Russian Global Economy

Russian Global Economy

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Table of contents

Introduction………………………………………………………3

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Monetary and fiscal policies……………………………………..3

Global Financial Crisis: Impact upon Russia…………………….4

Challenges faced by country economy……………………………5

Russia Transformation Plans………………………………………6

Sources of Comparative Advantage……………………………….7

Trade Policy with the US and Europe……………………………..9

Strategies for growth………………………………………………11

Conclusion…………………………………………………………12

References………………………………………………………….13

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Introduction

Russia is one of the countries in the world which has a strong economy. The country is eighth in the economy of the world in terms of the nominal value and lies sixth in terms of the purchasing power. The country experienced a good economic growth due to increased foreign investments, rising of the oil price, political stability and the rise of the oil prices. The country main exports are timber, natural gas, metals and oil which contribute to 80% of the country’s exports. (Carbaugh 2008). This research paper will look at the Russia economy at the global level, challenges and also at the different strategies that the country plans to employ to boost its economy.

Monetary and fiscal policies.

The monetary policies in Russia are aimed at controlling the rate of inflation and also in make the rabble have an exchange rate that is stable. The ruble has been rising due to the falls of the substantial exports. This has happened due to lack of sterilizing of profits in the commodity funds. The dominant monetary tool has been the management of supply instead of interest rates. There is a negative prediction by the central bank that in 2010 and 2011 that the current account would reach a negative value if the average oil values would be below $120/bbl.The vulnerability of the Russian foreign currency reserves has be depicted by the defense that the central bank has put in place and also due to the crisis of 2008. (David 2003).

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In Russia the local and central government expenditure are almost equal. Since the debt crisis of 1998 the fiscal policy has performed very well. In the 2002, the budget was calculated with a surplus of 1.63% GDP due to the surplus that was experienced in the past year of 2.4% of GDP.This growth was brought about by demand of consumption. This rate of growth of the economy is predicted will continue due to increase of the oil prices. If the price of oil will be low this will mean that the country will not active the targeted economical growth. Despite this also the high price of oil will also cause some negative effects to the economy. This will happen as the Russia ruble will rise in value hence making Russia’s exports to be less competitive in the world market. There has been increase in spending in salaries in the public sector; increase in pension and also in the social programmes.There has also bee increase in spending in the education and health care sector. There is also increase in the funding for the national projects such as agriculture, housing, education and health care as from 2006. (Robinson 2004).

Global Financial Crisis: Impact upon Russia

The crisis affected Russian economy when after it had experienced a commendable growth since 1991.The growth rate was at 7% until the autumn of 2008.The country budget was about $ 80 billion and had $469 billion record in export. The country had an international reserve of $597 billion .The exchange rate of its currency had risen since 2001 in a steady way. (David 2003).

However by the end of 2008 the situation changed and even today the economy has not yet fully recovered. The central bank has been forced to sell $210 international reserves in which 60% of this is the capital outflow. There has been the buying of a credible amount of foreign currency by domestic banks and also by households. Many sectors experience 20-30% decrease in their productions.

The Russian economy has been so much hit by this crisis due to: Financial systems which are weak, in the stock market there is high share of foreign capital, high debt that the foreign investors owe to Russian banks and companies, high dependency of oil exports, huge inflow of foreign currency between the year 2003 -2007 and many social commitment by the state which has caused excess budgetary expenditure and also due to ruble over evaluation since its rise

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from 2002 was by 145%.

The crisis has caused Russia to experience production activity slowdown, crunch in domestic credit, outflow of capital, national currency depreciation and increased inflation.

This crisis has really affected Russia in its foreign market .First it has affected its cooperation with the neighboring countries. This is because this countries act as the chief market to most of the manufacturing industries in Russsia.For example 90% exports in the auto mobiles export and 70% of exports in textiles. Russia depends on these countries for copper concentrates, chrome and iron ore. The cooperation has been affected not only to the neighboring countries but also with the European countries. This is because cooperate with Many European countries in transoportation, oil and gas production. Most of the labor force in construction industries in Russia also comes from these countries. (Letiche 2007).

Challenges faced by country economy

The international crisis is having great effects to many countries in the world. The crisis has affected the standards of living of many people and also in the employment sector. There are two major challenges that Russia is facing in the global economy. One is the challenge is over reliance of specific trading relationships. Russia is only a member of the APEC which is the only international multilateral trade grouping which it belongs. In the year 1998 Russia merchandise export to the APEC took 17% of the total exports. By the year 2007 the exports had reduced to 12% of total Russian trade. Russia has not been able to leverage its position in the APEC as Other Countries in the organization have done in terms of total dollar terms. Compared to other countries like Vietnam the country export to the APEC has tripled while that of Vietnam has exceeded by almost seven times during the same period of time that the two countries have been members of APEC.Russia continues to rely on the traditional trade partners instead of broadening its markets to other parts of the world as other countries such as China are doing. This has made the country to have a very narrow market. (Wiegert 2004).

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The other challenge being faced by Russia is lack of international confidence. The government has not been in a position to have a quick response in tackling the world economic financial crisis. This is making many households and businesses to postpone their expenditures. This has caused the financial crisis to turn to be an economic crisis. Russia is lacking crisis of confidence. Investors in the country no longer have confidence with a large amount of dollars flowing out of the country. Depositor who have lost confidence are also withdrawing rubles and converting them into dollars because of fear of devaluation or the collapse of the banking system. This is creating a situation that is not nice to the economy of the country.

Russia Transformation Plans

Russia economy is so reliant of on extraction of energy and also natural resources. This situation is bound to change if the plans the country have will succeed. There is a plan to make the country a global economic leader by making the economy to be science based economy i.e. to be relying on modern technologies instead of relying on natural resources. There has been a technological revolution which is going on in the country. There is confidence that this would help the country be among the top world economies by 2020.The country has a plan to spend $60 billion in promotion of innovation based economy. The concentration is on nuclear energy, aviation and software. There are network of science and technology hubs that have been set allover the country in this programme. (Letiche 2007).

The government has also lifted custom duties in order to encourage private investors in the new revolution in technology. Custom duties have been lifted on all equipments geared towards bringing high technology in the country. This new technologies will also assist the country to use science for its fuel growth. (Robinson 2004).

There also have been plans for the inclusion of fiscal and monetary stimulus packages in order to assist the economy to improve in its perfomance.The country is also in the process of doing away with isolationism. The country has realized that most of the challenges that it is facing are global challenges that requires global solutions. (Davydov 2000).

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Sources of Comparative Advantage

Russia enjoys comparative advantage over other countries in defense. It arms made sales of worth $7.1 billion according to a report by the US congressional research service as from1998-2005.These arms act as a source of income. This is because the defense industry is an industry just like others and also makes profit to the country. The arms also help the country to keep security. This brings a conducive environment for business. Russia produces arms that are meant for exports. Its arms are very suitable for many countries especially the third world countries. The arms are also cheaper compared to those produced in many other countries .The arms meet the specific needs of the target countries. It also exports most of these arms to Europe and USA. (Worth 2005).

Russia has been able to produce auto products that have been of high quality and more durable. Its manufacturing industries are developed and use modern technologies in the production process. The industries are effective in the supplying of the products in the export market and also in the local markets. The country has a culture of providing high quality education. There area also more intern programmes in different sectors. This makes the country be in a position to produce people who are well equipped to work in the industries. (Wiegert 2004). The salaries that most industries in Russia offer their employees is high as compared to many other countries .This has made Russia to be in a position to control brain drain to other countries. This makes many of the industries to be run by experts from the same country. This has really helped the country be in a position to enjoy competitive advantage in the global economic market over many other countries.

The government has really influenced the improvement of the competitive advantage in Russia. The government has been in the fore front in trying to bring stable economy in the country. The government has been expanding the market of the export to many countries that the country did not trade with in past years. It has increased its market in European countries and also currently holding talks with the US to see the best ways that the two countries can collaborate both in business and also in technological development especially at this moment when the country is revolutionizing to scientific based economy. (Davydov 2000).

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The government has also created a legal system that is conducive for business investments. The judicial system nowadays is very functional.Thhis has paved way to many local investors to have courage to engage more in business and also this has attracted more foreign investors especially from US and Europe.

The government has also increased the funding to many sectors including education. This will make the country be in a position to produce quality brains that care able to work efficiently in the job market. The government has also concentrated in improving the telecommunication allover the country. There is also a culture of hard working in Russia which has also helped the country in attaining competitive advantage in many industries. The country has also enjoyed a good political climate which has made it to be a favorable place for investment. (Worth 2005).

Trade Policy with the US and Europe

The US and Russia has not yet developed fully. The US imports and exports from Russia are not so diversified. The trade only involves few categories of commodities. US investments in Russia increased after the break of the Soviet Union. There has been expectation of higher trade when it comes to merchandise trade but this has not been attained. In 2006 the US accounted for $4.6 billion the direct foreign investment in

Russia. There have been issues that have arisen in the trade between the two countries. One of the issues is lack of PNTR from the US which has not gone well with Russia. Russia is viewed as good market for agricultural products from the US while Russia has been a good market for poultry products from USA.Despite this there has been restriction of meat imports. US consider these restrictions to be against international standards and also consider these restrictions to be unnecessary. There is also a restriction on the importation of US pork with the reason that US processing do not prevent the shipments from being affected by trichina which is parasitic worm.USA pork producers usually give assurance that the freezing done prevents this infestations. In 1993 Russia imposed a burn on beef from US after mad cow case was discovered in the US. There has also been lack of Intellectual property rights enforcement which

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had been a stumbling block in the trade negotiations between the two countries. Russia also has regulations on sanitary and phytosanitary which the USA has been a major concern to the US government. (Dolnaldson 2005).

Russia is a major trading partner in the European market. In 2008 the trade turn over of Russia in the EU reached 52.3%.EU is also a major investor in Russia. There are on going negotiations on Russia accession to the WTO negotiations on the agreements which will replace Partnership and Cooperation Agreement and also there are negotiations on how to implement European Russia Common Economic Space. (Dolnaldson 2005). In July 2008 there was a new trade agreement which would strengthen the trade relations between the two.EU major imports from Russia are mainly mineral fuel and energy. There are also some manufactured chemical goods and raw materials. Russia imports quite a variety of products from European Union. The products include transport equipments, live animals food and machineries. (Carbaugh 2008).

The partnership and cooperation agreement has been the foundation of EU-Russia trade relationship. It is the legal basis of trade between the two trading partners. It main objective is the trade and investment promotion and also development of smooth economic relations between the two. It has provisions on the economic relations between the two. Imports from the EU usually do not face any restriction measures in Russia. The only restrictions which exist In EU are mostly in the steel industry but currently they are being addressed in the bilateral agreement.

The two economies are eager to make a formidable economic intergration.The agreement main objective is to be in a position to tackle the regulatory issues and also assist in reform of Russia economy. (Letiche 2007).

The common Economic Space aims at finding a more open and a more incorporated market between the two economies.

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Strategies for growth

Due to the crisis in the economy and the challenges that the country is facing .The banks have embarked on the process of assisting the country in modernization of its economy and also in helping the country in the diversification of its economy in order to stop relying on just natural resources in its economy. (Mortgomery 2005).

One strategy that is put into place is the reduction of the energy and emissions on the green houses in all the sectors in the country .This will assist in the supporting cooperate competition and also will enhance prevention of climate change. But this strategy cannot succeed if there is no good action plan on energy efficacy .So there is need for the concerned authorities should to address this.

The other strategy is the modernization and the diversification of the Russian economy. This will assist in addressing the financial needs and also help in making the trade to flow in reaction to the crisis. This will also enhance development of the economy and efficacy of energy in the medium term. The banks have main role to play in making sure this happens by making the working capital accessible,finacing clients and ensuring there is direct foreign investment is resumed. This can be done by banks supporting corporate sector, offering technical assistance, financing enterprises through lending schemes or through the equity funds. However this will not be possible if the infrastructure will not be developed and also if there will not be efficient financing mechanisms. Good infrastructure will assist in the flow of goods, energy supply in the makes and also assist in accessibility of utility services. The challenge that this strategy will face is the availability of public financial support. (Worth 2005).

This strategy may not be successful because the financial sector is not yet stable to be in a position to finance the whole economy of the country.

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Conclusion

There is an urgent need for Russia to put measure to revamp its economy to be in a position to compete in the global market. This can only be done by the country opening more its market to many other countries even in Africa where its market is not so much developed. There is also need to employ more technological production techniques in its industry in order to increase its production in the global market. (Hill 2008). The government should put more efforts in developing its infrastructure which will enhance trade and also assist the financial sector to be in a position to have a smooth capital flow to the economy.

There is also dire need to establish more trade agreements with other countries both bilateral and multilateral forms of agreements.

References

Carbaugh, R. (2008).International economics, Cengage, ISBN 0324581483, 9780324581485

David, T. (2003).Real and financial dynamics in Russia, Springer ISBN 3450009108,

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9783540009108

Davydov, O. (2000).Liberalization of Russian foreign trade: problems and prospects, Fordham university press, ISBN0823219682, 9780823219681

Dolnaldson, R. (2005).Foreign policy of Russia, E Sharpe publishers, ISBN0765615681, 9780765615688

Hill, C. (2008).Global business today, Mc graw hill, ISBN0071100970, 9780071100977

Letiche, J. (2007).Russia move into the global economy, Routledge, ISBN0415770548, 9780415770545

Mortgomery, E. (2005).Internationalization and economic policy reforms in transition countries, Birkhauser publishers, ISBN3540240403, 9783540240402

Robinson, N. (2004).Reforging the weakest link: global political economy and post soviet change, Ashgate publishing, ISBN0754634949, 9780754634942

Wiegert, R. (2004).Economic opening up and growth in Russia, Springer.ISBN3540204958, 9783540204596

Worth, O. (2005).Hegemony, international political economy and post communism Russia, Ashgate publishing, ISBN0754637573, 9780754637578

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