Can Russia Complete?

Russian economy has been growing at an
average nominal rate of 6 percent annually for the past
decade. Among the most important factors contributing to its
expansion has been the skyrocketing cost of oil and gas. In
2000, when Vladimir Putin took office, the cost of oil was
approximately $20 a barrel; at the end of his term, it was
five times higher. Meanwhile, the competitiveness of Russian
enterprises has become increasingly fragile because of the
appreciating ruble, climbing resource prices, and rising
wages as well as the exhaustion of Russia's excess
industrial capacity. Observers have called for Russian
authorities to take measures to counterbalance the
nation's increasing economic dependence on natural
resources. Economic diversification can cover a wide number
of issues and involve many challenges, including
entrepreneurship, foreign investment, regional development,
and physical infrastructure. In Russia's case, it comes
down to one thing: ensuring that the manufacturing sector
can compete in the global economy. Russian competitiveness
will not depend on centralized, top-down efforts to pick
winners but on broader policy measures designed both to
improve the investment climate-which affects firms'
incentives to invest productively and create jobs-and to
develop a more competitive, knowledge-based economy. Russian
authorities are seeking to address many of the
country's most important developmental challenges.
Economic diversification will require reducing investment
risks induced by national and regional policies and lowering
barriers to entry for newer, more dynamic, and innovative
firms, specifically by facilitating transfer of land from
municipalities and from older, loss-making firms. It also
will require greater inclusiveness in government decision
making, more transparency regarding government decision
making, and stable legislation at all levels of government.
This book quantifies and benchmarks the relative strengths
of Russian manufacturing and identifies opportunities to
increase its productivity and competitiveness. This volume
focuses on the challenges now facing enterprises in Russia,
highlighting sources of productivity growth and
competitiveness within enterprises, including technological
progress (knowledge absorption and innovation), worker
skills, and the investment climate. After the 1998 crisis,
as gross domestic product rebounded, investment accelerated,
and foreign direct investment increased dramatically,
Russia's recovery surpassed expectations. Yet, a closer
look at national accounts reveals that much of that shift
has produced relative price increases in (non-tradable)
services and full capacity utilization in
industry-indicators more characteristic of a resource
dependent economy than of successful industrial diversification.