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OH Seung-Koo

Russia's Economy: Moving from Shadow to Light

OH Seung-Koo

Aug. 10, 2005

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Russia's economy at last is emerging from a long, dark tunnel of disorder that followed the unraveling of the Soviet system in 1991. For a time, it appeared incapable of raising itself from the abyss of chaos that gripped the country, as old and new political forces clashed constantly. Surfacing from the depth of this mess was a protracted recession, an unstable ruble, and violence and upheavals fomented by workers who lost their jobs. Rubbing salt in the wound, Russia defaulted on its foreign debts in 1998.

But "Mother Russia" is steadily recovering from the shock of disintegration since Vladimir Putin took over as president in 2000. The once-shattered economy is rebounding and a semblance of social order has been restored. The economy has grown at an average speed of 6.5% per year over the past five years. Its fiscal budget, once soaked in red ink for years, has reversed course and even achieved a small surplus. Both consumer prices and the foreign exchange rate have stopped their "roller coaster" volatility. Indeed, Russia has even managed to increase its foreign exchange reserves while cutting down on external debts.

All this is music to the ears of foreign investors. International rating agencies have upgraded Russia's sovereign credit rating to investment grade. Certainly, the Russian economy owes its recovery to the skyrocketing price of oil of which it has in abundance.

But President Putin clearly deserves some credit for his strong leadership. He has read the minds of Russians who are craving for social stability at the end of serious political and economic unrest. He has won strong nationwide support by responding to such popular yearning for leadership. His success in bringing Russia to the globally prestigious club of G8 nations has done a lot to restore the Russian people's pride in participating in the international community.

For all that, Russia's continued economic growth is something that can hardly be taken for granted. Problems are aplenty, such as excessive dependence on energy as the main source of growth, an industrial structure resting on state corporations and their monopolistic or oligopolistic power, bureaucratism, deep-rooted corruption, and weak transportation, communications and finance infrastructure.

If Russia has remained far behind other countries in these areas, it has plenty of potential for growth. Apart from vast natural resources including oil and gas, it boasts a leading edge in the natural sciences and aerospace engineering. Russia's human resources are a match for any of its rivals.

Putin is aggressively adopting programs for economic growth. They include expansion of investment in manufacturing and the service sectors; provision of social and political stability; strengthening of international economic cooperation by inducing more foreign capital and gaining membership in the World Trade Organization (WTO). He must also foster industries related to development of the information-technology (IT) sector and create the basis for a balanced development of Russia.

Strengthening the power of central government, Putin has overhauled the tax system and pursued judicial and political reforms as well as economic and administrative modernization. In order to provide greater social transparency and complete the ongoing tax reform, he is increasing government pressure on Russia's oligarchy. The West is concerned that Putin is pursuing this objective in ways that go against the principle of democracy and a market economy. Even so, the government seems to have the tacit support of the Russian people in moving against the oligarchs.

Putin is actively promoting an "e-Russia" strategy with the purpose of fostering the country's IT sector. He hopes to make the information industry the core of Russia's industrial structure in order to diversify its economy. For this purpose, the government is proceeding with plans to build an IT park inside a special economic zone designed only for the development of IT companies.

And he appears strongly committed to attracting foreign capital. A good example of this policy is the recent announcement inviting a dozen leading global IT companies to join Russia at the G8 conference in 2006.

Acceding to the WTO is another urgent agenda facing the country. Once Russia agrees to open up its service industry, joining the WTO will be just a matter of time. Its WTO membership will lead to wider market openings and more foreign direct investment, making Russia increasingly competitive and stronger in the world marketplace. That will certainly improve its international standing.

Korea should take note of the fact that Russia is making serious efforts to improve its transportation infrastructure to help develop natural resources in Siberia. It must stimulate trade with and attract investment from the Asia-Pacific region for development of the Russian far eastern regions. Korea needs to know that the US, Japan and China are fully engaged in exploring and developing energy resources in the Russian far east in order to strengthen their energy security.

It's time for Korea to participate in the vast Russian market. It must do this prudently. Russia's central and western regions are more suitable as markets, while the far eastern regions and Siberia are good for development of energy sources. Korea must cooperate more fully with Russia in developing forward-looking industries in areas like oceanography and aerospace engineering where Russia has a lead. In other words, Korea should be much more proactive in making use of Russia's vast pool of excellent scientific talents.

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