economy and commodity export bonanza
Russia's economy went into decline with the break-up of the
Soviet Union in 1991.
People on fixed incomes faced a sharp drop in their standard
of living while state-owned industries were auctioned off to
entrepreneurs at rock-bottom prices.
In 1998, an economic crisis led to a big devaluation of the
rouble which had a beneficial effect and led to the start of a
Since 2000, soaring oil, gas and other
commodities revenues have boosted state coffers and helped
Russia pay off its international debts.
In 2006, Gross Domestic Product grew by about 6.7%, but
overall, Russia's economy is still smaller than other G8
The US and Europe designated Russia a market economy in
2002, but the state still exerts considerable control over
Gas and oil revenues helped
lift the economy out of crisis
Russia's well-being hinges on energy. It accounts for a
fifth of Russia's GDP, which grew 8.1% in 2007. Oil and gas
generated 65% of export revenues and made up 30% of all
foreign direct investment in the country last year,
according to the World Bank and IMF.
There are three main types of financial models in the
world: Western, Asian and Russian. The Western financial
model is economically based, with gaining money and profit
as the end goal; such a model tends to crush inefficiency
and protect the system as a whole. The Asian model is
socially based. This model’s goal is maximum employment and
social stability, where money is used as a political
resource for nonfinancial ends despite all inefficiencies.
The Russian model is politically based. In Russia, finance
is a political tool to control the country and operates
much like money for loan sharks or organized crime. The
system is highly inefficient, but it allows a very small
few to hold all the power in an enormous country.
There is a dark side of the boom of commodity
exports of 2004-2008. The Russian economy is showing
significant signs of illness. Its symptoms include
near-complete crowding out of investments in manufacturing
and other lucrative export-oriented sectors and
the unsustainable trend of a strengthening currency driven
by excess petrodollars. Real-estate prices in central
Moscow are higher than those in any of the largest
cities in the world, and this is in a country with a GDP
per capita just one-fourth that of the United States.
Significant inflationary pressures are becoming more
visible with the headline inflation rate of 15%. Salaries
are growing at double-digit rates, making even some of the
most-promising industries, like high technology,
uncompetitive very rapidly.
Combined with near-complete nationalization of the main
driver of the boom, the oil and gas sector, investors in
the private sector have plenty to fear. With so much
capital flowing into less-productive government-driven
sectors and inflation inhibiting the long-term success of
the many of the other most-promising export-oriented
investments, it is hard to see how the Russian economy
could avoid a meltdown if oil prices continue to decline
Commodity producers account for a huge share of profits,
and thus the Russian market's P/E could rapidly swing into
double digits once the double whammy of declining commodity
revenues and rampant inflation hits in 2009.