Russia is emerging as a global economic giant.
By Liam Halligan
Last Updated: 12:09am GMT=A002/03/2008
'Medov, Medadova - whatever!"
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The bear is out of the woods: Click to enlarge
Hillary Clinton is a highly-educated woman. But this was her response
last week when asked to name the front-runner in Russia's presidential
election.
The New York senator and White House hopeful seems to wear her ignorance
of the world's largest country as a badge of honour. She is not alone.
In the run-up to today's Russian vote, the Western press has been full
of insinuation, slur and downright disinformation about a nation which
has risen from the ashes and is now emerging as a global economic giant.
I lived in Moscow for several years during the mid-90s - the roughest
period of Russia's "transition" from state-planning to capitalism. I've
paid regular visits ever since. I now work for a company that manages
foreign investments in emerging markets - including Russia.
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So, feel free to sniff at my motives. But please don't sniff at the
facts, which show that Russia, over the last ten years, has achieved
possibly the most incredible economic turnaround in human history.
When the Soviet Union imploded in the late 1980s and the planned economy
collapsed, Russian growth sunk deep into negative territory. For the
next decade, the country lurched from crisis to crisis.
Then, amid signs of recovery in 1998, Russia's fragile post-Communist
economy collapsed again - caught in a financial melt-down affecting all
emerging markets. Trying to defend its currency, the country defaulted
on its sovereign debt.
Since then, Russia has grown at a real terms average of 7 per cent a
year. In 2007, growth hit 8.1 per cent - higher than the year before,
despite the US-originated sub-prime crisis that has hobbled much of the
world.
Russia's reserves have ballooned from practically zero in 1998 to $480bn
(=A3242bn) today - the third largest haul on earth. The country is now
almost debt-free - with a budget surplus of 6 per cent of GDP, and a
trade surplus almost twice as much again.
Goldman Sachs describes Russia's economic performance as "remarkable".
UBS calls it "awesome". Russia, India, China and the other large
emerging markets are upending the world economic order. Their resurgence
has created hundreds of billions of dollars of wealth and lifted tens of
millions from poverty.
Western politicians struggle to adjust to these new realities -
particularly when it comes to the old "Cold War" enemy. But Russia is
now the world's ninth largest economy - and rising fast. And, in my
view, much of the scorn aimed its way is nothing but a small-minded
reaction to this rapidly ****fting balance of global power.
Three years ago, Russia overtook Saudi Arabia to become the world's
largest crude ex****ter. And the country's post-Soviet recovery was
initially built on a 50 per cent rise in annual crude production.
Had that increase not happened (had Russia chosen to join OPEC, for
example), oil would now be way above $150 a barrel, rather than close to
$100. Imagine how much that would now be hurting oil im****ters like
America and the UK.
But Russia is now far more than "just an oil and gas economy". Retail
sales are growing at around 13 per cent a year in real terms - one
reason why leading multi-nationals are now piling into Russia.
Construction is expanding by 16 per cent a year, and domestic investment
by 20 per cent - as Russia rebuilds its shattered post-Soviet
infrastructure. Again, this trend is now attracting massive - and
welcome - foreign investment.
The big blot on Russia's economic landscape is inflation - almost 12 per
cent last year. Like many fast-growing emerging markets, the country
suffers from high food prices. But Russian policy-makers are now
allowing the rouble to appreciate more quickly - bearing down on
expensive food im****ts. And, while the rest of the world has been
cutting interest rates, Russia's Central Bank just raised them - as part
of its bid to tackle inflation.
This is a country, of course, with many problems. As in any nascent
capitalist society (think England in the 1780s, or America in the
1870s), there is corruption and the legal system is fragile.
But, in recent years, despite factional in-fighting, the direction of
economic policy has been clear. Russia now has a 13 per cent basic rate
of income tax. Foreign banks can set up at will. Moscow, St. Petersburg
and, increasingly, Russia's regions are rippling with stores bearing
Western names and products. Despite his "hard-man" image, these
developments have all happened since President Putin took office in
1999.
And today's likely winner - Dmitri Medvedev - will encourage further
liberalisation. The 42-year-old has made a series of speeches calling
for "reduced taxes" and "decentralisation of power". A trained lawyer,
Medvedev will put effort into "improving the legal system".
Dismiss this as a wish-list if you like. But, again, the direction of
travel is clear. Russia wants to be a fully-developed market economy and
part of the global system - but on equal terms.
Will it be pushed around by the West? No. Will it allow the West to pull
its historic trick of annexing countries with large natural resources,
or treating them as supine? No.
Above all, Russia wants to trade with the West. But the West keeps
blocking its member****p of the World Trade Organisation - despite
admitting China.
Since the Soviet Union collapsed, Russia has made huge strides -
economically, but also in terms of freedom. Today's election, while
imperfect, is a testament to that.
Western businesses are engaging with Russia as quickly as they can,
desperate to gain a foothold in what will soon be one of the world's
very biggest economies.
Western politicians, meanwhile, cling to their cold war clich=E9s -
replacing the "iron curtain" with an "iron curtain of the mind".
? Liam Halligan is Chief Economist at Prosperity Capital Management
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