Russia’s Economic Future

Russia’s economic future Nowadays, Americans always come up with the rise of China and India as new economic powerhouses on the global stage. It’s easy to forget that another superpower in Asia – Russia – occupied the central spot in our nation’s foreign policy consciousness for almost five decades after World War II. But Russia still matters. In August, global wheat prices surged to two-year highs after Prime Minister Vladimir Putin announced a ban on exports due to weather-driven supply shortages there.

And the country remains a dominant supplier of oil and natural gas to the world market. Unlike China, however, the former Soviet Union has not been nearly as successful in making the transition from the communist era to a more market-based economy. According to Russia expert Bruce Parrott, not even the Russians are sure just what they want to be going forward. Although, the Russian economy faces serious challenges.

Russian industry is not likely to regain an important role in a global economy that demands peak efficiency. Consequently, the export of primary commodities and raw materials is likely to remain the bulwark of economic development. Primary commodity markets are relatively more susceptible to fluctuations than are industrial markets. Russia is likely to continue to be influenced by economic trends that it cannot control.

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Failures such as corruption are not moral failures, but a failure of administrative structure. There is a consensus that the country needs to strengthen the institutional and legal underpinnings of a market economy. Improving the legal and regulatory structure would provide a reliable framework for improving governance, strengthening the rule of law, reducing corruption, and attracting the long-term capital needed for deep restructuring and sustained growth. The country also needs to improve its tax system to encourage greater tax compliance and a realistic appreciation in the opulation that the people must pay for the costs of a modern society. The government must avoid pressures to use central bank money to finance its budget deficit. Further reforms are needed in the banking sector, including a legal framework to make it easier to close down troubled banks. Any measures aiming to reduce poverty levels among workers are primarily associated with the increase in the official wages drawn by the lower paid workers, the majority of which are women, and also with the identification and taxation of income in Russia’s informal sector.

A positive sign was that in mid-year 2000, the Russian government adopted an official development strategy for the period 2000-10. The strategy identified economic policy directed at ensuring equal conditions of market competition, protecting ownership rights, eliminating administrative barriers to entrepreneurship, making the economy more open, and carrying out tax reform. The strategy identified the creation of an effective state performing the function of a guarantor of external and internal security and also of social, political, and economic stability.

The strategy spoke of a “new social contract” between the more active sections of Russian society and the reformed government. Analysts of Credit Suisse bank believe that in the next 10 years the Russian economy will grow by more than 60 per cent. They base their forecast on the Russian abundant natural resources, the active development of its energy infrastructure, as well as on the country’s strong scientific and technological base in certain industrial sectors.

We foresee a bright future for the Russian economy, and we forecast an increase of 4. 9 per cent in 2011 and of 4. 6 per cent in 2012, said the Credit Suisse bank analysts. They believe that the Russian economy will thereafter be growing by 5 per cent annually and they believe that the major reason for the increase in the Russian economy is due to the well developed oil sector, which is still developing steadily.

Head of the Russian Academy of Sciences’ institute of economy’s center for comparative study of transitional processes, Leonid Bardomsky has this to say about the forecast of the Swiss analysts: “The Swiss analysts have made a conservative forecast, taking into account that in the last decade the Russian GDP has doubled. The experts have cautiously predicted an increase of 60 per cent, in view of the fluctuation of oil prices on the global market, where there is the expectation of an increase of 60 per cent which is normal for the sector.

Income from oil can guarantee the mentioned 60 per cent increase, but reaching 100 per cent will require the development of nanotechnology”, said Bardomsky. He believes that the Swiss bank has no trust in this and hence its conservative forecast is based on global extraneous developments. Meanwhile, Russia’s economy has many problems also. For example, it remains very vulnerable to external shocks and has not yet been able to develop a stable base for continued growth and poverty reduction.

While the data are not yet sufficient to carefully assess the impact of the economic recovery on the enterprise sector, it appears that the rebound in the non-oil/gas traded goods sector has so far been driven by the real depreciation of the ruble and the greater availability of capital. Furthermore, there are indications that industrial growth is beginning to slow. Therefore, maintaining a realistic exchange rate, while controlling inflation, must remain a policy priority for sustaining the recovery and future growth of the real economy. Strong fiscal discipline needs to be maintained.

A large swing factor is, of course, the level of capital flight, the reduction of which depends on progressive improvement in the investment climate in Russia. Finally, over the longer-term, Russia’s deteriorating infrastructure is a matter of concern. Russia’s basic public infrastructure—including roads, bridges, railways, ports, housing, and public facilities such as schools and hospitals—was built during the Soviet period. After independence, investment in maintenance and new construction of public infrastructure has fallen dramatically.

Russia’s aging physical plant is likely to become an increasing constraint to growth unless an improved investment climate can ensure substantially higher levels of investments than is presently the case. According to these problems, Russia should diversify its economy and not rely solely on oil and gas if it wants to achieve a significant breakthrough; it should continue to keep the ruble weak in relation to other world currencies, to get the best from, the export of its raw materials.

The Managing Director of the Department of Global markets of The New York-Mellon Bank, Michael Wolfork, says that in the first half of the New Year, prices of the Russian raw materials will increase as a result of high demands, and it will come about due to the lower exchange rate of the ruble against the dollar. European countries, the U. S and Japan will be buying more Russian goods if the ruble remains weak, said Wolfork. I think the world wants Russia to have a strong economy, to bring benefits not only to Russians, but also to the rest of the world.

If the potential of the Russian economy increases, the economies of the rest of the world will likewise be boosted. Financial experts believe that by 2030, the Russian economy will become the strongest in Europe, and this view is backed by experts of Price Water House Cooper in a report circulated in the City of London, the financial center of Britain. It is believed by experts that by 2030, the Russian economy will become the 5th strongest in the world.

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