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.