Russia is once again a mighty force. Or is it simply punching above its weight? Its massive size makes it almost inevitable that the country should boast huge natural resources – oil and gas aside, it also has the potential to be the world’s food basket. But Russia has weaknesses. For one thing, it suffers from a more serious demographic problem than most countries.
The Population Reference Bureau estimates that Russia’s population will fall from 129 to 110 million between 2008 and 2050. The fertility rate is 1.4 births per women; the UK, for example, has a fertility rate of 1.9.
But, it is ten years on from the Russian crisis of 1998. Back in 1998 the Russian rate of interest was 150 per cent, and nigh on ten years of recession followed. That is to say it took almost ten years for the economy to recover.
But today, Russia enjoys a stunning growth rate. It has become a major player again. Can this continue?
It seems much of Russia’s growth rate can be explained by vast overcapacity created during the Russian crisis. Since then, the economy has been catching up. But, there’s not much spare capacity left – very soon she may have to settle for similar growth rates as the rest of the developed world.
Inflation, is mounting – and is ever threatening to become a more serious problem. For example, wages are growing at 30 per cent per year. Russia remains too reliant on the price of oil and gas. If the price continues to fall, problems will mount.
Neil Shearing, emerging markets economist at Capital Economics says: “So while Russia has largely recovered from the 1998 crisis, it now faces a new set of policy challenges. Its notoriously outdated infrastructure must be updated in order to boost productive capacity. Mass immigration appears to be the only way to head off a demographic crunch that could see the population fall by almost 10m by 2020. At the same time, the authorities can no longer avoid the huge inequalities that have emerged over the past decade and public institutions remain underdeveloped. Finally, and perhaps most importantly, the economy is still highly dependent on oil and gas production. So while Russia’s recovery since 1998 has been impressive, the next decade is likely to prove just as challenging.”
Russia remains too relaint on the commodity price cycle. The crisis of 1998 had multiple causes – but cheap oil was surely a major factor. If oil falls back, then expect a similar slowdown in Russia. Russia needs to see consumer spending make up a higher proportion of GDP; only then will the economy be more balanced, and less reliant on the wings and arrows of commodity cycles.
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