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Contemporary Russian economy and commodity export bonanza

Russia's economy went into decline with the break-up of the Soviet Union in 1991.

Russian economy after the fall of the USSR

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 recovery.

Russia's wealth

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 industrialised nations.

The US and Europe designated Russia a market economy in 2002, but the state still exerts considerable control over business.

Pipeline construction

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 significantly.

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.

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