The Other 'New Russia'

December 14, 2007 Topic: Economics Region: RussiaEurasia

The Other 'New Russia'

The public focus in the West has been on Russia’s electoral politics and Vladimir Putin’s possible successors. But emerging consumer markets there represent another “new Russia” that the media is largely ignoring.

A decade ago, you might have noticed an increasing number of nouveau riche Russian tourists in Helsinki. But if you were to visit the Finnish capital today, you would see a dramatically different picture. Far more Russian tourists, buoyed by Russia's petroleum-fueled economic resurgence, are flocking to Helsinki. Russian investors, executives, entrepreneurs, academics and even middle-class families, wearing stylish jeans and fur coats and carrying shopping bags, are now commonplace in European capitals.

The conventional narrative on Russia in the Western media centers around its politics: President Vladimir Putin took over an emerging liberal democracy and is now in the process of turning it into an authoritarian democracy. But there is another "new Russia", one that is rapidly moving toward free  consumer markets, which will have far-reaching implications for the United States and the other industrialized democracies.


Building BRIC Potential

In the World Economic Forum's Global Competitiveness report, Russia ranks 58 th. It is relatively strong in macroeconomic stability, but its institutions are weak. Strengths include solid higher education and labor market efficiency. The large marketplace of 142 million people has great potential for innovation, but lacks business sophistication.

Russia creates less prosperity than it currently enjoys, argue the critics. As natural resources finance prosperity above sustainable levels, the signs of the "Dutch disease" grow in prominence: weakening government institutions and slowing efforts to upgrade competitiveness. In the absence of further diversification, Russia's economy is living off its resources.

With its declining population, Russia's challenge is to translate its vast resources into a more sustainable competitive advantage through productivity and innovation. But this is only a part of the story: the country does have some cause for optimism.

For half a decade now, Russia has been listed among the large emerging economies (BRICs, or Brazil, Russia, India and China), which, in less than 40 years, are expected to be larger than the G-6 in U.S. dollar terms. Since the late 1990s, Russia's growth rate has amounted to almost 7 percent.

In 2006, Russia's GDP was $987 billion, which put it behind Brazil (US$1,068 billion) but ahead of India ($896 billion). Russia's average income per capita-measured by GNI per capita-amounted to $5,780, which is well ahead of Brazil ($4,730), not to mention India ($820).


Multinational Maelstrom


Historically, industrialization and modernization have been driven by the growing role of new producers (the private sector) and new consumers (the middle class). Russia is no exception.

Recently, the first-ever survey of Russian multinationals (MNCs) in New York City and Moscow revealed a dramatic internationalization of Russian firms. Today, Russia's top 25 MNCs-ranked by foreign assets-have $59 billion in assets abroad and nearly $200 billion in foreign sales (including exports). They employ 130,000 people abroad. Their foreign assets, sales and employment have each more than doubled since 2004.

The MNCs are led by four oil and gas firms, such as Lukoil and Gazprom, and nine metals and mining firms, including Severstal and Rusal, which together account for 80 percent of total foreign assets of the top 25.

Russian multinationals are opening up the Russian economy to international ideas, talent and capital. In particular, St. Petersburg is growing into a "world city", which will dramatically change the economic and political landscape of the Baltic Sea Region.


Courting Consumers

Reflecting the new consumerism, Russia's top brands show robust growth in 2007, led by Beeline, MTS and and Megafon (telecom), Baltika (beverages), Lukoil and Rosneft (oil), Sberbank and AlphaBank (banks), Domik v derevne (food) and Pyaterochka (retail).

According to Interbrand, Russia's top 40 brands grew 23 percent in value over 2006, while new brands gained ground. In the past years, the top brands were dominated by oil and telecom brands. Now growth is more prominent in consumer-driven sectors, such as beverages, media and retail.

The rise of consumer markets has intriguing political implications.

Russia's monetary authorities have tried to keep the nominal exchange rate almost stable. Due to rapid inflation, this policy has translated into a stronger real exchange rate, which undermines Russian price competitiveness.

In 2006, imports to Russia grew by 22 percent, while export growth was 7 percent. Over time, such a discrepancy is unsustainable.

Economically, the new middle class needs foreign imports. Politically, Moscow's elites need the new middle class. This will, over time, prove to be the real challenge of the Russian government.


Dr. Dan Steinbock serves in the India, China and America Institute. Focusing on issues of international business and international relations, he resides in the United States, China and Europe.