Author`s name Michael Simpson

Russia's Increasing Noncompetitiveness

Russia is experiencing an increase in the unemployment rate
According to the information of Russia's State Statistics Committee, a rather good economic upturn has been registered in the first six months of the year. The GDP increased by 6.8 per cent within the first quarter of the year as compared with the same year-ago period. The RF Ministry for Economic Development and Trade says the showing made 7.2 per cent within the first six months. It is better than in 2002 when GDP increased by 4.1 per cent, than in 2001 when it gained 5.3 per cent and it increased by 5.4 per cent in 1999. It was only in 2000 when GDP increased by 9 per cent, the showing close to that one recently suggested by the president. Obviously, the import substitution as a result of multiple ruble devaluation had a positive effect in 2000.

Then the coefficient of backing import with export reached the showing of 2.4 times vs. the 1.9 times in 1999 and 2001 correspondingly. But later the ratio started changing in favor of import even quicker.

According to the results of the first six months of the year, despite of the high oil prices in the world the price appreciation of export was lower than that of import – 19.2 and 23 per cent correspondingly.

Nevertheless, starting with the second half of 2002, the economic growth in general was rather high. In 2003 it was mostly based upon the increase of the foreign trade turnover (over the first quarter of the year it increased by 26.6 per cent as compared with the same year-ago period) and upon relative success in the basic branches of the economy (with the exception of the agriculture) - by 7.2 per cent, including the 6.8 per increase in the industry. However, the Ministry for Economic Development and Trade estimates perspectives of growth for this year rather reservedly. One of the reasons is the sluggish dynamics of industrial production in the second quarter of the year.

This is why Minister for Economic Development and Trade German Gref says GDP will increase only by 5.9 per cent by the end of the year. At that, he adds, much will depend upon the world oil prices; the present-day forecast is rather favorable for Russia’s Urals oil - $26 per barrel.

However, attitude of economists to the situation is rather ambiguous. Many analysts think that the strong export supply may result in excessive strengthening of the ruble, in increase of production costs and reduction of the growth rate in the domestic industry. Meanwhile, Russia is experiencing an increase in the unemployment rate. In  the forth quarter of 2002 it made up over 6 million people (the average showing for 2002 – 5.7 million people), it reached 6.6 million people in February 2003 and in general the unemployment rate made up about 6.2 million people over the second quarter of this year.

According to the information provided by the Ministry for Economic Development and Trade, the ministry has already changed the forecast of the average annual ruble-to-dollar rate for 2003 from 33.7 to 30.9 rubles per dollar. In general, the ruble will get 12-13 per cent stronger within the year. But if the RF Central Bank actively supports the dollar it won't be able to restrain the inflation within the limits of the 12 per cent promised by the government; it may then reach 13.5-14 per cent. There are apprehensions that the Yukos scandal may entail outflow of capital from Russia. In any case, this tendency was evident in June and July, but it is not clear whether it happened because of the political events or because of a season peak payments on foreign contracts. Somehow or other for the next year the ministry forecasts a lower than for this year GDP growth - 5.2 per cent and it will make up a bit more than 6 per cent in 2006.

As is seen from the statistics, there are no signs of approaching the goal of the economic growth increase up to 10 per cent; statements of the government officials do not reveal assurance that this showing can be achieved in the nearest future. Economists are now focusing on the problem how to achieve macroeconomic conditions that are required for maintenance of at least some economic growth. It seems that bigger results are just a dream. But if we consider the problem closer we may see that there are other problems in addition to the macroeconomic proportions.

Let's take the Dutch disease for example. The problem is quite different here in Russia than in Holland. The paradox is that the disease may strike only rather highly developed industrial economies that are very competitive on the world market of labor division before the causes of the disease emerge. As contrast to these countries, Russia hasn't yet reached this level. Russia's low competitiveness on the foreign and the domestic markets is connected not with the level of production costs but with a restricted range and low quality of its goods. Majority of Russian producers can only compete for a place on the market with producers of low quality products meant for people with low solvency.

This statement is confirmed with the analysis of the data on industrial dynamics over the first six months of the year published by the RF Statistics Committee. On the basis of the data, groups of factors can be singled out that resulted in the industrial upturn by 6.8 per cent. The first group of factors is the anticipatory production growth in some industrial branches that set the pace to the economy or maintain the locomotive branches. This is first of all oil production that increased by 11.5 per cent over the first six months of the year.

The second group of factors includes success of separate enterprises in different industrial branches; the success was achieved thanks to the capability for growth under competitive conditions. These are enterprises in the non-ferrous metallurgy, in the light industry and in production of linen clothes. A great part of the increased production growth was fixed by several enterprises that strive for orders of small batches of goods, and especially for the mass demand for low quality cheap goods.

In general, the orientation of domestic producers on the limited demand for relatively cheap investment and consumer goods is a feature characterizing the incompleteness of the restorative growth based on old technologies. However, the potential of this growth is being exhausted which is proved by the low growth rate or the regress in the automobile and light industries, in the tractor and agriculture machine-building and in other branches where the unemployment growth has recommenced. The dependency upon the dynamics of the world oil prices and other exported raw stock goods can be overpassed only if the competitiveness of the processing industry goes higher with respect to the range and the quality and reaches the international standard. This is impossible without a large-scale application of advanced foreign technologies which in its turn requires the real ruble rate.

Yury Alexandrov
Doctor of Economic Sciences
Senior research assistant of the Institute for Oriental Studies
in Russia's Academy of Sciences

MiK news agency