Wiener Institut fürInternationale
Wirtschaftsvergleiche

The Vienna Institute forInternational EconomicStudies

www.wiiw.ac.at

Russian Economic and Integration Prospects
Peter Havlik
The Vienna Institute for International Economic
Studies (wiiw)
15th March 2008

2Energy Fuelling Growth and SuperpowerAmbitions
 Putin‘s key achievements- GDP growth and the ambivalent role of energy

 Russia and the EU: unequal or equal partners ?
- Russian economic dominance in the CIS- EU-Russia Neighbourhood integration prospects

 Economic challenges for the future- Is the rapid growth sustainable ?
- Duo Putin-Medvedev potentially disonant?

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3Putin‘s key achievements







Improved living standards
Rising employment
More FDI inflows
Repayment of external debts
Balooning Forex reserves
Restoring stability, stronger roleof the state
Russia is global player again
External relations deteriorate
Nationalism, racism , revival of
the Soviet past
Cartoon: Kommersant Vlast© wiiw

4

Russian GDP: nominal (EUR bn), real growth (%)
and per capita (EUR at PPP)
GDP (EUR bn)

GDP growth, in %GDP/capita, th EUR

1400
1200
101000800

5.75.7

5.2

5

5.4
6.4

600
400

6

6.4

7.3
5.1

-4.1 -3.6
1995

9.2

7.2

6.4

11

7.4

8.1

4.7

+235%

1.4

200
0

7.7

8.3

10

12.3

-5.3
1997

1999

2001

2003

2005

2007

16
14
12
10
8
6
4
2
0-2
-4
-6

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5Putin‘s key economic achievements
 Rising incomes and









wages
Less poverty, moreinequality
Rising employment
Surging FDI inflows
Repayment of external
debts
Ballooning Fôrex
reserves
Political stability
Stronger state
Persisting corruption
Democracy weakened20002007Population (mn)
Employment (mn)Monthly wages (EUR)
Poverty rate (%)
FDI inflow (EUR bn)
Current account in GDP (%)
Forex reserves (EUR bn)
Debt in GDP (%)
GDP/cap (00's EUR at PPP)
GDP/cap (00's EUR at ER)

0100

200 300400© wiiw6

External sector
Exports, EUR bn
Imports, EUR bn
Oil price (USD/bbl)

of which: oil & gas
Current account, % of GDP
100

300
250

80

200
60
150
40
100
20

50

001995

1997

1999

2001

2003

2005

2007

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7Drivers of GDP growth, 2000-2007
contributions of main components to GDP growth, in %Private c ons umption
Gros s c apital f ormation
GDP (right sc ale)State c ons umption
Net exports

100%

980%

8760%

640%
520%
40%

3-20%

2-40%

1
2000

2001

2002

2003

Source: wiiw Annual Database incorporating national statistics, wiiw forecast.

2004

2005

2006

2007

© wiiw

M
an Cu oH
RAfa noe
TgTst
aloct
el ratta ricr
Fu
esusulri& ns inct Tlt
Gtanarpu
es o nVg io raterecAn drtete8

Economic growth by sectors, 2002-2007(2002=100)
2007

100
120
140160180© wiiw

10Inflation and M2, annual change in per cent
CPI inflation, y/y in %M2, y/y in %

30

100

2580

2060

1540

1052000Jan

Jul

2000

Jan

Jul

Jan

2001

Jul

Jan

2002

Jul

Jan

Jul

Jan

2003 2004

JulJan2005

JulJan

2006

Jul

Jan

2007

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11

Industrial production and wages
Wages (EUR)

Production y/y change

Wages y/y change

30

400

25350
300

20250

15200

10150

5100

050
Jan

Jul

2000

Jan

Jul

2001

JanJul2002

JanJul2003

JanJul2004

JanJulJanJul2005 2006

JanJul2007

Jan© wiiw12

Nominal and real exchange rates
nominal RUB/EURreal, Jan 2000=100 (CPI based)

40

5060

35

703080252090100JanJul

2000

JanJul2001

JanJulJan

2002

JulJan2003

JulJanJul

Jan

2004 2005

JulJan2006

JulJan2007© wiiw

14

Unit Labour Costs (ULC) and contributions of key components
2000-2007, annual growth, in %Wages
Employment
ULC growth (right scale)GDP
Exchange rate RUR/EURULC level, Austria=100 (right scale))

45

100%

38,380%38,237,632,460%

20%
0%

35

27,440%18,013,220,322,922,920,1

40

3021,62516,515,912,120
15-20%

10-40%

50,10-60%
2000

2001

2002

2003

2004

2005

2006

2007

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15

EU-Russia integration prospects
and challenges

 Energy trade EU-Russia Neighbourhood© wiiw

16

The legacy of Putin‘s presidency
 High economic growth, improved

living standards, external public
debts repaid
Power consolidation in theKremlin
Taming oligarchs
Russia back on the world stageBut: Excessive dependence onenergy (Dutch disease danger)
Democracy rolled back, humanrights record mixed
Reviving ugly remnants of Soviet
past
Rising assertiveness, external
relations deteriorate

Cartoon: Kommersant Vlast© wiiw

17

Structure of EU-Russian trade, 2006, in %EU exports: EUR 56 bn (1.7% of the total)
EU im ports: EUR 137 bn (3.7% of the total)
60

Oil, Gas

50
40

RefinedFuels Basic Metals

30
20100O ther

Transport

El.equip

MachinMetalsMinerals

RubberChemic.

Fuels

Paper

W ood

Leather

Textiles

Food

Stone

MiningO il,gasAgric© wiiw

18

Selected Oil and Gas Pipelines in the FSU© wiiw

20CIS and the EU: Economic size, 2007Russia, Ukraine, Kazakhstan, Belarus, (rest)CIS
Real GDP in the CIS

Real GDP in Europe
EU(15), NMS, Russia, Ukraine%5%4%6%21%2%8%57%01%67© wiiw

22

CIS (FSU): Key economic data
GDP levels in 2007 (2000=100)
 Estonia
 Latvia
 Lithuania
 Azerbaijan
 Armenia
 Belarus
 Georgia
 Kazakhstan

182
184
171
317
230
171
176
197

 Kyrgyzstan
 Moldova
 Russia Tajikistan
 Turkmenistan
 Uzbekistan
 Ukraine
 CIS

134
152
156
183
.
153
167
163

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23CIS (FSU): Key economic data (3)GDP per capita at PPP in 2007, EUR
 Estonia
 Latvia
 Lithuania
 Azerbaijan
 Armenia
 Belarus
 Georgia
 Kazakhstan

17680
14540
15000
8000
5000
8800
3600
8810

 Kyrgyzstan
 Moldova
 Russia Tajikistan
 Turkmenistan
 Uzbekistan
 Ukraine

1640
2200
12320
1360
.
2220
5760

 CIS

9000

 NMS(10)13840

 EU(27)24860© wiiw

24

CIS (FSU): Key economic data (4)Share of CIS in exports, in %, year 2007
 Estonia
 Latvia
 Lithuania
 Azerbaijan
 Armenia
 Belarus
 Georgia
 Kazakhstan

1817331831463817

 Kyrgyzstan
 Moldova
 Russia Tajikistan
 Turkmenistan
 Uzbekistan
 Ukraine CIS .

50411515502538© wiiw

25

CIS (FSU): Key economic data (5)Share of CIS in imports, in %, year 2007
 Estonia
 Latvia
 Lithuania
 Azerbaijan
 Armenia
 Belarus
 Georgia
 Kazakhstan

181629
33
34
66
35
45

 Kyrgyzstan
 Moldova
 Russia Tajikistan
 Turkmenistan
 Uzbekistan
 Ukraine CIS .

6336156243© wiiw

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CIS (FSU): Key integration projects
 12 FSU republics: Commonwealth of Independent States (CIS) Common Economic Space (CES): Russia, Belarus, Kazakhstan,Ukraine Union of Russia and Belarus
 Central-Asian Cooperation: Russia, Kazakhstan, Kyrgyzstan,Uzbekistan, Tajikistan (+Belarus, merged with Eurasian
Economic Community)

 GUAM: Georgia, Ukraine, Azerbaijan, Moldova
 Russian capital dominates energy, metals and telecom sectors inthe CIS – integration from „below“© wiiw

27

Common Economic Space (since 2003):Russia, Ukraine, Belarus, Kazakhstan-The aim is to establish Customs Union-Ukraine‘s reluctacy reflects unclear relations with the EU, aspiring formembership in the EU and NATO-Difficulties in dealing with Lukashenko‘s Belarus-

Good understanding with Nazarbayev‘s Kazakhstan

Likely consequences-

Better market access for exports to Russia (especially UA metals andfood, machinery from BY)-

Cheaper fuels imports from Russia (shift to the ‚country of destination‘
principle of VAT taxation)© wiiw

28

EU-Russia: institutional relations
 No EU accession, PCA Agreement (expired 2007, automaticallyprolonged)‘Market economy’ status (since 2002)‘Energy dialogue’ and ‘Strategic partnership’ (Kyoto Protocol)
WTO accession deal with the EU (May 2004)
Road Map for Four Common Spaces (May 2005)
But:

 Growing mutual suspicions, contest for „near abroad“
 EU concerns with values (Chechnya) and market access(energy supplies; financial services; investments in strategic sectors)

 Russia refuses to ratify Energy Charter Prospects unclear: “New Neighbours” or “Common Spaces”?

© wiiw

29

EU-Russia co-operation prospects
and challenges
 Lack of coherent EU policies, yet NMS bring new accents
 Russia grudgingly accepted NATO and EU enlargement
 EU external border (Estonia, Latvia) not ratified yet, bad relations
with Belarus, disappointment with Ukraine

 Independence of Kosovo, consequences for Abkhasia, South
Ossetia, Transdnestria and Nagorny Karabakh Russia demands more than Neighbourhood Programmes
 Russia is suspicious towards EU initiatives in the CIS
 EU Free Trade Area with both Russia, Ukraine and Belarus ?
© wiiw

30EU neighbourhood co-operation challenges
 Reforms are instrumental to the development of good relations
with all EU neighbours

 Trade diversification, investment climate improvements (FDI) are
crucial for a sustainable development in the CIS

 Effective border regions assistance from the EU Develop ‘partnerships’ and ‘common spaces’ between theenlarged EU and all its New Neighbours simultaneously Avoid / remove new divisions and artificial barriers Do not create unrealistic expectations (Ukraine) !
© wiiw

33

Economic outlook and challenges facing
the new President Dmitry Medvedev

 Diversification of the economy
 Transition of power© wiiw

34

Russian GDP: nominal (EUR bn), real growth (%)
and per capita (EUR at PPP)
GDP (EUR bn)

1400
1200
1000
800
600
400
200
0GDP growth, in %GDP/capita, th EUR
14.7 16
13.9
13.1
14
12.3
1112
10
10
9.2
10
7.7 8.38
5.7 5.7 5.2 5 5.4 6 6.4
6
7.4 8.1
7.3 7.2
6.4
6.4
6.4
6 5.5 4
5.1 4.7
20
1.4-2-4-4.1 -3.6-6-5.3
1995
2000
2005
2010+400%© wiiw

35

External sector
Exports, EUR bn
Imports, EUR bn
Oil price (USD/bbl)

of which: oil & gas
Current account, % of GDP
100300???

2508020060
150401002050001995

2000

2005

2010

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36

Drivers of GDP growth, 2000-2010 (A)contributions of main components to GDP growth, in %Private c ons umption
Gros s c apital f ormation
GDP (right sc ale)State c ons umption
Net exports

100%

980%

8760%

640%
520%
40%

3-20%

2-40%

1
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Scenario A: Oil price constant (USD 70/bbl), resource-based growth, little diversification
Source: wiiw Annual Database incorporating national statistics, wiiw forecast.

2010© wiiw

37

Drivers of GDP growth, 2000-2010 (B)contributions of main components to GDP growth, in %Private c ons umption
Gros s c apital f ormation
GDP (right sc ale)State c ons umption
Net exports

100%

980%

8760%

640%
520%
40%

3-20%

2-40%

1
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Scenario B: Oil price constant (USD 70/bbl), successful diversification away from energy.
Source: wiiw Annual Database incorporating national statistics, wiiw forecast.

2010© wiiw

38

Medvedev‘s future plans and challenges
 Four „I“s as key priorities:




Institutions, Innovations, Investments,
Infrastructure
Using Industrial Policy instruments
Public-Private Partnership
Outward expansion of Russian
businesses (CIS, EU, etc)
Is he a hawk or a dove ?
Will he be able to step out of Putin‘sshadow ?
Will he survive the whole term ?
Cartoon: Kommersant Vlast© wiiw

39

Medvedev‘s future plans and challenges
 Is GDP growth sustainable ?
 Demography, emerging labour
shortages and migrant workers
 Will duo Medvedev-Putin functionsmoothly ?
 What about rivalling apparatuses ?
 What about corruption and inefficiency
in general ?
 Less confrontation in external relations ?
 Restoring the CIS, a new partnershipwith the EU (more than energy) ?
 Confronting China (Far East) and USA(NATO) ?

Cartoon: Kommersant Vlast© wiiw

40

Thank You for your attention !!!
Arigato daimas !!!

© wiiw