Tag: Russia
To Commemorate the 1917 Revolution in Russia – Occasions More for Reflections than for Celebrations
The centennial of the 1917 revolution in Russia provide opportunities for the public to refresh knowledge of the tumultuous events that dramatically changed the country’s history. Conferences, television series and debates, exhibitions at historical and art museums are some of the activities that will illuminate the February and October revolutions in 1917. The complex, intertwined and contradictory historical process and the following tragic Civil war 1918 – 1922 calls for careful, objective and dispassionate approaches and evaluations.
Over the last years, Russia has officially sponsored or encouraged great historical commemorations, e.g. the bicentennial of the war against Napoleon in 1812 and the centenary of the outbreak of the First World War. In contrast, this year’s commemoration of the 1917 revolution(s) in Russia – the first in February and the other in October (old style calendar) – pose a whole range of difficult questions. In the contemporary school curriculum in Russia, the most often used concept is ‘the Great 1917 Revolution in Russia’, thereby avoiding the previous, inappropriately counter posed February vs. October revolution. Instead, emphasis shifts to a continuous spectrum of revolutionary processes on different levels of the state and in various social groups throughout 1917. Likewise, this concept captures the multi-ethnic character of the revolution better than ‘the Russian revolution’.
In this brief, I outline the expected results from professional historians and archivists, by academic institutions and museums. In a forthcoming study of recent Russian historiographic debates (Samuelson, 2018), I intend to analyze also the changing official assessments of the 1917 revolutions.
In the Soviet era until the glasnost in the late 1980s, party-controlled historians described the ‘Great Socialist October revolution’ tendentiously, with many obfuscations and ‘white spots’. Not only were the opponents of the Bolsheviks depicted in caricature forms; also, the later oppositionists to Stalin’s party line were eliminated from the 1917 history, or mentioned merely for the alleged mistakes. In the West, on the other hand, there existed a plethora of interpretations of the Russian revolution, reflecting ideologies and worldviews of liberals, conservatives, as well as exiled Russian politicians (see e.g. Mazour, 1971 or Laqueur, 1967).
In the decades since the fall of the Soviet Union, Russian historians have profoundly enriched our knowledge of the 1917 revolutionary process as well as the ensuing Civil war. ‘Un-persons’ like Lev Trotsky, and hundreds of other who were expelled later from the Communist party, got back their due place in history. Works have been published of monarchists, liberals and socialists who led the Provisional governments during 1917. Historical studies by exiled scholars, as well as memoirs by politicians and diplomats that were once published in the West, have now been reprinted by Russian publishing companies (for the best survey, see Gennadyi Bordiugov, 2013 (1,520 pages!!)).
In today’s Russia, there co-exist an abundance of interpretations and assessments of the 1917 revolutions. The February strikes and uprising in Petrograd triggered the abdication of tsar Nikolay II, led to the founding of a republic and the formation of new government. The revolutionary changes outside the capital, throughout the whole empire, took quite different forms and only in recent years, regional scholars could describe them objectively.
Naturally, the fundamental changes in the political landscape in Russia after the return from exile of Vladimir Lenin in spring 1917 have attracted interest by scholars. Solid biographies of Lenin by Dmitrii Volgogonov (1994), Vladlen Loginov(2017), Anatolii Latyshev(1996) and Elena Kotelenets(2017), to mention only a few, give the Russian public a more nuanced figure than the more hagiographic works published in the Soviet epoch. The British historian Catherine Merridale (2016) gives a fascinating narrative of how Lenin’s return from exile in Switzerland would completely change the perspectives of the revolution. The renowned Russian specialist Vladimir Buldakov wrote profound reinterpretations of the ‘Red Troubled times’ (Krasnaya smuta) of 1917 in the first of a series of path-breaking research in the central and regional archives (Buldakov 2010, 2015).
As we approached the centennial of this decisive and deeply divisive year in Russia’s long history, many observers wondered how it was to be officially observed. Just like similar jubilee years, for example in 1989 of the French Revolution, it seemed obvious that this was not a time for triumphant celebrations as had been the case of the annual October Revolution holiday (on 7th November, new calendar) in the Soviet era. On the other hand, it would equally be unfortunate to pass over in silence this eventful revolutionary year. So by support from the Ministry of Culture, the Russian Historical Society (abbrev. RIO) set up a vast program of conferences, round tables, exhibitions and publications. Universities all over the Russian Federation will organize gatherings for historians and students. Central and regional archives arrange exhibitions, the explicit purpose of which is, not to give any definite value judgments, but to let the public form their own views on the personalities by pondering over original documents on Tsar Nikolai II and the tsarist family, the politicians of various parties, as well as on Lenin, Bolsheviks and others of the Left.
The call from the Russian political leaders has been to strive for a balanced, as dispassionate as possible, reassessment of the 1917 revolution in Russia. The ensuing civil war 1918–1922 created a generation-long, deep division among Russians, inside the country and in exile. Just as was the case in other countries, e.g. Finland and Spain, where civil wars scarred the national fabric in the 20th century, at present, the goal should be for reconciliation and mutual understanding of the historical actors on all sides of the political spectrum.
This spring, the Siberian branch of the Academy of Sciences in Novosibirsk organized a round-table on the 1917 revolution. Dozens of scholars presented their research findings and opinions on various events in the region; the protocol’s understatement that “the discussions had often a polemical character” indicate that the Russian revolution is still a subject of hot controversies, even in academic circles. On 29–31 March, the Moscow State University arranged the first of several grand international conferences planned this year. In twenty sessions, hundreds of scholars from all over Russia and from foreign countries gave papers on widely different aspects of the revolutionary processes. Likewise, universities in Samara, Volgograd, Cheliabinsk and other cities have announced their forthcoming conferences on the 1917 Revolution.
The main depository of political archives, RGASPI, in Moscow has contributed over 800 archival documents to a special exhibition, ‘1917. The Code of the Revolution’ at the Central Museum of Contemporary Political History. (https://www.sovrhistory.ru/events/exhibition/58becc2aa0e5981d9da515c4, accessed 31.03 2017). Two grand exhibitions projects with less-known archival documents attempt to give new perspectives, first, on Tsar Nikolai II, and, later this year, on Vladimir Lenin; both are of course well-known personalities, but the archivists and museums’ commissars hope to inspire visitors to renew their perspectives. In St. Petersburg, besides conferences, round-tables and exhibitions, there will be theatrical performances to reproduce dramatic events of 1917 and precisely on the streets and squares where they once upon a time took place. Russian Internet sites will provide pieces of contemporary news from 1917 for each day (https://project1917.com/).
Publishing houses have started new series devoted to the 1917 revolution in Russia, and the shelves in bookshops give abundant ‘food for thought’ for eager readers. Here one can find not only Trotsky’s own renowned History of the Russian Revolution written in his exile in the USSR. There are also memoirs by officers in the White Army during the Civil war, and a multitude of new popular-history works that reflect today’s ‘lessons of history’. The leading publishing company Rosspen will edit an archival documentary series, and compile an encyclopedia on the 1917 Revolution, thus hopefully summing up what has been accomplished in the former states of the USSR concerning the dramatic year of 1917 that was to profoundly change not only the country’s history, but even global history for many years ahead.
References
- Dmitrii Volkogonov, Lenin: A New Biography, New York, 1994;
- Vladlen Loginov, Lenin: How to become a leader, Glasgow 2017;
- Anatolii Latyshev, Rassekrechennyi Lenin (The declassified Lenin), Moscow 1996;
- Elena Kotelenets, Bitva za Lenina. Noveishie issledovaniia i diskussii (The Fight over Lenin: Recent research and discussions), Moscow 2017.
- Catherine Merridale, Lenin on the train (Swedish edition Lenins resa: Vägen till revolutionen 1917), London 2016.
- Vladimir Buldakov, Krasnaya smuta: Priroda i posledstviia revoljutsionnogo nasiliya (The Red Troubled Times: The nature and consequences of revolutionary violence), Moscow 2010;
- Vladimir Buldakov, Voina, porodivshaia revoliutsiiu (The War that brought along the revolution), Moscow 2015.
- Lennart Samuelson, Sovjetepoken i backspegeln.The Soviet Epoch in the Rear-view Mirror’, forthcoming in 2018
- Anatole G. Mazour, The Writing of History in the Soviet Union, Stanford: Hoover University Press, 1971;
- Walter Laqueur, The Fate of the Revolution: Interpretations of Soviet History from 1917 to the Present, London: Macmillan, 1967.
- Gennadyi Bordiugov (ed.), Mezhdu kanunami: Istoricheskie issledovaniia v Rossii za poslednie 25 let, Moscow: AIRO-XXI, 2013
The photograph to this policy brief shows Bolshevik leader Vladimir Lenin and other Russian exiles in Stockholm, 13 April 1917, on their way from Switzerland, to change the course of the Russian Revolution and world history of the 20th century. Social democrat Ture Nerman is talking with Lenin (4th from right, with umbrella).; behind them – mayor Carl Lindhagen and Aleksandra Kollontay, radical feminist who spent World War One here and in the 1930s to return to Stockholm as ambassador of the USSR.
Note: This Swedish photograph is in the public domain in Sweden because one of the following applies: (i) The work is non-artistic (journalistic, etc.) and has been created before 1969, (ii) The photographer is not known, and cannot be traced, and the work has been created before 1944.
Too High or Too Low? The Pros and Cons of Regulating the Reserve Price in Public Procurement in Russia
In theory, an optimally set reserve price leads to an optimal outcome in all standard auctions. In reality, however, it is difficult to identify the optimal reserve price. In public procurement auctions, a higher reserve price may lead to a higher competition for the contract, because more suppliers will find the contract profitable. Thereby a higher reserve price may lead to lower prices. But on the other hand, if competition in the market is already quite low or the risk of collusion is high, a higher reserve price will just lead to higher contract prices. The controlling bodies in Russia become suspicious when the reserve price in public procurement auctions is too low because they are afraid it is a sign of collusion between the procurer and the seller. Indeed it may be the case that the reserve price is set low to exclude other sellers from competing, thus acting against efficiency. Using data on public procurement of gasoline in 11 Russian regions in 2011-2013, we show that a higher reserve price did not lead to lower contract prices, and that low competition in the private market was a major obstacle to efficiency.
Why is the reserve price important?
The reserve price is widely discussed in the auction and procurement literature. Standard auction theory says that an optimally set public reserve price results in the optimal outcome in all standard forms of auctions with risk-neutral agents and independent private values (Myerson, 1981). But practice is far from pure theory. The procurer does not have all information to set the optimal price and this leads to losses in social welfare (Klemperer, 2004; Dimitri et al, 2006).
There are several concerns for a practitioner here. First, there is the question of whether the reserve price should be known to everybody in advance (Dimitri et al, 2006; Brisset et al, 2015; Eklof&Lunander, 2003). Second, the reserve price influences the entry decision and competition for the contract (Klemperer, 2004; Krishna, 2009; Wang, 2016). Generally, a higher reserve price may lead to higher competition for the contract, because more suppliers will find that contract profitable, which may in turn lead to lower prices. But on the other hand, if there is a high probability of collusion in the market, a higher reserve price will just lead to higher contract prices due to coordinated behavior of the potential sellers (Wang, 2016). The procurer could use lower reserve prices to decrease gains from collusion (Krishna, 2009), but in a corrupt environment a lower reserve price is treated as an instrument to restrict entry for the favor of preferred bidders in exchange for bribe (Guide to Combating Corruption & Fraud in Development Projects).
Hence, there are various arguments for and against setting the reserve price in public procurement auctions higher rather than lower. We are interested in showing which of them hold true in practice, or in other words, do higher reserve prices lead to lower contract prices in public procurement auctions?
In Russian public procurement, the reserve price in an auction is set by the procurer and is visible to everybody. Moreover, before April 2011, procurers were free to set the reserve price, and they could easily set it unreasonably high, and then share the surplus with a seller. Starting from April 2011, procurers are obliged to prove that the reserve price is set at a reasonable level. In the explanations to the Law from Ministries of Economy and Finance, there are recommendations to set the reserve price higher rather than lower. Regulators are much more afraid of corruption than a high price of the contract.
Using data on public procurement of gasoline in 11 Russian regions in 2011-2013, we show that a higher reserve price did not lead to lower contract prices, and that low competition in the private market was a major obstacle to efficiency.
How does public procurement of gasoline work in Russia?
To make it clear how auctions in Russia are held, we will now present some details on Russian public procurement of gasoline.
First, the public procurement law is the same for all Russian regions. Second, the detailed information on public procurements – including calls for bids, chosen procedure, auction protocols, and supporting technical documentation – is published online at a unified website. If the reserve price is below 500000 rubles, public buyers of gasoline may choose between sealed-bid “paper” auctions and open-bid electronic auctions. If the reserve price is above 500000 rubles, they should use open electronic auctions.
To set the reserve price, a procurer may ask a few firms to provide estimates of an expected price of the contract at which they would agree to sign the contract. Alternatively, procurers may search for price information on the Internet or in other open sources on prices of goods and services (some gasoline stations publish its prices online, e.g.). The reserve price may then be calculated on the basis of these prices.
The procedures start when a procurer publishes the call for bids, stating basic characteristics of the contract and the reserve price. In sealed-bid auctions the bidders send their price quotations and the supporting documents. The bids are opened simultaneously, and the lowest bid (or the earliest bid in case where two or more equal prices are announced) wins. Open-bid auctions are conducted in two stages. By the first deadline all perspective bidders should provide a statement of interest, including the supporting documents and in some cases monetary deposits. Procurer may assess the statements of interest and exclude the firms that do not meet the basic requirements at the bidding stage. At the second stage, the preselected bidders show up at the auction and make descending open bids. The lowest bid wins the contract.
Data, empirical strategy, and results
To figure out whether higher reserve prices lead to lower contract prices in public procurement auctions, we used data on public procurement procedures available at a unified official public procurement website. In particular, we collected data on all public purchases of gasoline with octane number 92 at the regional level in 2011-2013 in 11 regions of Russia (1559 observations).
Among the characteristics of the procurement procedures, the most important are the number of bidders, the type of the procurement procedure (sealed-bid or open), and the characteristics of the contract (the volume and duration). We also take into account the number of price quotations the procurer uses to calculate the reserve price and some other characteristics of the purchase: the number of procurers in centralized purchase, the number of purchases of gasoline this procurer made in 2011-2013, and whether the procurer requested some special conditions from the seller (e.g., that the seller should have a network of gasoline stations).
The information allowed identifying:
- Procurements with only one bidder;
- Procurements with no or a very small price decrease as a result of the auction;
- Procurements with a reserve price higher than the market price;
- Procurements with a reserve price higher than the maximum of the price quotations.
Using these new variables, we test whether the probability that there is only one bidder (which is not what a regulating body would wish to see) correlates with auction characteristics and the fact that the reserve price is higher than the maximum of the price quotations (implying it is unreasonably and probably inefficiently high).
Table 1 Regression results
| Probabilty | Probabilty | |
| VARIABLES | One bidder | Discount = 0 |
| one bidder | 1.074*** | |
| (0.115) | ||
| open auction | 0.749*** | -0.191* |
| (0.0973) | (0.115) | |
| volume | 8.62e-06*** | -3.03e-06 |
| (2.51e-06) | (1.96e-06) | |
| duration | 0.000828* | 0.00209*** |
| (0.000454) | (0.000610) | |
| number of price quotations | -0.126*** | 0.386*** |
| (0.0436) | (0.0539) | |
| reserve price is higher than max of quotations | -0.469*** | 0.560*** |
| (0.108) | (0.136) | |
| Constant | -0.264** | -0.694*** |
| (0.126) | (0.160) | |
| Observations | 931 | 932 |
Standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1
We also test whether the probability that there is no price decrease during the auction (discount equals zero) correlates with the auction characteristics and the fact that the reserve price was higher than the maximum of the price quotations or just higher than the market price.
Table 1 shows that a higher reserve price does not lead to a higher competition, but leads to higher probability of the situation that there will be no price decrease at all. Hence, there is no evidence that setting the reserve price at a higher level will attract more bidders and result in lower contract prices.
Conclusion
Auctions are viewed as one of the best ways to achieve lower prices. But in reality there are many factors that make this questionable. In this policy brief, we focus on the regulation of the reserve prices in public procurement. Is it reasonable to recommend procurers to set high reserve prices? We look at a specific market with high entry barriers, and a relatively low number of suppliers active on the public procurement market. Such markets face high collusion risk. We show that high prices do not attract more bidders and auctions with reserve prices set higher than all quotations end up with no price decreases during the auction. A big share of auctions (46% in our data set) in Russia is inconsistent (only one bidder comes to bid), and in such an environment high reserve prices can only increase government spending. It is more reasonable to follow the ideas mentioned by Krishna (2009) and use low reserve prices to decrease contract prices and, thus, gains of suppliers from colluding behavior, even if it happens. Our study shows that general recommendations that do not take into account market specifics could not help procurers achieve efficient results.
References
- Krishna, Vijay. Auction theory. Academic press, 2009, ch.11.
- Klemperer, Paul. “Auctions: Theory and Practice.” Princeton University Press, 2004, ch.1,3,4.
- Dimitri, Nicola, Gustavo Piga, and Giancarlo Spagnolo, eds. Handbook of procurement. Cambridge University Press, 2006, ch.11.
- Myerson, Roger B. “Optimal auction design.” Mathematics of operations research 6.1 (1981): 58-73.
- Brisset, Karine, François Cochard, and Julie Le Gallo. “Secret versus public reserve price in an “outcry” English procurement auction: Experimental results.” International Journal of Production Economics 169 (2015): 285-298.
- Eklöf, Matias, and Anders Lunander. “Open outcry auctions with secret reserve prices: an empirical application to executive auctions of tenant owner’s apartments in Sweden.” Journal of Econometrics 114.2 (2003): 243-260.
- Wang, Hong. “Information Acquisition Versus Information Manipulation in Multi-period Procurement Markets.” Information Economics and Policy (2016).
- Guide to Combating Corruption & Fraud in Development Projects, http://guide.iacrc.org/
The Economics of Russian Import Substitution
This policy brief discusses the economic mechanisms triggered by import substitution policies, associated losses and conditions that ensure positive economic effects. Numerical estimations of potential effects of Russian import substitution policies indicate a decline in GDP, decrease in output of unprotected sectors and consumers’ welfare losses. We conclude with a discussion of the role imports play in economic efficiency.
Import substitution: pro and contra
Two years after joining the WTO, in the new political reality, Russia began implementing a series of import substitution policies. Supported sectors range from agriculture and production of metal products, to computer equipment and special purpose vehicles. The potential economic effects of these policies are of substantial interest and importance both for researchers, policymakers and the general public. However, they have not yet been quantitatively assessed. This policy brief summarizes the results of a study of these effects conducted at CEFIR in 2016 (Volchkova and Turdyeva, 2016).
Import substitution can be implemented by a range of instruments aimed at creating preferential conditions for domestic producers of imported goods compared to foreign competitors. Barriers to trade are the most common and easily available policy tools. Trade barriers lead to price increase on domestic market relative to the world price of the good.
Domestic manufacturers in the protected industry enjoy higher prices on domestic market, thereby securing higher revenues at the same costs. The protected sector also is able to put into operation those capacities that were generating losses in the absence of protective measures. However, if the economy works at full employment in absence of import substitution, then in order to increase production in the protected sectors, factors should be reallocated there from the other sectors. As a result of the import-substituting policy, producers in unprotected sectors will decrease the scale of production, and some will exit the industry. That is, producers that were efficient enough before import substitution policies will be forced out by those that cannot compete at international prices. From the point of view of welfare economics, this maneuver is accompanied by a loss of economic efficiency.
Economic literature discusses several cases when import substitution can be justified, such as a presence of positive external effects from protected sectors to the economy; learning-by-doing effects in protected sectors; and an infant industry argument. All of these cases imply market failures in the absence of government intervention, leading to lower than socially optimal output of the sector in question. Then, government interventions aiming to increase output – such as import substitution – might bring additional welfare improvement to the economy. If any of these effects do take place then the gain brought by protected sectors may compensate for the loss by the unprotected. To validate any of these cases one needs to perform a thorough and independent analysis of the economy based on very detailed information.
Estimates of static and dynamic effects of import substitution
In order to illustrate the potential effects of import substitution policies in the current Russian situation, we use a static CGE model of the Russian Federation constructed at CEFIR.
Based on publicly available documents (Russian Government’s Decrees №2744-Р 29.12.2015 and № 2781-р 31.12.2015), we identify the sectors that are targeted by the import substitution policy: agriculture and four manufacturing sectors (metal production; machinery and equipment; cars; sea crafts, airplanes and spaceships).
To model the effects of import substitution, we calculate an ad valorem tariff equivalent, which ensures a 10% decline of the volume of import in each of five industries. In order to simulate proposed policy measures, we conduct six experiments: increase in import tariffs in each of five industries individually, and a comprehensive policy change with an increase in all five tariffs simultaneously.
If import substitution policy is implemented not by trade policy instruments but only through producer support measures then it will be accompanied only by changes in relative prices for producers while consumer prices will not be affected and will be determined solely by international prices. In this case, our estimates will represent an upper bound of possible consumers’ losses. Since the distortion of relative prices for producers do not depend on a particular instrument chosen to implement import substitution policy then the consequences for other sectors and for efficiency of the overall production will be the same under trade or domestic policy interventions.
Table 1 shows the results of our calculations. Columns (1) – (5) present the estimates of the effects of the import-substitution measures in the relevant sectors. Column (6) reports the results of the comprehensive policy reform.
Table 1. Consequences of the decline in imports by 10% in the protected sector (s).
| Agriculture | Metals | Machinery, and equipment | Cars | Sea crafts, airplanes and space ships | Tariff change in all industries | |
| (1) | (2) | (3) | (4) | (5) | (6) | |
| Ad valorem tariff equivalent, % | 2.9 | 3.9 | 6.1 | 6.7 | 5.6 | |
| Change in | ||||||
| CPI, % | 0.04 | 0.09 | 0.39 | 0.3 | 0.3 | 1.0 |
| Protected sectors’ output, % | 0.7 | 2.5 | 9.8 | 10.3 | 8.3 | 3.8 |
| All other production, % | -0.2 | -0.4 | -0.5 | -0.2 | -0.5 | -2.3 |
| GDP, % | -0.002 | -0.011 | -0.023 | -0.005 | -0.018 | -0.049 |
| Welfare, % | -0.015 | -0.020 | -0.074 | -0.041 | -0.080 | -0.215 |
Source: Authors’ own estimation.
Our results illustrate the anticipated effect of import substitution policy in economy with full employment. The protected industries increase their output at the expense of other industries. An increase in economic inefficiency is reflected by a fall in GDP.
In order to capture dynamic effects of the proposed import substitution policy, we simulate an import tariff increase in a Solow-type growth model calibrated for the Russian economy. The proposed policies result in a deeper economic decline in 2016 than in the baseline scenario (-0.76% in the baseline scenario and -0.79% in the import substitution scenario), followed by somewhat faster growth in subsequent years due to a lower base. The aftermath of the import substitution policy is still visible in 2020: GDP growth in 2020 relative to 2015 in the baseline equals 2.4365%, while the import restriction in all targeted industries will reduce economic growth in a five-year term by 0.007 percentage points, to 2.4295%. The numbers correspond to the expected reduction in economic efficiency as a result of the import substitution measures.
While numbers in terms of GDP do not look particularly large, the annual losses in GDP in nominal figures correspond to $650 million in value added, which is roughly equivalent to 30,000 jobs lost in Russia due to import substitution. Besides, effect on growth adds to 5,000 more jobs lost over 5 years.
As we mentioned above these losses might potentially be justified by the positive external effect from an increased output of the protected industries on the rest of economy. To ensure this, the selection of industries for protection should have been done through independent expertise based on a thorough analysis of sectoral interaction over time. However, the way the economic policy is formulated in modern Russia, with heavy influence of lobbying groups and very little contribution from independent economic research, we can hardly expect that the industries targeted for import substitution satisfy the objective criteria of positive external effects.
Imports as drivers of competitiveness
Classical trade theory shows that imports are a major cause of gains from trade integration. Modern trade theory complements the classical mechanism by selection effects among heterogeneous firms when only the most productive firms are able to sell in foreign markets (Melitz , 2003).
Keeping in mind that a substantial part of manufacturing trade flows consists of intermediate products that are used as inputs in subsequent production (in the case of Russia, the share of intermediates in imports is more than 60%) then the above reasoning implies that the competitiveness of domestic production is determined, among other things, by the availability of cheap imports.
Numerous empirical studies for many countries confirmed that industries with a higher share of imported intermediate goods are more productive than industries with a lower share (Feenstra, Markusen, and Zeile, 1992). Recent studies, analyzing data at the level of individual firms (Bernard at al., 2012; Castro, Fernandes, and Farolec, 2015; Feng, Li, and Swenson, 2016), confirm that the effect takes place at firm level: firms importing more intermediate goods have higher productivity than firms importing less, other things being equal, which suggests that imports of intermediate goods is an important source for the growth of firms’ competitiveness.
A study conducted for Russian firms showed that labor productivity in Russian companies which import intermediate goods is 20% higher compared to similar firms not importing intermediates (Volchkova, 2016).
On this basis, we have every reason to believe that import is one of the sources of economic competitiveness that enhances effectiveness of the economy. Thus import substitution policies in the absence of objective information and a profound selection procedure for protected sectors, are harmful to the economy. In an open economy, the effect of the firms’ selection and the availability of cheap imports ensure growth of sectoral productivity, but productivity declines in “protected” sectors. That is, while our estimates above assess the direct negative impact on Russian economic output and welfare from inefficient reallocation of factors of production, the implementation of import substitution policies also puts the Russian economy in a disadvantaged position relative to more liberal economies on the international markets due to forgone competitiveness. This creates additional obstacles for Russia on its way to export diversification and sustainable growth.
References
- Feenstra, Robert C, James R Markusen, and William Zeile. 1992. “Accounting for Growth with New Inputs: Theory and Evidence.” The American Economic Review 82 (2). American Economic Association: 415–21. http://www.jstor.org/stable/2117437.
- Feng, Ling, Zhiyuan Li, and Deborah L. Swenson. 2016. “The Connection between Imported Intermediate Inputs and Exports: Evidence from Chinese Firms.” Journal of International Economics 101: 86–101. doi:10.1016/j.jinteco.2016.03.004.
- Melitz, Marc J. 2003. “The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity.” Econometrica 71 (6). Blackwell Publishing Ltd: 1695–1725. doi:10.1111/1468-0262.004
- Pierola Castro, Martha D., Ana Margarida Fernandes, and Thomas Farolec. 2015. “The Role of Imports for Exporter Performance in Peru.”
- Volchkova, Natalya A. 2016. “Prospects of the export diversification:” Dutch Disease “or the failures of economic policy?” in “Seven lean years: the Russian economy on the verge of structural changes: the round table materials” / ed. Rogov. -Moscow: Foundation “Liberal Mission” (in Russian)
- Volchkova, Natalya A., and Natalia A. Turdyeva 2016, “Microeconomics of Russian import substitution”, Journal of New Economic Association, forthcoming (in Russian)
Russia and Oil — Out of Control
Russia’s dependence on oil and other natural resources is well known, but what does it actually mean for policy makers’ ability to control the economic fate of the country? This brief provides a more precise analysis of the depth of Russia’s oil dependence. This is based on a careful statistical analysis of the immediate correlation between international oil prices — that Russia does not control — and Russian GDP, which policy makers would like to control. I then look at how IMF’s forecast errors in oil prices spillover to forecast errors of Russian GDP. These numerical exercises are striking; over the last 25 years oil price changes explain on average two thirds of the variation in Russian GDP growth and in the last 15 years up to 80 percent of the one-year ahead forecast errors. Instead of controlling the economic fate of the country, the best policy makers can hope for is to dampen the short-run impact of oil price shocks. A flexible exchange rate and fiscal reserves are key volatility dampers, but not sufficient to protect long-term growth. The latter will always require serious structural reforms and the question is what needs to happen for policy makers to take action to get control over the long-term fate of the economy.
In a recent working paper (Becker, 2016), I take a careful look at the statistical relationship between Russian GDP and international oil prices. This brief summarizes this analysis and its policy conclusions.
Russia and oil, the basics
Although Russia’s oil dependence is discussed every time international oil prices drop, it is not uncommon to hear that oil is not really so important for the Russian economy. The argument is that the oil and natural resource sector only accounts for some 10 percent of Russian production. This is indeed consistent with the official sectoral breakdown of GDP that is shown in Figure 1 where the minerals sector indeed only has a 10 percent share.
Figure 1. Structure of GDP in 2015
Source: Federal State Statistics Service, 2016
However, this static picture of production shares does not translate into a dynamic macro economic model that allows us to understand what is driving Russian growth. Instead a careful analysis of the time series of Russian GDP is required to understand how important oil is for growth.
Russian GDP can be measured in many different ways: nominal rubles, real rubles, U.S. dollars, or in purchasing power parity (PPP) terms to mention the most common. Here we focus on GDP measured in real rubles and U.S. dollars since we want to get rid of Russian inflation, which has been quite high for most of the studied time period. The PPP measure generates figures and numerical estimates that are in between the real ruble and U.S. dollar measures and are not included here to conserve space.
The first evidence of the importance of international oil prices as a major determinant of Russian income at the macro level is presented in Figures 2 and 3 where the first figure shows dollar income and the second real ruble income. In both cases it is obvious that there is a strong correlation and that the correlation is higher for income measured in dollars.
Figure 2. U.S. dollar GDP and the oil price
Source: IMF, 2016
Figure 3. Real ruble GDP and the oil price
Source: IMF, 2016
However, it is also clear that all the time series have some type of trends or in econometric language, are non-stationary. This means that simple correlations of the time series shown in Figure 2 and 3 may not be statistically valid (or “spurious” as it is called in the literature). This is not a critical issue but can be handled by regular econometric methods.
Russia and oil, the econometrics
When time series are non-stationary they need to be transformed to some stationary form before we can do regular regressions (in Becker, 2016 I also address the issue of using a framework that allows for co-integration).
Two transformations that make the variables stationary are to use first differences or percent growth rates. Both are used before we run simple regressions of growth or first differences of GDP on growth or first difference in international oil prices. The full sample starts in 1993, but since the early years of transition were subject to many different shocks at the same time, a shorter sample starting in 2000 is also used.
A number of observations come from the estimates that are presented in Table 1: Oil prices are always statistically significant; the adjusted R-squared is higher for dollar income than real rubles (with one exception due to a large outlier in 1993); overall the explanatory power of these simple regressions are very high (42-92 percent) and the explanatory power increases in all specifications when going from the full sample (1993-2015) to the more recent sample (2000-2015). Note that the latter sample perfectly overlaps with the current political leadership so contrary to some wishes; the oil dependence has not been reduced under Putin/Medvedev.
Table 1. Russian macro “models”
Source: Becker 2016
Russia and oil, the forecasts
The strong correlation between international oil prices and Russian GDP provides a very simple econometric model for explaining past variations in Russian GDP. Unfortunately it does not imply that it is easy to forecast Russian GDP since international oil prices are very hard to predict. There are many models that have been used to forecast oil prices, but the IMF and many others now use the market for oil futures to generate its central forecast of oil prices.
The IMF also provides confidence intervals around the central forecast, and the uncertainty surrounding the forecast is substantial: In the latest forecast the 68 percent confidence interval goes from around 20 dollars per barrel to 60 one year ahead, while the 98 percent interval ranges from 10 dollar per barrel to around 85. With oil currently around 45 dollars per barrel, these variations imply that oil prices could either halve or double in the next year, not a very precise prediction to base economic policy on for Russia since the estimates for real ruble growth in the later sample in Table 1 imply that Russian GDP growth in real ruble terms could be anywhere from minus 5 to plus 10 percent, or a fifteen percentage point difference!
If we look at past IMF forecasts of oil prices and Russian GDP and see how much they deviate from actual values a year later we can compute one year ahead forecast errors. We can do this calculation for the last 16 years for which the IMF data is available. Figures 4 and 5 show how the forecast errors in oil prices correlate with the forecast errors for dollar income and real ruble income, respectively. Similar to the regressions presented in Table 1, the correlations are very high for both measures of GDP: 82 percent for dollar GDP, and 65 percent for real ruble GDP.
In other words, a very large share of the uncertainty surrounding Russian GDP forecasts can be directly attributed to variations in international oil prices, a variable that (again) Russia does not control. The fact that the variations in oil prices explain somewhat more of the variation in dollar income compared to real ruble income is a result of a policy change that in later years allowed the exchange rate to depreciate much more rapidly when oil prices fall.
Figure 4. Forecast errors
Source: Becker 2016
Figure 5. Forecast errors
Source: Becker 2016
Policy conclusions
The depth of Russia’s oil dependence is much greater than what casual observers of the mineral sectors share of GDP would suggest. At the macro level, variations in international oil prices explain at least two thirds of actual Russian growth and even more of the one-year ahead forecasts errors.
The experience of the 2008/09 global financial crisis provided an important lesson to Russian policy makers, which is that exchange rate flexibility is required to dampen the real impact of falling oil prices and to protect both international reserves and the fiscal position. In the more recent years, the currency has been allowed to depreciate in tandem with falling oil prices and the drop in real ruble income was therefore less severe in 2015 than in 2009. Income in dollar terms, instead, took a greater hit, but this was a necessary corollary to protecting reserves and the budget. A flexible exchange rate and gradual move to inflation targeting in combination with accumulating fiscal reserves in times of high oil prices are key to Russia’s macro economic stability.
Nevertheless, these policies are not sufficient to remove the long-run impact that low or declining oil prices will have on growth, measured both in real ruble terms or dollar terms. It is nice to have fire insurance when your house burns down, but when you rebuild the house you may want to consider not building another straw house. For Russia to build a strong economy that is not completely hostage to variations in international oil prices, fundamental reforms that encourage the development of alternative, internationally competitive, companies are needed. This includes reforms that initially will reduce policy makers control over the economy and legal system, but over time it will provide the much needed diversification away from exporting oil that puts the fate of the Russian economy squarely in the hands of international oil traders. Losing some control today may provide a lot more control in the future for the country as a whole, but perhaps at the expense of less control for the ruling elite.
References
- Becker, T, 2016, “Russia’s oil dependence and the EU”, SITE Working paper 38, August.
- Federal State Statistics Service (or Goskomstat), 2016, data http://www.gks.ru/wps/wcm/connect/rosstat_main/rosstat/en/figures/domestic/
- IMF, 2016, World Economic Outlook, April data from http://www.imf.org/external/pubs/ft/weo/2016/01/weodata/index.aspx
Russia’s State Armament Plan of 2010 – The Macro View in mid-2016
Russian defense spending has increased significantly in recent years and reached over 4 percent of GDP in 2015 according to estimates. If the Russian state armament program for 2011-2020 is fulfilled, further large investments will be made in the years to come to modernize the military forces. However, the macro economic realties have change dramatically since the original plans were drawn up in 2010. This brief provides an analysis of what the new macro economic reality means for the armament plans that were made in 2010. In short, the major issue is not that spending as a share of GDP has increased dramatically but rather that the nominal ruble amounts that make up the plan amount to significantly less real purchasing power both in real ruble and dollar terms according to the most recent forecasts. In other words, it is not necessarily the trade off between different government spending areas that will be the main issue in this new macro economic environment, but rather what the priorities will be regarding different types of military equipment within the existing plan.
A 2016 study by Julian Cooper details Russia’s state armament plans for 2011 to 2020, “GPV-2020” (in Russian, State armament program is Gosudarstvennaia Programma Vooruzheniia), to the extent that is possible by using open source information. He makes a special point of discussing the non-transparent structure of Russian defense spending, which makes more precise calculations and statements regarding this expenditure area difficult or even impossible. Nevertheless, he provides broad numbers for the state armament plans that are publically available and this is used in this brief.
The plans of 2010
The state armament plans for 2011-2020 that were made in 2010 were stated in nominal ruble terms. The full path of the plan has not been announced but a total of 19 trillion rubles has been mentioned.
Figure 1. Armament and defense spending
Source: Author’s calculations based on Cooper (2016)
Cooper’s study details amount until 2015 and in Figure 1, the remaining years have been guesstimated by a smooth trend that delivers a cumulative plan of 19 trillion rubles.
The armament plans were very ambitious and it is noteworthy that they were almost fully implemented during the years for which we have actual numbers from Cooper’s study (the blue and red lines almost overlap perfectly). The other rather remarkable feature is how high these spending are compared to the national defense spending reported in his report, with the GPV plan peaking at 70 percent of defense spending.
Changing macro environment
The armament plans were not made in a vacuum but decided based on the economic outlook at the time, i.e., what policy makers projected in 2010.
Figure 2. IMF forecasts and actual GDP
Source: Author’s calculations based on IMF (2010, 2016). Note: The IMF’s 2010 forecast only goes to 2015 and for the remaining years a constant growth rate based on the last year is used.
Figure 2 shows what the IMF’s growth forecasts back in 2010 implied for the development of nominal GDP (dotted blue line); what actually happened until 2015 (solid red line); and what is projected to happen between 2016 and 2020 according to the latest IMF World Economic Outlook forecast of April 2016 (dotted red line). As is pointed out in Becker (2016), international oil prices are key for Russia’s growth performance and any forecast of it is no better than the forecast of oil prices. This implies that also the IMF’s April 2016 projection is highly uncertain, but this is true for any other forecast of Russian GDP as well.
There are two important observations that follow from Figure 2; first, nominal GDP at the start of the program was underestimated; and second, the growth rate was overestimated. As coincidence some times has it, two wrongs make close to a right for 2016; i.e., the forecast of 2010 almost perfectly coincides with what is expected to be the nominal GDP level in 2016 and 2017 in the latest IMF forecast. However, since the slowdown in expected growth is rather significant, in later years the IMF now expects nominal GDP to be less than what it thought it would be in 2010.
Implications for the GPV
The fact that nominal GDP in 2016 and 2017 is almost exactly the same as projected in 2010 implies that the GPV plan as a share of GDP based on the 2010 forecast compared with the 2016 forecast is almost the same in 2016 and 2017. This may be viewed as a peculiar circumstance but it can also have real implications. If the plan in 2010 was developed with a greater view of priorities in different government spending areas, the fact that the plan is still not absorbing more as a share of GDP suggest that the plan may not necessarily be a contentious issue at the level of the government.
However, this is expected to change after 2017 when nominal GDP will be lower than originally thought, and therefore the GPV share of GDP would be higher as seen in Figure 3.
Figure 3. GPV plan as share of GDP
Source: Author’s calculations based on Cooper (2016) and IMF (2010, 2016)
A more immediate concern would be what the nominal spending plan from 2010 actually buys in real terms in 2016. This is a more fundamental issue than changes in nominal GDP that will affect how quickly the armed forces can modernize their equipment. Figure 4 compares how the real purchasing power of the plan has changed from the 2010 to the 2016 forecasts, both in terms of constant (or real) ruble terms (green and purple lines) and in nominal U.S. dollar terms (red and blue lines).
Figure 4. The real spending power of GPV
Source: Author’s calculations based on Cooper (2016) and IMF (2010, 2016)
It is clear that there has been a significant reduction in real purchasing power both in real ruble and dollar terms. The cumulative change in real ruble terms is a loss of 12 percent in purchasing power, while the loss in dollar terms is 45 percent. Since most of the loss in spending powers is from 2014 forward, the impact in the remaining years is even higher than what these cumulative numbers indicate.
The actual impact on the spending plan will crucially depend on how much of what is planned needs to be imported but it is nevertheless clear that there has been a significant reduction in purchasing power if the initial plan in nominal ruble is implemented. This is without any consideration of the impact of sanctions or reallocating government resources to other spending areas that may be considered and would affect this calculation.
Policy conclusions
Although the precision of the discussion in this brief is no better than the accuracy of the available numbers, the general trends and qualitative conclusions made here are most likely still relevant. And without any claim of being able to assess the quality of military equipment or the ability Russia’s military industrial complex to make the right priorities (see instead Rosefielde, 2016 for such discussion), it is clear from a pure economics standpoint that the changing macro environment will have serious real implications for how quickly the modernization process of equipment can go.
It is also highly likely that the worsening of the economic outlook in 2016 compared with 2010 will lead to more general discussions of government spending priorities. Spending on producing arms by the military industrial complex could in principle be a Keynesian type of demand injection that can raise growth in the short run if there are idle resources that are put to use and generate income to workers that in turn spend more of consumption. However, it is not likely that the resources required to build sophisticated new military equipment is idle even in an economic downturn, so this effect is likely not very significant. Instead, more spending in areas that are already in short supply will generate inflation or put pressure on the exchange rate depending on how much is produced domestically and how much is imported of the demanded goods and services.
Long-term growth can also be affected if the GPV plan crowd out resources from other spending areas. The effect will of course depend on what the spending alternatives are and how this is linked to future growth; if military spending does not generate growth by itself while reducing spending on education, research and health care that we think promote long-term growth, prioritizing military spending will have an additional price in terms of reduced future growth. There could be cases where spillovers from military production are significant and spur new businesses and thus generate economic growth, but this does not seem to have been the case in the past in Russia.
In short, it will be hard for policy makers to avoid making tough decisions on what spending areas to prioritize given the new macro outlook for Russia. And even if the spending in nominal rubles in the GPV-2020 plan does not change, there will be new trade-offs to be made within the plan given how higher inflation and a depreciated currency has reduced the purchasing power of the original 2010 plan.
References
- Becker, T, 2016, “Russia’s oil dependence and the EU”, SITE Working paper 38, August.
- Rosefielde, S., 2016, “Russia’s Military Industrial Resurgence: Evidence and Potential”, Paper prepared for the conference on The Russian Military in Contemporary Perspective Organized by the American Foreign Policy Council, Washington DC, May 9-10, 2016.
- Cooper, J., 2016, “Russia’s state armament programme to 2020: a quantitative assessment of implementation 2011-2015”, FOI report, FOI-R-4239-SE.
- IMF, 2010, World Economic Outlook, October 2010 data, http://www.imf.org/external/pubs/ft/weo/2010/02/weodata/index.aspx
- IMF, 2016, World Economic Outlook, April 2016 data, http://www.imf.org/external/pubs/ft/weo/2016/01/weodata/index.aspx
Effects of Trade Wars on Belarus
The trade wars following the 2014 events in Ukraine affected not only the directly involved participants, but also countries like Belarus that were affected through international trade linkages. According to my estimations based on a model outlined in Ossa (2014), these trade wars led to an increase in the trade flow through Belarus and thereby an increase of its tariff revenue. At the same time, because of a ban on imports in the sectors of meat and dairy products, the tariff revenue of Russia declined. As a member of the Eurasian Customs Union (EACU), Belarus can only claim a fixed portion of its total tariff revenue. Since the decline in the tariff revenue of Russia led to a decline in the total tariff revenue of the EACU, there was a decrease in the after-redistribution tariff revenue of Belarus. As a result, Belarusian welfare decreased. To avoid further welfare declines, Belarus should argue for a modification of the redistribution schedule. Alternatively, Belarus could increase its welfare during trade wars by shifting from being a part of the EACU to only being a part of the CIS Free Trade Area (FTA). If Belarus was only part of the CIS FTA, the optimal tariffs during trade wars should be higher than the optimal tariffs without trade wars. The optimal response to the increased trade flow through Belarus is higher tariffs.
Following the political protests in 2014, Ukraine terminated its membership in the CIS Free Trade Area (FTA) and moved towards becoming a part of the EU. The political protests evolved into an armed conflict and a partial loss of Ukrainian territory. These events led to Western countries introducing sanctions against some Russian citizens and enterprises. In response, Russia introduced a ban on imports from EU countries, Australia, Norway, and USA in the sectors of meat products, dairy products, and vegetables, fruits and nut products. In addition, both Ukraine and Russia increased the tariffs on imports from each other in the above-mentioned sectors.
Clearly, the trade wars affected directly involved participants such as the EU countries, Russia, and Ukraine. At the same time, countries like Belarus that were not directly involved in the trade wars, were also affected because of international trade linkages. It is important to understand the influence of trade wars on none-participating countries. To address this question, a framework with many countries and international trade linkages will be utilized and I will in this policy brief present some of my key findings.
Framework and Data
To evaluate the effects of the trade wars, I use the methodology outlined in Ossa (2014). This framework is based on the monopolistic competition market structure that was introduced into international trade by Krugman (1979, 1981). The framework in Ossa (2014) allows for many countries and sectors, and for a prediction of the outcome if one or several countries changes their tariffs. Perroni and Whallye (2000) and Caliendo and Parro (2012) present alternative frameworks with many countries that can also be used to estimate the welfare effects of tariff changes. The important advantage of the framework introduced in Ossa (2014) is that only data on trade flows, domestic production, and tariffs are needed to evaluate the outcomes of a change in tariffs, though the model itself contains other variables like transportation costs, the number of firms, and productivities.
It should also be pointed out that the framework in Ossa (2014) is not an example of a CGE model as it does not contain features such as investment, savings, and taxes. Since the framework in Ossa (2014) is simpler than CGE models, the effects of a tariff change can more easily be tracked and interpreted. On the other hand, this framework does not take into account spillover effects of tariff changes on for example capital formation and trade in assets.
The data on trade flows and domestic production come from the seventh version of the Global Trade Analysis Project database (GTAP 7). The data on tariffs come from the Trade Analysis Information System Data Base (TRAINS). The estimation of the model is done for 47 countries/regions and the sectors of meat and dairy products.
Results
According to my estimations, because of the ban on imports by Russia, the trade flow through Belarus increased. Belarusian imports of meat products are estimated to have increased by 28%, and imports of dairy products by 47%. Such increases in imports mean an increase in the tariff revenue of Belarus. It should be pointed out, however, that the model only tracks the effects of the ban on imports in the sectors of meat and dairy products. An alternative way would be to construct an econometric model that takes into account different factors influencing the trade between the countries. The effects of the decrease in the price of oil and the introduced ban on imports, which happened close in time, could then have been evaluated.
The estimated model further predicts that, because of the ban on imports, the tariff revenue collected by Russia in these two sectors has decreased by 53%. This means that since Belarus can only claim a fixed portion (4.55%) of the total tariff revenue of the EACU, its after-redistribution tariff revenue collected in the meat and dairy product sectors declined by 44.86%, in spite of its increase in before-redistribution tariff revenue by 35%. The decline in Belarus’ after-redistribution tariff revenue is thus estimated to have led to a decrease in welfare by 0.03%. To prevent such a decrease in the future, Belarus should argue for an increase in its share of the total tariff revenue of the EACU.
Furthermore, in addition to the decrease in the tariff revenue, the estimated model predicts that the real wage in Russia decreased by 0.39%, and its welfare by 0.49%.
The introduced ban on imports also affected the European countries that used to export to Russia. The model predicts that the welfare of Latvia declined by 0.38% and that the welfare of Lithuania declined by 0.27%. A substantial portion of the decline in welfare of these countries can be explained by a decrease in their terms of trade. The introduced ban on imports by Russia led to a decline in prices in the countries that exported meat and dairy products to Russia. Lower prices led to a decrease in the proceeds from exports collected by EU countries, and lower proceeds from exports buy less import, implying a decrease in their welfare.
In spite of the increase in tariffs between Russia and Ukraine, the model predicts an increase in the welfare of Ukraine by 0.23% following the formation of the EU-Ukraine Deep and Comprehensive Free Trade Area (DCFTA). An increase in real wages by 0.34% is the main factor contributing to this welfare increase. This is because it is associated with a redirection of Ukrainian exports from Russia towards the EU. The predicted increase in real wages in Ukraine have not materialized so far, presumably because of the ongoing military conflict and because time is needed to redirect the trade flows in response to the changes in the tariffs.
While bearing in mind that the analysis is only based on the sectors of meat and dairy products, Belarus could have increased its welfare during the trade wars if it had shifted from EACU status back to CIS FTA status with tariffs set at before-EACU levels. In this case, Belarus would not have needed to share its tariff revenue with other countries, and would then have increased its tariff revenue by 47.93% instead of the now predicted decline by 44.86%. Similarly, the welfare during trade wars could then have increased by 0.05%, instead of the now predicted decline by 0.03%. Another advantage of moving to CIS FTA status during trade wars is that the real wage could have increased by 0.04% instead of the 0.003% in the case of continued EACU status. Belarus could further have benefitted from moving to CIS FTA status by choosing optimal tariffs. This study suggests that the optimal tariffs of Belarus under CIS FTA status with trade wars are higher than the optimal tariffs under CIS FTA status without trade wars. Higher tariffs is the optimal response to the increased trade flows through Belarus resulting from trade wars.
Conclusion
Although it is optimal to move to CIS FTA status during trade wars, it is optimal to move back to EACU status after the trade wars are over. Therefore, such a policy should be adopted with caution, since the shift back to EACU status will likely not be possible. If it is expected that the trade wars will continue for a long period of time, or if the other members of the EACU will often deviate from the common tariffs, a transition to CIS FTA should be adopted. At the same time, asking for an increase in its share of total tariff revenue of EACU is a feasible strategy for Belarus to follow.
While estimating the effect of a transition from EACU status to CIS FTA status for Belarus during trade wars, the evaluation was done using two sectors affected by counter-sanctions. To evaluate the full welfare effect of this transition, its effect on the other sectors of Belarus should also be estimated, which is a question for the further research.
Traces of Transition: Unfinished Business 25 Years Down the Road?
This year marks the 25-year anniversary of the breakup of the Soviet Union and the beginning of a transition period, which for some countries remains far from completed. While several Central and Eastern European countries (CEEC) made substantial progress early on and have managed to maintain that momentum until today, the countries in the Commonwealth of Independent States (CIS) remain far from the ideal of a market economy, and also lag behind on most indicators of political, judicial and social progress. This policy brief reports on a discussion on the unfinished business of transition held during a full day conference at the Stockholm School of Economics on May 27, 2016. The event was organized jointly by the Stockholm Institute of Transition Economics (SITE) and the Swedish Ministry for Foreign Affairs, and was the sixth installment of SITE Development Day – a yearly development policy conference.
A region at a crossroads?
25 years have passed since the countries of the former Soviet Union embarked on a historic transition from communism to market economy and democracy. While all transition countries went through a turbulent initial period of high inflation and large output declines, the depth and length of these recessions varied widely across the region and have resulted in income differences that remain until today. Some explanations behind these varied results include initial conditions, external factors and geographic location, but also the speed and extent to which reforms were implemented early on were critical to outcomes. Countries that took on a rapid and bold reform process were rewarded with a faster recovery and income convergence, whereas countries that postponed reforms ended up with a much longer and deeper initial recession and have seen very little income convergence with Western Europe.
The prospect of EU membership is another factor that proved to be a powerful catalyst for reform and upgrading of institutional frameworks. The 10 countries that joined the EU are today, on average, performing better than the non-EU transition countries in basically any indicator of development including GDP per capita, life expectancy, political rights and civil liberties. Even if some of the non-EU countries initially had the political will to reform and started off on an ambitious transition path, the momentum was eventually lost. In Russia, the increasing oil prices of the 2000s brought enormous government revenues that enabled the country to grow without implementing further market reforms, and have effectively led to a situation of no political competition. Ukraine, on the other hand, has changed government 17 times in the past 25 years, and even if the parliament appears to be functioning, very few of the passed laws and suggested reforms have actually been implemented.
Evidently, economic transition takes time and was harder than many initially expected. In some areas of reform, such as liberalization of prices, trade and the exchange rate, progress could be achieved relatively fast. However, in other crucial areas of reform and institution building progress has been slower and more diverse. Private sector development is perhaps the area where the transition countries differ the most. Large-scale privatization remains to be completed in many countries in the CIS. In Belarus, even small-scale privatization has been slow. For the transition countries that were early with large-scale privatization, the current challenges of private sector development are different: As production moves closer to the world technology frontier, competition intensifies and innovation and human capital development become key to survival. These transformational pressures require strong institutions, and a business environment that rewards education and risk taking. It becomes even more important that financial sectors are functioning, that the education system delivers, property rights are protected, regulations are predictable and moderated, and that corruption and crime are under control. While the scale of these challenges differ widely across the region, the need for institutional reforms that reduce inefficiencies and increase returns on private investments and savings, are shared by many.
To increase economic growth and to converge towards Western Europe, the key challenges are to both increase productivity and factor input into production. This involves raising the employment rate, achieving higher labor productivity, and increasing the capital stock per capita. The region’s changing demography, due to lower fertility rates and rebounding life expectancy rates, will increase already high pressures on pension systems, healthcare spending and social assistance. Moreover, the capital stock per capita in a typical transition country is only about a third of that in Western Europe, with particularly wide gaps in terms of investment in infrastructure.
Unlocking human potential: gender in the region
Regardless of how well a country does on average, it also matters how these achievements are distributed among the population. A relatively underexplored aspect of transition is to which extent it has affected men and women differentially. Given the socialist system’s provision of universal access to education and healthcare, and great emphasis on labor market participation for both women and men, these countries rank fairly well in gender inequality indices compared to countries at similar levels of GDP outside the region when the transition process started. Nonetheless, these societies were and have remained predominantly patriarchal. During the last 25 years, most of these countries have only seen a small reduction in the gender wage gap, some even an increase. Several countries have seen increased gender segregation on the labor market, and have implemented “protective” laws that in reality are discriminatory as they for example prohibit women from working in certain occupations, or indirectly lock out mothers from the labor market.
Furthermore, many of the obstacles experienced by small and medium-sized enterprises (SMEs) are more severe for women than for men. Female entrepreneurs in the Eastern Partnership (EaP) countries have less access to external financing, business training and affordable and qualified business support than their male counterparts. While the free trade agreements, DCFTAs, between the EU and Ukraine, Georgia, and Moldova, respectively, have the potential to bring long-term benefits especially for women, these will only be realized if the DCFTAs are fully implemented and gender inequalities are simultaneously addressed. Women constitute a large percentage of the employees in the areas that are the most likely to benefit from the DCFTAs, but stand the risk of being held back by societal attitudes and gender stereotypes. In order to better evaluate and study how these issues develop, gendered-segregated data need to be made available to academics, professionals and the general public.
Conclusion
Looking back 25 years, given the stakes involved, things could have gotten much worse. Even so, for the CIS countries progress has been uneven and disappointing and many of the countries are still struggling with the same challenges they faced in the 1990’s: weak institutions, slow productivity growth, corruption and state capture. Meanwhile, the current migration situation in Europe has revealed that even the institutional development towards democracy, free press and judicial independence in several of the CEEC countries cannot be taken for granted. The transition process is thus far from complete, and the lessons from the economics of transition literature are still highly relevant.
Participants at the conference
- Irina Alkhovka, Gender Perspectives.
- Bas Bakker, IMF.
- Torbjörn Becker, SITE.
- Erik Berglöf, Institute of Global Affairs, LSE.
- Kateryna Bornukova, Belarusian Research and Outreach Center.
- Anne Boschini, Stockholm University.
- Irina Denisova, New Economic School.
- Stefan Gullgren, Ministry for Foreign Affairs.
- Elsa Håstad, Sida.
- Eric Livny, International School of Economics.
- Michal Myck, Centre for Economic Analysis.
- Tymofiy Mylovanov, Kyiv School of Economics.
- Olena Nizalova, University of Kent.
- Heinz Sjögren, Swedish Chamber of Commerce for Russia and CIS.
- Andrea Spear, Independent consultant.
- Oscar Stenström, Ministry for Foreign Affairs.
- Natalya Volchkova, Centre for Economic and Financial Research.
Coming to Terms with the Past – Challenges for History Teaching in Russian Schools
Russia is currently reforming its history teaching in basic schools. An original idea of producing one single textbook was abolished. Instead, three different textbook series for 6th to 10th graders, as well as teacher’s manuals and map books, have been written. They are all based on the same conceptual framework (kontseptsiia) and differ merely in pedagogical approaches. To facilitate teaching on topics in Russia’s millennium-long history where the professionals disagree on interpretations, a series of survey brochures are written on over twenty “difficult questions”. Contrary to the views by some observers in the West of a state-ordered streamlining of historical narratives, the new history textbooks offer the pupils an overview of how and why historians diverge in their interpretations and assessments of many events, personalities and transitions in the millennium-long Russian history.
How to educate the next generations on Russia’s past has been in the focus for more than a decade, and not only among the professional historians, history teachers and pedagogues. New textbook proposals have spurred debates in society at large.
After the breakdown of the Soviet educational system in history, one whole year passed when the subject of history even disappeared from the curriculum; the old textbooks on the 20th century in particular were recognized as full of myths; taboo subjects were omitted and propaganda clichés abundant. In lack of new textbooks, teachers were free to use materials from the vital press and journals of the glasnost period. Only a few years later, however, there was a plethora of newly written history textbooks, including translations such as the French historian Nicolas Werth’s on Russia in the 20th century (Werth 1992). These new textbooks were checked at the Ministry of Education and either authorized or recommended, depending on their pedagogical qualities. Among the pioneers of history schoolbooks should be mentioned Aleksandr Danilov and Liudmila Kosulina, whose works are printed in many new editions (see e.g. Danilov 2007).
In the 2010s, there were already a huge number of recommended and authorized textbooks on Russian history. Every schoolteacher in the Russian Federation had a plethora of handbooks with their accompanying pedagogical matters (‘blind history maps’, questionnaires, teacher’s manual, CD-ROMs, etc.) to choose from. Interpretations differed in these books. Children from two parallel schools in the same town could have read two contradictory presentations of a number of events, depending on the textbook author’s ideological framework.
In 2013, the president and the government approved the oft-repeated demand for ‘a unified, single history textbook for schools’ (edinyi uchebnik istorii). While president Putin had just hinted on what was wishful, the burdensome task to accomplish a sound standardization of history teaching fell on commissions in the academic community. The historians responsible for the new conceptual framework emphasize their striving towards de-politization of history (Chubarian 2013). The evolution of ‘history policy’ in neighboring states set a bad example, as parliaments, governments or even presidents legitimate the one and only correct historical facts or interpretations. The Council of Europe and OSSE use a similar ‘history policy’ adopting resolutions described as scientific accomplishments, not merely political attitudes. Institutes for the national memory, sometimes jointly with laws of the parliaments, dictate how historical personalities, events and political movements are to be characterized, and divergent presentations may be subject to judicial prosecution. Contrary to a widespread opinion in the West, Russian historians and politicians who are interested in history questions actually strive to avoid ‘history policy’ (Chubarian 2016).
Nonetheless, Russian parliamentarians have sometimes tried the same approach to counter the political use of past events. Examples can be quoted of how specific events during and after the First World War, as well as the Second World War 1939-1945 have been used to criticize the present-day Russian regime, its leaders or even its people (Miller & Lipman 2012) .
The process to achieve a new uniform history textbook was multifaceted. First, a ‘concept framework’ (kontseptsiia) was set up in a concise form. This included the main historical facts to be treated. It further enumerated tens of historical events, processes and changes that have been hotly debated. This framework was thereafter widened to become a ‘historical-cultural standard’ with detailed description of how each epoch in Russia’s millennium-long history would be presented in the new textbooks.
Russia decided to use a ‘linear system’ of history education’ (lineika), i.e., to teach chronologically from 5th to 10th class and use the 11th, final year for special courses. Six author groups and publishing houses participated in the contest for a set of new schoolbooks. Merely three of them were approved. Today, the first textbooks have appeared from the publishing companies Prosveshchenie (Enlightenment), Russkoe Slovo (Russian Word) and DROFA. The reformation will however be gradual as the older, authorized books can still be used. It will take at least until 2020 before these new history textbooks are the only standard ones.
Professional historians do not create history manuals for teachers, textbooks as well as auxiliary pedagogical matters in splendid isolation. Numerous seminars and colloquiums have been organized all over the country, where history teachers met with authors, discussed projects or shared their experiences from using pilot copies of the new books. Likewise, now that the first new textbook is used in schools, several hundred tutors will organize courses for teachers’ advancement and acquaintance with recent research.
The ‘conceptual framework’ was widely discussed in 2013–14 at teachers’ seminars all over Russia and at the First All-Russian congress of history teachers. The first new teacher’s manuals and textbooks have been presented by the authors at the Third history teachers’ congress held in Moscow in the first week of April 2016. Most sections at this congress concerned strict pedagogical and examination matters. For your humble servant, the most fascinating section at this congress was devoted to what has been termed as “difficult questions”.
Contrary to the views by some observers in the West of a state-ordered streamlining of historical narratives, with emphasis on the state and high politics level, these new textbooks give the teenage pupils a basic understanding on how and why historians diverge in their interpretations and assessments of many events, personalities and transitions in the millennium-long Russian history. Already at the first meetings with history teachers, over thirty such thorny historical riddles were mentioned. To give history teachers a better position, the publishing companies have engaged leading specialists to write up-to-date surveys of recent research and the present state of debates.
These surveys start with the century-long debates on the origins and character of the early medieval Russian state formation. How the rule of Ivan IV (Ivan the Terrible, Ivan Groznyi) has been evaluated is described in another survey. Similar debate surveys are due to appear on Peter the Great and other tsars.
Western observers of the Russian historical scene concentrate on how the country’s 20th century history is analyzed. These are also the matters that tend to divide the scholarly community as well as the general public in Russia. Consequently, teacher’s guidebooks on these topics are much in demand. They treat such complex questions as how the autocracy had progressed by the 1900s, what long-term processes and which events caused the downfall of the monarchy in 1917. Other surveys analyze Soviet nationality policies. The international situation in the 1930s and in the early phase of World War Two is carefully described. The Soviet Union during the Cold war is analyzed with references to the most recent findings in Russian and Western archives. Furthermore, the causes of the failure of Gorbachev’s perestroika and its effects are discussed in another survey.
In Russia, as elsewhere, anniversaries and centenaries tend to heighten an already eager public interest in history. For the approaching 100th anniversary of the Russian revolution, we likewise expect to find numerous collective monographs, encyclopedias, as well as re-printed memoirs and scores of unearthed archival documents in exhibitions. No doubt, however much professional historian complain of “the tyranny of jubilees” that divert from their chosen fields, the scholarly community in Russia will certainly take this opportunity to widen its research field to new aspects of the historical scenes during 1917.
Literature
- Chubarian, Aleksandr O. (2013) “Istoriia ubivaet Ivana Groznogo” (History kills Ivan the Terrible), Rossiiskaia gazeta, 4 September.
- Chubarian, Aleksandr O. (2016), “Voprosy k istorii” (Questions to History), Ogonëk, No 12, 28 March.
- Danilov, A.A. & L.G. Kosulina (2007), Istoriia. Gosudarstvo i narody Rossii: 9 klass (History. The State and peoples of Russia. 9th class), Moscow.
- Miller, A. & M. Lipman (2012), Istoricheskaia politika v XXI veke (History policy in the 21st century), Moscow.
- Werth, Nicolas (1992), Istoriia sovetskogo gosudarstva 1900 – 1991, Moscow (translation of Histoire de l’Union Soviétique. De l’Empire russe à la CEI, 1900 – 1991, Paris 1991).
Is Local Monetary Policy Less Effective When Firms Have Access to Foreign Capital?
Central banks affect growth in part by raising or lowering the cost of investment through their influence over local interest rates. We examine whether the ability of local firms to raise money abroad reduces the influence of local monetary policy authorities. Surprisingly, it does not. In fact, we find that firms that are able to raise equity capital from foreign investors are more responsive, not less, to local monetary policy shocks than those that raise capital only in the domestic market. These findings suggest that foreign investors confer an efficiency effect, improving the sensitivity of stock prices to local monetary policy shocks.
One means by which central banks affect economic growth is by influencing interest rates that impact the cost of financing for firms. For example, when a central bank lowers interest rates, those lower rates make new investment cheaper and more profitable. That encourages companies to invest more. Profits rise, firms hire more and we see growth in the economy as a whole.
When firms are able to raise money abroad, they are no longer as dependent on the local economy for financing. This potentially causes problems for central banks and other local monetary policy authorities who wish to influence the local economy by controlling interest rates.
This brief summarizes the results of Francis, Hunter and Kelly (2016), where we examine the extent to which monetary policy authorities’ influence differs across firms that are able to access foreign capital (also called “investable stocks”) and those that are largely dependent on the local market (also called “non-investable stocks”). Contrary to expectations, the evidence shows that firms that are able to raise foreign capital by being open to foreign equity investment are actually more sensitive to local monetary policy shocks than those that are not.
The perks and perils of financial liberalization
Over the last 30 years, the authorities in several less developed countries liberalized their domestic financial markets by allowing foreign ownership of local stocks. There are tremendous benefits for the local firms that became ‘investable’ as these countries liberalized, relative to firms that remained dependent solely on domestic stock markets. These include, inter alia, (1) being able to raise large tranches of foreign capital at lower rates than available in the domestic market, which reduces their financing constraints and increases their ability to invest, (2) substantial improvement in the liquidity of their stocks, (3) improvements in corporate governance and reporting (see Reese and Weisbach, 2002), and (4) greater efficiency with which their stocks incorporate value-relevant information.
Despite these benefits, there is widespread concern that liberalization comes with several problems. First, foreign capital flow (“hot money”) can cause excess volatility in local stock markets and exchange rates when foreign investors rapidly repatriate their funds. Second, local firms may become sensitive to foreign monetary policy shocks, and those foreign monetary shocks may be contrary to what is needed in the local economy. Third, and perhaps chief among the problems, is that if a large segment of domestic firms is able to raise capital abroad, then local monetary authorities may lose their ability to influence the domestic economy through their control of local policy interest rates. We examine this last concern in this policy brief below.
What does the research tell us?
One of the big challenges when measuring the impact of changes in monetary policy on an economy is the fact that the effects of investment started or stalled by changes in monetary policy may take months, or even years, to play out. The long time frame makes it very difficult to tell whether changes in monetary policy affect the macro economy. To solve this problem we follow in the footsteps of the former Chair of the U.S. Federal Reserve, Ben Bernanke (see Bernanke and Blinder, 1992, and Bernanke and Kuttner, 2005) and examine the impact of monetary policy shocks on stock returns. We do this because stock prices reflect anticipated changes in the economy and they are one of several channels through which monetary policy actions are transmitted to the real economy. That is, if local stock prices respond to monetary policy changes, it is likely the local economy will respond as well.
Because stock prices move in anticipation of future improvements in the economy, it is very important that we measure monetary policy surprises (also referred to as shocks) and not merely observed changes in monetary policy. To do this we model expectations about local monetary policy as a function of changes in oil price, changes in the U.S. Fed-funds rate (a proxy for changes in U.S. monetary policy), local industrial production growth, inflation rate and exchange rate changes. Details are described in the companion paper to this brief, Francis, Hunter and Kelly (2016).
We examine the impact of local monetary policy shocks on local stock returns. We find that for 17 of the 24 developing markets in our sample a one-standard-deviation surprise increase in local monetary policy interest rates results in an immediate and statistically significant 1.06% decline in the country’s overall stock market index. Interestingly, the unresponsiveness of the remaining seven stock markets to local monetary policy is not entirely due to the dominance of foreign (U.S.) monetary policy. In only four of the seven markets is foreign monetary policy simultaneously significant.
As noted above, one possible concern is that local monetary policy influences the investment and financing decisions of only non-investable firms. However, we find that firms that have access to foreign equity capital are at least as sensitive to local monetary policy shocks as are firms that are closed to foreign equity investment. In about 30 percent of our sample, Chile, Mexico, Venezuela, Jordan and Russia, firms that are open to foreign investment are even more sensitive than the ones that are closed. This evidence is consistent with the hypothesis that foreign investor participation in investable stocks improves the informational efficiency of investable firms’ stock prices, making them more sensitive to local monetary policy shocks. We call this an “efficiency” effect. This is counter to the predictions of the “integration” effect, whereby local stocks that are accessible to foreign investors are more responsive to foreign, not local, monetary policy shocks.
As an example, consider the impact of local monetary policy shocks on the returns of Brazilian stocks that are open and closed to foreigners, as depicted in Figure 1. In both panels the stock market is subjected to a one- standard-deviation surprise tightening of monetary policy, which is equivalent to 0.52% higher policy interest rates. In the top panel, the response is a statistically significant decline of 1.9% in the stock prices of firms that are open to foreign investment. In the bottom panel, the same monetary policy surprise translates into a statistically insignificant 0.9% lower prices for stocks that are closed to foreign investment. These findings are typical of the other countries in our companion study.
Figure 1. Impulse Responses of Brazilian Stock Returns to a One-Standard-Deviation Structural Shock in Local Monetary Policy
Investable stocks – open to foreign investment
Non-investable stocks – closed to foreign investment
Source: This figure reports impulse responses (center line) of investable and non-investable stock returns over 24 months in response to a one-standard-deviation structural shock in local Brazilian monetary policy. The impulse responses are obtained from a structural VAR model with eight endogenous variables: oil prices, the U.S. Fed-Funds rate, local industrial production growth, inflation, exchange rates and investable and non-investable Brazilian stocks. The left axis is in percent and the horizontal axis is months after a policy shock. The outer bands are probability bands used to determine statistical significance. The impulse response in a given period is significant, if both outer bands are on the same (lower or upper) side of the horizontal line at zero.
Ruling out alternate interpretations
One concern with the above results is that they might be driven by the simultaneous response of stock prices and monetary policy to emerging market crises that occurred during our sample period. However, the results when controlling for the Mexican and Asian currency crises are materially the same. The Russian default in 1998 is prior to the start of our data for Russia.
Additionally, one might be concerned that when we separate stocks into investable and non-investable, what we are really doing is separating firms on the sensitivity of their product markets to changes in the local economy. To examine this, we determine whether our results hold for stocks that operate in traded-goods markets and for those that operate in non-traded goods markets. We continue to find that investable stocks are more sensitive than non-investable stocks to local monetary policy in both markets.
Summary and policy implications
Our research suggests that firms that are open to foreign investment are at least as sensitive to local monetary policy as are firms that remain closed to foreign investment. These findings assuage a non-trivial concern among monetary policy authorities that while access to foreign capital has many benefits, it may come at the cost of a loss of ability to influence one’s own local economy. The primary policy implication of our work is that foreign investment in local stocks does not result in a loss of monetary policy control. In fact, our results suggest that foreign investment makes local firms more responsive to monetary policy shocks.
Important Policy Lessons from Swedish-Russian Capital Flows Data
A recent study of capital flows between Sweden and Russia provides many policy lessons that are highly relevant for the current economic situation in Russia. In line with studies on other countries, bilateral FDI flows were more stable than portfolio flows, which is important for a country looking for predictable external sources of funding. However, much of the FDI flows came with trade and growth of the Russian market. The sharp decline in imports and fall in GDP is therefore bad news also when it comes to attracting FDI. The conclusion is (again) that institutional reforms and reengaging with the West are crucial policies to stimulate both the domestic economy and encourage much-needed FDI.
In a recent paper (Becker 2016), I take a detailed look at the trends and nature of bilateral capital flows between Sweden and Russia over that last 15 years. Although the paper focuses on the capital flows of a relatively small country like Sweden with Russia, it sheds some light on more general theoretical and empirical issues associated with FDI and portfolio flows that are highly relevant for Russia today.
Measuring Bilateral FDI
One general qualifier for studies of bilateral capital flows is however the reliability of data; Not only is a significant share of international capital flows routed through offshore tax havens which makes identifying the true country of origin and investment difficult, but also many investing companies are multinationals (MNEs) with operations and shareholders in many countries so it is hard to have a clear definition of what is a “Swedish” or a “Russian” company. In addition, when different official data providers, in this case Statistics Sweden (SCB) and the Central Bank of Russia (CBR), report capital flows on the macro level, there are large discrepancies.
Private companies also gather company level data on FDI that can be aggregated and compared with the macro level FDI data. This data is on gross FDI flows and should not be expected to be the same as the net macro level FDI flows data but is a bit of a “reality check” of the macro data.
Figure 1. Average annual FDI flows
Sources: SCB, CBR, fDi Market, MergerMarkets
The reported annual average flow of FDI from Sweden to Russia varies from around USD500 million to USD1.2 billion depending on the data source. Russian flows to Sweden are rather insignificant regardless of the source but the different sources do not agree on the sign of the net flows (Figure 1).
The differences between data sources suggest that some caution is warranted when analyzing bilateral FDI flows. With this caveat in mind, there are still some clear patterns in the capital flows data from Sweden to Russia that emerge and carries important policy lessons in the current Russian economic environment.
FDI vs. Portfolio Investments
There is a large literature discussing the distinguishing features of FDI and portfolio flows (see Becker 2016 for a summary). Some of the key macro economic questions include which type of flows provides most international risk sharing; are most stable over time; or most likely to contribute to balance of payments crises when the flows go in reverse. In addition, there are potential differences in terms of the amount of international knowledge transfers and how different types of capital flows respond to institutional factors.
Figure 2. FDI and portfolio investments
Source: SCB
Figure 2 shows that FDI has been much more stable than portfolio flows in the years prior to and after the global financial crisis as well as in more recent years. Although all types of capital flows respond negatively to poor macroeconomic performance, and the stock of portfolio investments swing around much faster than FDI investments, i.e., portfolio flows go in reverse more easily and can contribute to external crises. This makes FDI a more preferable type of capital flow for Russia.
FDI and Trade Go Together
Since FDI is a desired type of capital flow, it is important to understand its driving forces. The first question to address is whether FDI and trade are substitutes or complements. Since the bulk of FDI comes from MNEs that operate in many countries, we can imagine cases both when FDI supports existing trade and cases when it is aimed at replacing trade by moving production to the country where the demand for the goods is high.
In the case of Sweden and Russia, the macro picture is clear; FDI has increased very much in line with Swedish exports to Russia (Figure 3). Both of these variables are of course closely correlated with the general economic development in Russia, but even so, the very close correlation between FDI and trade over the last 15 years suggests that they are compliments rather than substitutes.
Figure 3. Swedish Exports and FDI to Russia
Source: SCB
Most FDI is Horizontal
FDI flows are often categorized in terms of the main motivating force for MNEs to engage in cross-border investment: vertical (basically looking for cheaper inputs), horizontal (expanding the customer base), export-platform (producing abroad for export to third countries) or complex (a mix of the other reasons) FDI.
Looking at the sectoral composition of FDI from Sweden to Russia (Figure 4), most investments have come in sectors where it is clear that MNEs are looking to expand their customer base. Even in the case of real estate investments, a large share is IKEA developing new shopping centers that host their own outlets together with other shops. Communication and financial services are also mostly related to service providers looking for new customer. Only a small share is in natural resource sectors that would be more in line with vertical FDI, while there are very few (if any) examples of MNEs moving production to Russia to export to third countries.
Figure 4. Sectors of Swedish FDI to Russia
Source: SCB
Policy conclusions
The above figures on bilateral capital flows from Sweden to Russia carry three important policy messages: 1) FDI is more stable than portfolio flows; 2) Trade goes hand in hand with FDI; and 3) FDI to Russia has mostly been horizontal and driven by an expanding customer base.
In the current situation where Russia should focus on policies to attract private capital inflows, the goal should be to attract FDI. Instead, the government is now looking for portfolio inflows in the form of a USD3 billion bond issue. But FDI is a more stable type of international capital than portfolio flows and also come with the potential of important knowledge transfers both in terms of new technologies and management practices.
However, as we have seen above, FDI inflows have in the past been correlated with increased trade and an expanding Russian market. In the current environment, where imports with the West declined by 30-40 percent in the last year, GDP fell by around 4 percent, and the drop in consumers’ real incomes have reached double digits in recent months, it is hard to see any macro factors that will drive FDI inflows.
Instead, attracting FDI in this macro environment requires policy changes that remove political and institutional barriers to investments. The first step is to fulfill the Minsk agreement and contribute to a peaceful solution in Ukraine that is consistent with international laws. This would not only remove official sanctions but also provide a very serious signal to foreign investors that Russia plays by the international rulebook and is a safe place for investments from any country.
The second part of an FDI-friendly reform package should address the institutional weaknesses that in the past have reduced both foreign and domestic investments. It is telling that many papers that look at the determinants of FDI flows to transition countries include a ‘Russia dummy’ that is estimated to be negative and both statistically and economically significant (see e.g. Bevan, Estrin and Meyer, 2004 and Frenkel, Funke, and Stadtmann, 2004). One factor that reduces the significance of the ‘Russia dummy’ is related to how laws are implemented. Other studies point to the negative effect corruption has on FDI.
Reducing corruption and improving the rule of law are some of the key reforms that would have benefits far beyond attracting FDI and has been part of the Russian reform discussion for a very long time. It was also part of the reform program that then-President Medvedev presented to deal with the situation in 2009 together with a long list of other structural reforms that would help modernize the Russian economy and society more generally.
As the saying goes, don’t waste a good crisis! It is time that Russia implements these long-overdue reforms and creates the prospering economy that the people of Russia would benefit from for many generations.
References
- Becker, T, 2016, “The Nature of Swedish-Russian Capital Flows”, SITE Working paper 35, March.
- Bevan, A, Estrin, S & Meyer, K 2004, “Foreign investment location and institutional development in transition economies”, International Business Review, vol. 13, no. 1, pp.43-64.
- Frenkel, M, Funke, K & Stadtmann, G 2004, “A panel analysis of bilateral FDI flows to emerging economies”, Economic Systems, vol. 28, no. 3, pp. 281-300.