy it should try to break into and has been pursuing heavy plant, but it has been demonstrated that this is pretty much impossible in the current circumstances. What is important first of all is to find a trustworthy partner and actually try doing business, even if the amount invested is small. It is vital to join hands firmly with that partner and nurture them while practicing the necessary skills oneself. I think that the time has come to think about it in earnest. Unlike the major companies in which the managers devoted themselves to feathering their own nests by manipulating or trading their own company’s stock, or colluding with the government in secret deals, which was rampant in the 1980s, not to mention companies that have been tied to Soviet-style management techniques and have been sinking while fearing reform, there are a number of managers who are studying hard, however small their business may be. (I believe that the Japan Center, to which I belong, can play a part in this.)

Ideal direction of business in the future

  • It is said that Russia will develop a fully-fledged support system to strengthen exports other than raw materials. When it comes to imports from Russia, Japan labors under the preconceived notion that there is nothing to buy. I believe that what is most necessary is the idea of joining forces with highly adaptable Russian companies to establish a cooperative framework in product development and distribution in order to create things for the Japanese and global marketplaces that are truly promising in terms of demand, rather than simply searching for existing products in Russia. It may be quicker and easier to import technology from Japan, but it is also possible to develop new commercial products by adjusting Russian technology. Another meaningful approach to searching for Russian technology is to initiate contact with the International Science and Technology Center (ISTC), of which Japan is a member and within which it is active. In addition, it does not have to be an epoch-making product related to high technology. For example, I think that the superb technology used by Japanese small and medium-sized enterprises, which have been improved over the course of many years, could easily be adapted for use in Russia. In addition, the business style does not merely have to involve outright buying and selling; tolling business could fit in, too. Of course, investors should be prepared to encounter some risks, but it is important to enter the market with an awareness that these risks are at the same level as in other countries. Fortunately, there are also Japanese organizations, including the Japan Center, the Japan Association for Trade with Russia & Central Eastern Europe (ROTOBO) and JETRO, which could provide a great deal of information, as well as introducing investors to enterprises or people who could become partners; these organizations should be utilized substantially.
  • I would like to permit myself to add one more comment regarding the relationship between Japan and Russia. The achievement of major projects focusing on energy resources has a large impact on the economic relationship of the two countries. However, projects such as these can neither be realized in the short term nor undertaken by a single private sector entity. (Although there are some projects being targeted on which the public and private sectors could work together, so these possibilities undoubtedly ought to be pursued and I certainly do not wish to deny their significance.) Nevertheless, as cities and regions in Northeast Asia have slowly but surely been establishing economic relationships unrelated to such large projects at the intergovernmental level, private companies that previously had no relationship with Russia have begun to show an interest in the country, with companies in both countries approaching each other and establishing relationships; although this is low-profile, it will certainly lay the foundations for the future and I harbor secret hopes regarding the results of this. Of course, it goes without saying that maximum use should be made of the facilities of NEXI (Nippon Export and Investment Insurance) and JBIC (Japan Bank for International Cooperation), and there is a great need for research into this. The fact that the number of passengers on Aeroflot flights alighting at Moscow’s Sheremetyevo Airport who say that they are visiting Russia for the first time has been increasing recently also looks promising. I wish them luck and would be happy to offer them a helping hand if they require it.

[Translated by ERINA]