Tag: Russia
Fiscal Decentralization and Budget Discipline in Russian Regions
Authors: Michael Alexeev, Indiana University, Nikolay Avxentyev and Arseniy Mamedov, Russian Academy of National Economy and Public Administration.
We use panel data from the Russian regions for 2005-2013 to estimate the link between intraregional fiscal decentralization and regional budget deficits. Although Russian regions are not as autonomous in their fiscal policies as regions in other federal states such as Switzerland and the US, we obtain rather robust and highly statistically and economically significant results. Most importantly, we show that expenditure decentralization tends to have a positive effect on consolidated regional budget balance, while the weakness of regional tax base (relative to municipal one) is associated with significantly higher deficits. Also, as expected, the dependence of municipal budgets on transfers from the regional government leads to higher deficits of the consolidated regional budget. We conjecture that the deficit-reducing role of expenditure decentralization is due in part to better monitoring by the citizens and more efficient handling of expenditures by officials closer to the place where the funds are spent. Also, it might be easier for the regional government to pre-commit to a given level of expenditures when these expenditures are allocated to municipalities, because most municipalities in Russia appear to have harder budget constraints than the regional government.
Crisis and Trust
Authors: Maxim Ananyev and Sergei Guriev, CEFIR
Our research uses the 2008-2009-crisis experience in Russia to identify the relationship between income and trust. In 2009, Russian GDP fell an 8-percent drop in 2009. The impact of the crisis was very uneven among Russian regions because of their differences in industrial structure inherited from the Soviet times. We find that the regions that specialize in producing capital goods, as well as those depending on oil and gas, had a more substantial income decline during the crisis. The variation in the industrial structure allows creating an instrument for the change in income. After instrumenting average regional income, we find that the effect of income on generalized social trust (the share of respondents saying that most people can be trusted) is statistically and economically significant. Controlling for conventional determinants of trust, we show that a 10 percent decrease in income is associated with 5-percentage point decrease in trust. Given that the average level of trust in Russia is 25%, this magnitude is substantial. We also find that the post-crisis economic recovery did not restore the pre-crisis trust level. Trust recovered only in those regions where the 2009 decline in trust was small. In the regions with the large decline in trust during the crisis, trust in 2014 was still 10 percentage points below its pre-crisis level. This has straightforward policy implications: governments should pursue generous countercyclical policies especially in the areas that are the most vulnerable to macroeconomic shocks.
How Transport Links Help Market Integration: the Case of Moscow Office Rental Market
This brief is based on a research project on the Moscow office real estate (Ignatenko & Mikhailova, 2014). We study the market for office space rentals in Moscow. Our main interest regards spatial competition: when an object is rented, does the rental rate respond to the behavior of competing objects in a geographical vicinity? What is the geographical extent of the market, and how do urban transportation links help integrate local markets and extend the geographical scope of competition? We find that urban transportation “shortens” the effective distances and intensifies competition between geographically differentiated objects. The effects are modest but statistically significant.
We analyze a unique dataset on office space rental deals in Moscow in 2001-2010. The dataset was collected by an analyst team at Cushman & Wakefield Russia and includes all the deals on office spaces that were publicly advertised, with detailed and verified information on the object characteristics, rental prices, and the contract dates. We also have information on the object’s location – precise geographical coordinates – and thus we are able to study this market at a very detailed level of geographical aggregation.
Moscow Office Rental Market in 2001-2010, an Overview
The market for office space in Moscow went through a stage of rapid growth through 1990s and 2000s. Economic development drove the demand for all types of offices at all price ranges. The demand was met by a conversion of residential and industrial spaces into offices, as well as by new construction. In our sample, the top year in terms of the number of transactions was 2005, with a slight decline in the years after, and a somewhat sharper drop in 2009 after the global financial crisis. The composition of different types of offices and their characteristics have changed toward slightly higher quality through that decade: the share of transactions with class A and B+ offices was steadily rising (see Figure 1).
Figure 1. Number of Office Rental Transactions by Year and Class of Office
Source: Authors’ own calculations.
Up until the third quarter of 2008, the rental rates were constantly increasing. Average office rental prices in Moscow grew more than two-fold during 2001-2008, but fell almost to the initial level after the global financial crisis and the subsequent crush of the market. Figure 2 illustrates the quarterly index of simple average office rental rates and the corresponding hedonic price index. A hedonic index is constructed using a regression of the objects’ prices onto the observed characteristics of the objects and a set of time period indicators. Thus, the regression decomposes the overall price into the contributions of object quality and time period. The estimated time effects give the hedonic index, cleaning the time series of prices from all of the effects of changes in quality. Interestingly enough, the value of the hedonic index at the beginning of 2010 was exactly at the same level as in 2001. Thus, although the average price level was higher in 2010, all the price gains can be attributed to an increase of the average object’s quality.
Figure 2. Average Price and Hedonic Price Index of Moscow Office Rentals, 2001-2010
Source: Authors’ own calculations.
In Moscow we observe a typical behavior of the real estate market during booms and busts. While prices rise, tenants switch to lower quality objects to fit the budget, and the hedonic index rises faster than the average price. When prices fall, tenants support the higher end of market, looking for high-quality bargains, and the hedonic index falls faster than the average price. Overall, Moscow real estate market fits the basic stylized facts.
A hedonic analysis reveals the value of the object’s characteristics in the eyes of the consumer. The presence of transport infrastructure creates direct benefits. Consumers value an accessible transport infrastructure: offices lose 9% of rental price for each 10 minutes of walking distance to the nearest subway station. It is easy to calculate the surplus from a new subway line: it would increase the value of the land and real estate objects in the area of service. Because land and real estate are supplied inelastically, the bulk of this benefit goes to the owner. Consumers (in our case, tenants) receive the benefit of shorter commuting time, but in exchange for higher rental prices.
In addition to these direct benefits, transport links also tend to promote market integration by making objects that are near and objects that are far away, more substitutable in the eyes of the consumer. Transport links lower the degree of product differentiation in the geographical dimension. And, as with any kind of product differentiation, this should limit seller’s market power and reduce prices. The benefits of increased competition (if any) go directly to consumers. We analyze competition between the offices for rent in the context of geographical distance to determine whether transport links indeed make competition stronger.
Spatial Competition and Transport Infrastructure
We use the dataset to study price competition between real estate objects. Real estate objects are best thought of as differentiated goods. Each object possesses a set of characteristics and a fixed location, i.e. objects are differentiated by consumer characteristics and by geography. Each object is essentially unique, but the owners’ market power is limited by competition. Competition between objects is stronger if objects are closer in consumer characteristics and in location, so that potential tenants view them as closer substitutes. An owner of an object reacts to the behavior of their competitors, i.e. sets the price reacting to the prices set by similar objects in the neighborhood. We study how the strength of price reaction depends on geographical distance between objects by estimating the slope of the reaction function of the owners in a price competition game.
Our estimates show that price reactions of competition from the neighboring objects are very modest. Hypothetically, if two offices of similar size in the same location are for rent, and one of them cuts a price by 10%, the other responds on average by cutting price by only 1.7%. Even at a zero geographical distance between competing objects, there is substantial market power, presumably because of strong differentiation in the other product characteristics. The response is weaker if competing objects are located further away from each other, and at 1.8 kilometers is statistically indistinguishable from zero, i.e. such objects practically do not compete.
When we consider competition inside a more narrowly defined class of offices (grouping A and B+ offices vs B- and C offices), the results change slightly. We find that offices compete mainly within their own class. The reaction to the prices of another class is not different from zero, even in the immediate geographical vicinity. For the offices within the same class the geographical range of competition extends from 1.8 km to 2.1 km, and the reaction to neighbor’s prices is slightly stronger, with an elasticity of 0.2.
As a next step, we include transport links into our measure of distance. Consider offices that are located on the same subway line, i.e. where a passenger can travel between locations without changing the line. Price response to such competing objects is not much stronger: about 22% of the shock, but it stays above zero at longer distances. Price responses become indistinguishable from zero only at a distance of about 4.7 km. Figure 3 compares the two estimated price response functions: for all offices and for offices of the same class and on the same subway line.
Figure 3. Price Response as a Function of Geographical Distance when Objects are Connected by a Direct Subway Line
Source: Authors’ own calculations.
To summarize, our findings confirm the old stylized fact: the real estate market is very “local”. It is local not only in a geographical sense, but also in a product space sense: objects compete only with similar objects and mainly in the immediate geographical neighborhood. Direct transportation links (subway) promote market integration: it “shortens” the effective distance and makes the geographical boundaries of a market much wider. In the case of office real estate, the effect on the price level is very modest. The price reaction is weak even in the immediate vicinity, and it decays quickly with the distance. Yet our research underscores that the effects of transportation links on market integration and competition are real and measureable, and should be considered in cost-benefit analysis of transportation projects.
References
Ignatenko, Anna and Tatiana Mikhailova “Spatial Competition and Transport Infrastructure: The Case of Moscow Office Rental Market”, mimeo, 2014
Governance Quality as a Determinant of FDI: the Case of Russian Regions
This brief highlights the results of a study of the effect of poor governance quality on foreign direct investment in Russia. Using a survey of businesses across forty administrative districts, we find that a higher frequency of using illegal payments and a higher pressure from regulatory agencies, enforcement authorities, and criminals, negatively affect foreign direct investment (FDI). We find that moving from average to top governance quality across Russian regions more than doubles the FDI stock.
What are the reasons for the large heterogeneity in investment across cities, regions, and countries? Why do some of them prosper while others struggle in attracting investors and developing in the long term? This brief summarizes a study (Kuzmina et al, 2014) where we explore how quality of governance affects a specific type of investment – foreign direct investment (FDI). FDI is a very important source of economic growth, especially for developing countries. It allows them to overcome the local deficiencies in capital, technologies, and expertise, and has strong and long-lasting effects on growth – through both direct and spillover channels. Analysis of the determinants of FDI is popular among academic researchers, however, the existing empirical research, especially the one based on cross-country variation in governance quality, is not entirely convincing.
FDI Inflows in Russian Regions
During the first decade of transition in 1990s, the inflow of FDI to Russia was low compared to the Eastern European countries and other emerging economies. However, this changed dramatically around 2003. As oil prices surged FDI flows into Russia increased ten-fold within just a few years. As Figure 1 shows, a maximum of $74.8 billion was achieved in 2008 (corresponding to 4.5% of the country’s GDP), and Russia became one of the top countries in the world for inward FDI. By 2006, FDI inflows to Russia in per capita terms had surpassed FDI into China.
Figure 1. Foreign Direct Investment in Russia 1992-2012
Notes: This figure plots the evolution of FDI in Russia in 1992-2012. The blue line measures net inflows in current US$ billions (the scale corresponds to the left axis), and the red line measures net inflows as the percentage of GDP (the scale corresponds to the right axis). The data come from the World Bank(http://databank.worldbank.org/).
Nevertheless, the stock of FDI in Russia has remained substantially lower than in some comparable middle-income countries. The accumulated stock of FDI as a share of GDP (PPP) in Russia was 21% in 2013. This is only slightly more than in Ukraine (18%), and significantly less than the 28% in Brazil and the 30% in Poland. The stock of FDI in 2012 was distributed mainly between manufacturing (32%), real estate (15%), mining and quarrying (15%), and financial services (13%). Given the diversity of Russian regions in terms of natural, economic and institutional conditions, we also observe a substantial heterogeneity of FDI across Russian regions. The accumulated stock of FDI per capita is only $0.32 in the Republic of Karachaevo-Cherkessia, while it reaches a substantial $30,371 in the Sakhalin region. The average regional accumulated stock is just above $1,000 per capita. In terms of total stock, Moscow City is the leader with more than $39 billion of accumulated FDI.
An important feature of FDI in Russia is a significant share of so-called round-tripping investments. In 2012, $7.5 billion out of $18.5 billion of inward FDI in Russia came from offshore financial centers, with the most important OFC being Cyprus that delivered around 80% of total offshore investments. On overall, about half of total inward FDI stock in Russia comes from offshore countries.
There are several reasons behind the significant role of offshores in external Russian transactions. The traditional cause for using offshore financial centers (OFC) in developed countries is tax avoidance. While profit concerns are relevant for Russian law-abiding entrepreneurs, there are also other important reasons that force them to use offshore shells for their Russian-based enterprises. The possibility to get cheaper international financing and some other financial services for large Russian companies is important for large companies. On the other hand, underdeveloped institutions and poor property right protection are often referred to as the main driving forces for small and medium sized companies to go offshore (Ledyaeva et al., 2013; Kheyfets, 2013).
Given the importance of round-tripping investments in the Russian economy and the differences in incentives behind regular FDI and the one from offshores, we need to distinguish between these two types of investments when studying their determinants. On the one hand, poor regulatory governance might be a reason for the higher volumes of round tripping investments, but on the other hand, they might be a reason for the low attractiveness for true foreign investments.
Diversity of Quality of Governance across Russian Regions
The stable macroeconomic environment in Russia over the last decade has benefited Russian regions in attracting FDI. The diversity of Russian regions in various institutional aspects is, however, recognized in many studies. Yakovlev and Zhuravskaya (2007) report substantial differences in the speed of regulatory reform in twenty Russian regions over 2002-2005. A recent subnational survey of firms in 37 Russian regions by the World Bank indicates significant differences in the list of the most severe obstacles for firms’ performance across regions (World Bank, 2013).
The governance quality data in our study come from the Index of Support (“Index Opory”) survey conducted in 2011. This is a survey of directors of small and medium Russian firms that was collected by the Eurasia Competitiveness Institute (a not-for-profit think tank) and Opora Rossii (a non-for-profit organization that supports small business). It includes about 6000 firms and is designed to be a random sample of small businesses, stratified by size, location (urban or rural), and industry (with about two thirds from agriculture and manufacturing industries, and the rest from infrastructure and services).
Our data cover 40 regions. The surveyed regions are the most developed ones and their economic weight corresponds to 84% of total FDI stock and 83% of GDP in 2011.
All respondents of the survey were asked to answer a set of questions related to regional infrastructure, availability of labor, capital, and intermediate goods, and the absence of administrative pressures. Their answers were then aggregated within regions and all regions were ranked according to each criterion. We use the data coming from the administrative pressure section of the survey. The surveyed regions are ranked according to the average answers on questions reagrding the frequency of firms in the region using illegal payments to officials (Bribes to Officials), the frequency of firms facing abuse on the side of inspection authorities (Inspection Agencies Pressure), the side of enforcement authorities (Police Pressure), and the criminal community (Criminal Pressure).
To give a few examples, the top regions in terms of governance quality are Belgorod and Astrakhan Regions, as well as Stavropol and Krasnodar Territories. For example, the Belgorod region is ranked first in terms of police pressure, second in terms of bribes to officials and criminal pressure, and sixth in terms of inspection agencies pressure. This makes it the top region overall. The Kaluga region, which is commonly viewed as one of the best regions to invest in, in Russia, is ranked fifth overall, achieving some of the best positions in all indicators except for bribes to officials where it is somewhere in the middle (ranked 16th). To give a comparison, Moscow City ranks 27th overall. Leningrad, Irkutsk, Voronezh, Ryazan, and Rostov Regions take the bottom five places.
Worker Strikes in 1895-1914 and Why They Matter for Today
The common problem in this type of research is the reverse causality between the main variable of interest – quality of governance – and FDI. The effect of foreign investors might go through the better practices they bring to the host country or through the legal restrictions imposed on their business by the domestic jurisdiction in any country in which they decide to invest. To deal with the reversed causality problem in our study, we rely on an instrumental variable approach. As an instrument for governance quality in Russian regions, we choose the intensity of worker strikes in Russian provinces 1895-1914. We assume that the intensity of strikes in this period can be used as a proxy for the trust between the local businesses and the political elites, on the one hand, and ordinary people, on the other.
The choice of this period is not accidental. First, this was a period of unprecedentedly high growth of Russian industries. In 1887-1900, the production of many industrial goods and fuels in Russia increased by factor 3 to 5 in real terms; around five thousand kilometers of railroads were put in operations annually. Not surprisingly, the conflicts between workers, on the one hand, and management and owners, on the other, intensified in the 1890s. The police was an important instrument that managers and owners relied upon to keep control over the workers. The important link between local authorities and industrialists was formed to ensure the alignment between the interests of police and business owners. The formation of enforcement agencies was strongly influenced by this alignment, and this alignment in turn defines the level of trust between the elites and enforcement agencies, and the population.
Second, before 1897 no law regulated the duration of working hours in Russia. It was in discretion of the factory owners to establish the norms. On June 2, 1897 the first law governing working hours at a level well below the pre-existing level in Russian factories was signed into force. This law was an important first step towards improving the living conditions of Russian workers. With this law, workers could now claim their rights against the factory management. The factory inspections that were launched earlier, around 1882, were supposed to control the enforcement of labor regulation in general and the new labor law in particular. However, as conflicts between workers and capital owners and management dramatically intensified, these regulatory agencies were used to control workers and their organizations (Kupriyanova, 2000).
We interpret the intensity of strikes at the regional level as a measure of the revealed conflict between the state and the owners of existing businesses, or the local elite, on one hand, and the population on the other. In these conflicts, the enforcement and first regulatory agencies were used to secure the interests of small groups of local elites against interests of the broad population. In this way, we may rely on the intensity of strikes as an inverse proxy for the trust between population and local elites.
Modern research recognizes the importance of history for economic development. Nunn (2009) indicates several mechanisms that justify the projection of history onto modern life. For our study, two of these mechanisms are especially relevant. One is the historical root of modern formal institutions. The second is the effect of history on social and cultural norms. Aghion et al. (2010) suggest a mechanism of possible coevolution of trust and regulation: people in low-trust environments want more government interventions even though they are aware of the low quality of governance. For our study, the prediction of the study by Ahgion et al. (2010) – about the link between the trust and the quality of governance and their coevolution – is especially relevant.
One important issue about using our instrument is whether we can reasonably assume the preservation of some institutions or social norms through the two later dramatic changes in the Russian political regime. While there is evidence of institutional persistency, some aspects of institutions do change often. Acemoglu and Robinson (2006) address this question of whether changes in certain dimensions of institutions are consistent with overall institutional persistence. One of the results of their study is the possible persistence of the institutions that are essential for the allocation of resources in the economy despite the changes in the political regime. The essential condition for institutional persistence is the persistence of the incentives of those in power to distort the economic system for their own benefit. Therefore, as long as the incentives are preserved, the institutions may survive changes in the regime.
A number of empirical studies support this conclusion. To cite just one relevant study in the Russian context, Dower and Markevich (2014) show that the measure of conflict brought by the Stolypin land reform in Russian farmer’s communities about a hundred years ago explains current attitudes toward the privatization outcomes of the 1990s.
Results: Good Governance Matters for Non-Offshore FDI
Putting together data on the FDI stock in Russian regions, the level of governance quality in regions as of 2011, and some other controls, our results indicate that a higher administrative burden, a higher pressure of enforcement and regulatory agencies, a poor criminal situation and a higher level of corruption reported by the businesses in Russian regions contribute to a lower level of investments of foreign residents. Using the instrumental variable, which proxies the conflict between elites and people at the time when the regulatory agencies were formed a century ago, we can find the causal effect of governance quality on foreign investment. As an additional test, we study the effect of governance on offshore-related direct investments. We show that the sensitivity of offshore investments on governance quality is positive and non-significant. These results confirm our assumption that poor quality of governance decreases the reward of investments and is an important determinant of economic activity.
There is a straightforward policy application of our result. The improvement of governance quality alone, better compliance of regulatory agencies with existing legislation, is an important source of increases in the attractiveness of the regions for foreign investors. In particular, moving from average governance quality to the top increases FDI by 158%. This suggests that there are large returns to improving the quality of governance at the regional level, and this policy does not require a lot of budget spending which is especially important in modern Russia.
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References
- Acemoglu, D., and Robinson, J. (2006) “De Facto Political Power and Institutional Persistence”. American Economic Association Papers and Proceedings 96(2), pp. 325-330.
- Aghion, P., Y. Algan, P. Cahuc and A. Shleifer (2010) “Regulation and Distrust,” The Quarterly Journal of Economics, vol. 125(3), pp. 1015-1049
- Becker, S., Boeckh, K., Hainz, Ch. And L. Woessmann, (2011) “The Empire Is Dead, Long Live the Empire! Long-Run Persistence of Trust and Corruption in the Bureaucracy”, IZA Discussion Paper No. 5584
- Dower, P., and A. Markevich, (2014) “On the Historical Origins of Resistance to Privatization in the Former Soviet Union”, Journal of Comparative Economics, forthcoming
- Kheyfets, B. (2013) “De-offshorization of Economy: International Experience and Russian Specifics”, Voprosy Economiki, Issue 7 (in Russian)
- Kupriyanova, L., (2000) The “labor problem” in Russia in the second half of XIX – early XX century. History of entrepreneurship in Russia. Book 2. Moscow (in Russian)
- Ledyaeva, S., Karhunen, P., And J. Whalley. (2013) “Offshore Jurisdictions, (Including Cyprus), Corruption Money Laundering and Russian Round-Trip Investment”, NBER WP 19019
- Nunn, N., (2009) “The Importance of History for Economic Development.” Annual Review of Economics, 1(1), pp. 65-92
- Yakovlev, E., and E. Zhuravskaya, (2013). “The Unequal Enforcement of Liberalization: Evidence from Russia’s Reform of Business Regulation,” Journal of European Economic Association, 11(4), pp. 808–838.
Is Cutting Russian Gas Imports Too Costly For The EU?
This brief addresses the economic costs of a potential Russian gas sanction considered by the EU. We discuss different replacement alternatives for Russian gas, and argue that complete banning is currently unrealistic. In turn, a partial reduction of Russian gas imports may lead to a loss of the EU bargaining power vis-à-vis Russia. We conclude that instead of cutting Russian gas imports, the EU should put an increasing effort towards building a unified EU-wide energy policy.
Soon after Russia stepped in Crimea, the question of whether and how the European Union could react to this event has been in the focus of political discussions. So far, the EU has mostly implemented sanctions on selected Russian and Ukrainian politicians, freezing their European assets and prohibiting their entry into the EU, but broader economic sanctions are intensively debated.
One such sanction high on the political agenda is an EU-wide ban on imports of Russian gas. Such a ban is often seen as one of the potentially most effective economic sanctions. Indeed the EU buys more than half of total Russian gas exports (BP 2013), and gas export revenues constitute around one fifth of the Russian federal budget (RossBusinessConsulting,2012 and our calculations). Thus, by banning Russian gas the EU may indeed be able to exert strong economics pressure on Russia.
However, the feasibility of such sanction is questionable. Indeed, in 2012 Russia supplied around 110 bcm of natural gas to EU-28 (Eurostat), which constitutes 22.5% of total EU gas consumption. There are a number of alternatives to replace Russian gas, such as an increase in domestic production by investing in shale gas, or switching to other energy sources, such as nuclear, coal or renewables. However, many of the above alternatives, e.g. shale gas or nuclear power, involve large and time-consuming investments, and thus cannot be used in the short run (say, within a year). Others, such as wind energy, are subject to intermittency problem, which again requires investments into a backup technology. The list of alternatives implementable within a short horizon is effectively down to replacing Russian gas by gas from other sources and/or switching to coal for electricity generation. Below, we argue that even if such a replacement is feasible, it is likely to be very costly for the EU, both economically and environmentally.
Notice that any replacement option will be automatically associated with a significant increase in economic costs. This is due to the fact that a substantial part of Russian gas exports to Europe (e.g., according to Financial Times, 2014 – up to 75%) are done under long-term “take-or-pay” contracts. These contracts assume that the customer shall pay for the gas even if it does not consume it. In other words, by switching away from Russian gas, the EU would not only incur the costs of replacing it, but also incur high financial or legal (or both) costs of terminating the existing contracts with Russia, with the latter estimated to be around USD 50 billion (Chazan and Crooks, Financial Times, 2014).
Due to this contract clause, own costs of replacement alternatives become of crucial importance. The coal alternative is currently relatively cheap. However, a massive use of coal for power generation is associated with a strong environmental damage and is definitely not in line with the EU green policy.
What about the cost of reverting to alternative sources of gas? First, in utilizing this option, the EU is bound to rely on external and potentially new gas suppliers. Indeed, the estimates of potential contribution within the EU – by its largest gas producer, the Netherlands – are in the range of additional 20 bcm (here and below see Zachmann 2014 and Economist 2014). Another 15-25 bcm can be supplied by current external gas suppliers: some 10-20 bcm from Norway, and 5 bcm from Algeria and Libya. This volume is not sufficient for replacement, and is not likely to be cheaper than Russian gas.
This implies that the majority of the missing gas would need to be replaced through purchases of Liquefied Natural Gas (LNG) on the world market, in particular, from the US. This option may first look very appealing. Indeed, the current gas price at Henry Hub, the main US natural gas distribution hub, is 4.68 USD/mmBTU (IMF Commodity Statistics, 2014). Even with the costs of liquefaction, transport and gasification – which are estimated to be around 4.7 USD/mmBTU (Henderson 2012) – this is way lower than the current price of Russian gas at the German border (10.79 USD/mmBTU, IMF).
However, this option is not going to be cheap. A substantial increase in the demand for LNG is likely to lead to an LNG price hike. Notice that, at the abovementioned prices, US LNG starts losing its competitive edge in Europe already at a 15% price increase. Just for a very rough comparison, the 2011 Fukushima disaster lead to 18% LNG price increase in Japan in one month after disaster. Some experts are expecting the price of LNG in Europe to rise as much as two times in these circumstances (Shiryaevskaya and Strzelecki, Bloomberg, 2014).
Moreover, it is not very likely that there will be sufficient supply of LNG, even at increased prices. For example, in the US, which is the main ”hope” provider of LNG replacement for Russian gas, only one out of more than 20 liquefaction projects currently has full regulatory approval for imports to the EU. This project, Cheniere Energy’s Sabine Pass LNG terminal, is planned to start export operations no earlier than in the 4th quarter of 2015 with a capacity of just above 12bcma (World LNG Report, 2013). Of course, there are other US and Canada gas liquefaction projects currently undergoing regulatory approval process, but none of them is going to be exporting in the next year or two. Another potential complication is that two thirds of the world LNG trade is covered by long-term oil-linked contracts (World LNG Report, 2014), which significantly restricts the flexibility of short-term supply reaction, contributing to a price increase. All in all, LNG is unlikely to be a magical solution for Russian gas replacement.
All of the above discussion suggests that it may be prohibitively expensive for the EU to do completely without Russian gas. Maybe the adequate solution is partial? That is, shall the EU cut down on its imports of natural gas from Russia, by, say, a half, instead of completely eliminating it?
On one hand, this may indeed lower the costs outlined above, such as part of take-or-pay contract fines, or costs associated with an LNG price increase. On the other hand, cutting down on Russian gas imports may lead to an important additional problem, loss of buyer power by the EU.
Indeed, the dependence on the gas deal is currently mutual – as outlined above, not only Russian gas is important for the EU energy portfolio; the EU also represents the largest (external) consumer of Russian gas, with its 55% share of the total Russian gas exports. In other words, the EU as a whole possesses a substantial market power in gas trade between Russia and the EU, and this buyer power could be and should be exercised to achieve certain concessions, such as advantageous terms of trade from the seller etc.
However, the ability to have buyer power and to exercise it depends crucially on whether the EU acts as a whole to exercise a credible pressure on Russia. That is, the EU Member States may be much better off by coordinating their energy policies rather than diluting the EU buyer power by diversifying gas supply away from Russia. This coordination may be a challenge given the Member States’ different energy profiles and environmental concerns. Also, such coordination requires a stronger internal energy market that will allow for better flow of the gas between the Member States. While demanding any of these measures would be double beneficial: they will improve the internal gas market’s efficiency, and at the same time reinforce the EU’s buyer power vis-à-vis Russia.
To sum up, the EU completely banning Russian gas imports does not seem a feasible option in the short run. In turn, half-measures are not necessarily better due to the loss of the EU’s buyer power. Thereby, the best short-term reaction by the EU may be to put the effort into working up a strong unified energy policy, and to place “gas at the very back end of the sanctions list” for Russia as suggested by the EU energy chief Gunther Oettinger (quoted by Shiryaevskaya and Almeida, Bloomberg, 2014).
References
- BP, 2013, Statistical review of the world energy
- Chazan, Guy and Ed Crooks, Financial Times, April 3, 2014, Europe’s dangerous addiction to Russian gas needs radical cure
- Economist, April 6, 2014, Conscious uncoupling
- Eurostat energy statistics
- Henderson, James, 2012, “The potential impact of North American LNG exports”, Oxford Institute for Energy Studies, Working Paper NG 68, Oxford,
- IMF commodity statistics, April 2014
- Le Coq, Chloé and Elena Paltseva, 2013, “EU-Russia Gas Relationship at a Crossroads”, in “Russian Energy and Security up to 2030”, edited by Susanne Oxenstierna and Veli-Pekka Tynkkynen, Roothledge
- RossBusinessConsulting,Feb 6, 2012, “Доходы РФ от экспорта нефти и газа выросли в 2011 г. на треть» (The revenues of Russia from oil and gas export have growth by a third in 2011)
- Shiryaevskaya and Strzelecki, Bloomberg, Mar 28, 2014, Europe Seen Paying Twice as Much to Replace Russian Gas
- Shiryaevskaya and Almeida, Bloomberg, May 7, 2014, Europe Gas Options Seen Limited by Costs at $200 Billion
- World LNG Report, 2013, International Gas Union (IGU)
- World LNG Report, 2014, International Gas Union (IGU)
- Zachmann, Georg, Bruegel, March 21, 2014, Can Europe survive without Russian gas?
Whither Russia’s History Thought? Trends in Historical Research, Teaching and Policy-Making
The next Russian generation’s understanding of their country’s past may turn out to be more refined and complex than at present whether or not the current project of a single history-textbook and accompanying pedagogical materials are successful. Rather than imposing a new version of Stalin’s infamous ‘Short course’, as certain Western mass media predicts, the new history books will probably reflect even the most debated parts of Russia’s history from the 800s to the present, and in particular the turbulent 20th century.
Western mass media have a tendency to focus on Russian historical debates only when ‘spectacular’ and/or ‘scandalous’ events appear. For example, few news agencies paid any attention as to how the school textbooks on Russia’s contemporary history had changed through the 1990s. A whole year history classes were cancelled in the late glasnost period! This was because the Soviet-era teaching was recognized as totally outmoded in light of all the revelations on Stalinism. Starting in the mid-1990s, several groups of renowned historians produced new textbooks, history maps, and CD-ROM-materials for Russian general schools. In these pedagogical devices for children up to the final 11th class, few if any of the formerly ‘taboo questions’ remained unmentioned. By the early 2000s, a new historical landscape of Russia’s past – especially from the 1860s to the present – had appeared. Every history teacher had a number of handbooks to choose among. However, with time, it was obvious that not only did the basic ideological and political attitudes of the textbook writers influence how they presented a historical narrative. There was also a wide divergence in how even the basic facts on historical events were described.
History teaching in Russian schools has thus been highlighted in Western mass media only when a certain author has been criticized or a specific textbook lost its recommendation from the Russian Ministry of Education. Therefore, the understanding in the West, even in academic circles, of how the Russians in general have changed their perception of their country’s past is likely superficial. The obvious language barrier is only a first hindrance that explains this ignorance. The lack of knowledge of, and even an interest in, i) Russian professional historians, ii) popularizes and publicists in mass media, and iii) the general public as shown in social media describing epochs and events in the past, may also be related to a certain degree of Russophobia, traditionally present in the West.
Instead, the Western average reader tends to get his views on Russia’s Vergangenheitsbewältigung, that is its ‘coming to terms with the past’, from highly restricted analyses like Sherlock’s book (Sherlock 2007) or polemical surveys like Satter’s (Satter 2011). Sherlock investigates the glasnost debates, but ignores the changes in the 1990s and draws farfetched conclusions on the present Putin-period, based on statements by politicians. Satter concentrates on how certain leftist, pro-Stalinist opinions remain in the public sphere concerning history writing or history-memorialization with respect to the victims of state terror and repression. These two authors emphasize how politicians, rather than professional historians, have made statements, or sometimes suppressed commemorative actions on Russian history, thus creating a skewed image of how the past is analyzed in the historians’ community. In reality, there are few subjects, especially concerning the Stalinist period, that have not been investigated because of lack of sources and of non-access to archives. The remaining ‘white spots’ on the historical map concern matters that are likewise often state secrets in other states, such as military intelligence. Given how much was until 1991 classified in the archives, it is worthwhile pondering how much historians and archivists in Russia have already achieved.
The Russian professional historians’ achievements in the post-Soviet period can now be grasped easily in the solid 1,500 pages long volume, edited by one of Russia’s foremost historiographers Gennadii Bordiugov (Bordiugov 2013). Bordiugov and his colleagues have held numerous conferences since the mid-1990s where practically every new research project on all aspects of Russia’s 20th century history has been analyzed. These have been updated and collected into a massive volume. Another conference was devoted to the changing character of the historical community in general, to the research and teaching conditions in Russian universities, as well as to the interaction between historians and politicians (Bordiugov 2012). To a large extent, the economic history of Russia was until the late 1980s hampered by its rigid attachment to the Marxist and Leninist schemes of ’historical materialism’. Thus, starting during the glasnost era, Russian economic historians have made serious revisions, widespread re-interpretations and new research on practically all important stages of the evolution of the Tsarist economy, in particular concerning the early industrialization, the banking system and the entrepreneurial efforts in the 19th century. These achievements are well reflected in the two-volume encyclopedia on Russia’s economic history from oldest times till 1917, under the scientific guidance of academician and head of the Institute of Russian History of the Academy of Sciences, Iurii Petrov (Petrov 2008).
A new trend in the field is the outright proclaimed and implemented ‘history policy’ (in line with a state’s economic, social and foreign policy). Politicians strive to use their country’s past, its military feats or civilian achievements for their present purposes. This has been apparent in Russia as well as in Eastern and Western Europe, first in the wake of the collapse of the communist regimes, and then as a matter of geopolitical and socio-economic confrontation. The resolutions on 20th century history by the PACE, OSCE and other forums are examples of such history policy. Without doubt Russian publicists have also been involved in dreadful ‘wars of memory’ in particular vis-à-vis the Baltic states and Ukraine (see Borgiugov 2011b). However, among both Russian historians and certain politicians there exists a better grasp of the risks involved in history policy campaigns than seems to be the case in some East European countries. This is easily explicable, given the Russian state’s complicated thousand-year legacy of multi-cultural encounters, complex forms of conquest and expansion, social conflicts and revolutions, as well as religious and ideological controversies.
Thus, a striving towards a unified version of Russian history was reflected in the proposals by a commission set up in 2013 to formulate the ‘concept for a new, single textbook for schools on Russian history’. The initiative to substitute a multitude of textbook by a single one was set out in early 2013 in a directive from president Vladimir Putin. The original idea in Putin’s directive was to eliminate internal contradictions concerning historical events, and create a solid handbook in history with presumably straightforward, undisputable ‘facts’, just like the natural sciences can be said to have ‘a single knowledge framework’. Academicians Aleksandr Chubarian, Iurii Petrov, other historians as well as scholars from other disciplines plus politicians, led the commission. This initiative from Putin has been widely interpreted as a new stage in ‘history policy’ of the Russian government with the purpose of enforcing a new kind of patriotism or even legitimizing the allegedly ever more authoritarian present regime. However, when the concept for a single textbook was published in late autumn 2013, it became apparent that the commission had formulated a new academic, rather than a politicized framework for presenting Russia’s whole history, from the 800s to the present, with merely sketched outlines for each epoch, century of crucial decade. In over thirty appendices to the concept, leading experts describe major historical controversial questions, such as Ivan IV (‘The Terrible’), Vladimir Lenin and the 1917 Revolutions. Suffice it to mention that the appendix on the Great Terror 1937-1938 is written by Russia’s leading expert on Stalinism, professor Oleg Khlevniuk (see e.g. Khlevniuk 2008).
In early summer 2014, we can expect that the official announcement on the conditions for participation in the writing of the new textbook on Russia’s history will be announced. Just as for architectural contests, the mere presentation of a master-copy of the ‘pedagogical package’, i.e. not only the textbook but also guidelines for teachers, historical atlases, working notebooks with tasks for pupils, as well as audio and video materials will demand substantial investments from the participants’ side. Although the remuneration, in case of winning the contest, may be great, it is not expected that more than a few institutions or groups of historians will find the financial resources at hand. These proposed new textbooks will then be circulated and judged in a manner that remains to be determined.
The initial reactions in 2013 by Russian politicians and Western journalists at the appearance of the concept were skeptical. Concerns, however, were often somewhat biased. For example, in an article in ‘The Moscow Times’ the opposition politician Vladimir Ryzhkov had no objections on the first one thousand years of Russia’s history outlined in the concept. Instead, Ryzhkov lamented that the last paragraphs in the concept on Putin’s presidency had not mentioned certain oligarchs and recent dissenters. (Ryzhkov 2013). The American historian and specialist on Ukrainian history Mark van Hagen expressed his fears that Putin’s textbook would try to indoctrinate the Russian masses in a manner similar to how Stalin’s infamous ‘Short Course of the Bolshevik Party’s history’, but, of course, with a presumably new authoritarian, Orthodox Christian and multicultural Russian idea (quoted in Reuters. 2013).
It remains to be seen how much of such fears turn out to be prescient, or on the contrary, wide of the mark. Already at the official presentation in January 2014 of the commission’s result to president Putin, a number of changes in the original proposal for a single textbook were apparent. A careful reading of Putin’s speeches as well as those of Sergei Naryshkin, chairman of the Russian Historical Society and speaker of the Duma, and Academician Chubarian, scientific leader of the commission, indicate that the pedagogical package (i.e. the teacher’s handbook, textbook, map and task booklets, as well as CD-ROM and video) are likely to be much more pluralistic, as to interpreting history, than what either the initiators intended originally or what their critics presumed eventually.
Although the original idea formulated by the president himself included a phrase on giving the school children just ‘one single textbook’ (Russian: edinyi uchebnik) with new narrative, free of contradictions and contested interpretations, we can already see that even the announced concept for such a ‘single history textbook’ may well turn out to be as dynamic and thought-provoking as the real historical events were. Another alternative outcome that cannot be excluded, will be that not one single, but a few new textbooks – with different pedagogical and other highlights – will be declared as winners, provided that they reflect the new, more nuanced version of Russia’s history from oldest times to the present. In either case, these new pedagogical instruments are bound to reflect, given dozens of special surveys by experts on the debates among historians added to the concept, the achievements of archivists, professional historians and teachers in the past quarter-century. Thus, in conclusion, while substantial arguments may be raised against the political request of a single textbook on Russia’s history, the presentation of this new concept and the forthcoming contest may turn out to produce a number of excellent history teaching materials that in a wider sense will reflect both the professional historians’ achievements in recent decades, the publicists’ opinions and the expectations of the broad public.
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References
- Bordiugov, Gennadii, editor (2011a), Nauchnoe soobshchestvo istorikov Rossii: 20 let peremen, (Russia’s scientific community of historians: 20 years of changes), Moscow: AIRO-XXI.
- Bordiugov, Gennadii (2011b), ‘Voiny pamjati’ na postsovetskom prostranstve (‘Memory wars’ in the post-Soviet spheres), Moscow: AIRO-XXI.
- Bordiugov, Gennadii, editor (2013) Mezhdu kanunami: Isotricheskie issledovaniia v Rossii za poslednie 25 let (Between tomorrows: Historical research in Russia in the last 25 years), Moscow: AIRO-XXI.
- Khlevniuk, Oleg (2008), Master of the House, Stalin and His Inner Circle, New Haven, CT: Yale University Press.
- President of Russia, Meeting with designers of a new concept for a school textbook on Russian history http://eng.news.kremlin.ru/news/6536accessed 2014-05-07
- Petrov, Iurii, chief editor (2008), Ekonomicheskaia istoriia Rossii s drevneishikh vremen to 1917. Entsiklopediia, Moscow: Rosspen).
- Reuters. US edition Gaabriela Baczynska ‘Putin accused of Soviet tactics in drafting new history book’ 18 November 2013, http://www.reuters.com/article/2013/11/18/us-russia-history-idUSBRE9AH0JK20131118, accessed 20140507Ryzhkov, Vladimir (2013), ‘Putin’s Distorted History’, The Moscow Times, 18 November 2013.
- Satter, David (2011) It Was a Long Time Ago, and It Never Happened Anyway: Russia and the Communist Past, New Haven. CT: Yale University Press.
- Sherlock, Thomas (2007) Historical Narratives in the Soviet Union and Post-Soviet Russia: Destroying the Settled Past, Creating an Uncertain Future, London: Palgrave Macmillan.
Skill Structure of Demand for Migrants in Russia: Evidence from Administrative Data
Authors: Simon Commander (IE Business School, EBRD and Altura Partners) and Irina Denisova (CEFIR, NES).
Using Russian Ministry of Labor administrative data for all legal migrant applications in 2010 and matching the migrant to the sponsoring firm, we find that there is some – albeit limited – evidence of firms using migrants to address high skill shortages. However, the overwhelming majority of migrants are skilled or unskilled workers rather than qualified professionals; a reflection of the low underlying rates of innovation and associated demand for high skill jobs.
Migration policy continues to be a priority in Russian economic policy. This is driven both by a demand for labor – given the unfavorable demographic trends of the last decades – and the easily available supply from the CIS countries. It is still not clear, however, what is the skills structure of the demand for migrants. Relatively new administrative data on demanded permissions to employ migrants sheds however some light on the issue.
In particular, we use the 2010 nationwide dataset ‘Job positions filled by migrants’ published by the Russia Federal Employment Service. The dataset gives detailed information on the applications for permits for migrants, including the 4-digit occupation, firm ID and the offered wage. The Federal Employment Service’s role is to approve or reject an application. In almost all cases documented in this dataset, approval was granted. Moreover, in 99% of the cases, the duration of the permitted contract was one year.
The data allow us to study the skill composition of demand for migrants from the legal sector, with the sizeable illegal labor migration staying beyond the scope of the study. The total number of applications for all of Russia in 2010 was just over 890,000, of which nearly 250,000 or 28% originated from firms in Moscow. The analysis below uses the permission data for the 21 most developed Russian regions (a full version of the paper is available as Commander and Denisova, 2012).
A breakdown of the number of requests in 2010 by skill type using the one-digit ISCO-88 classification (Managers, High-level professionals, Mid-level professionals, Service worker, Skilled agricultural workers, Craft and trades workers, Plant and machine operators, Unskilled workers) shows that over 70% of the requests were for skilled and unskilled workers. At the same time, about 17% of the total migration requests were for higher-level professionals (7%) and managers (10%). Among managers, nearly nine out of ten requests were for production or department managers with no more than 12% of managerial migration requests being for top-level executives. Among the category of high-level professionals, architects and engineers accounted for over two-fifths of requests.
Is the situation any different in the main urban labor markets? In Moscow a lower proportion – around two thirds of the migrant applications – were for skilled and unskilled workers. The starkest difference was that professionals working in IT accounted for a minute share of total high-level skill applications in Russia, but nearly 9% in Moscow. Thus, while there are some differences in the migration profile between Moscow and the rest of the country, the broad picture that emerges is one where migration policy and practice seem to be responding mainly to the apparent bottlenecks at the lower-skill end of the labor market.
Legal requests for migrants are massively dominated by requests concerning low-skill groups; and illegal migrants, as shown by anecdotal evidence, are mainly low skilled. At the same time, there is a sizeable demand for qualified migrants, managers and professionals. There are two potential motives to issuing a request for a qualified migrant: to economize on the costs of labor by substituting a local laborer with a migrant; or to fill in the gap of the scarce qualification/skills hardly available domestically. The two motives could be distinguished by looking at the wage offers associated with the posted positions and comparing them with wages paid in comparable occupations in the same region. The aim of the exercise is to see – particularly within the categories of higher-skilled applicants – whether they command any wage premium that might reflect their scarcity value.
Figures 1-2 plot the reported (relative) wage offers for two migrant skill categories: Department Managers (ISCO code=122) and Computing Professionals (ISCO code=213). The figures depict distributions of relative (to the region average) wage in logs, thus implying that the points around 0 are the wage offers at the level of regional average, above 0 means positive wage premium, and below 0 means negative wage premiums (economizing on the costs). Each figure also gives the mean search wage from the EBRD survey of recruiting agencies in 2010 (relative to the regional average).
Figure 1. Relative Wage Distribution, Production and Operation Department Managers (ISCO-88 Code: 122)
Source: Authors’ calculations based on Rostrud 2010
It is clear from Figure 1 that the wage offers for migrants do not identify any clear positive selection effect, in that migrants’ wages mostly fall below the survey search mean comparators. In the majority of cases, the offered wages also fall below the regional average wage thus implying that the motive is to substitute for cheaper labor.
The demand for migrants with skills of IT professionals is more complicated: there are those who offer wages below regional average, but there is also a large group of those ready to pay a wage premium to attract migrants (with log wage above zero). The search through recruiting agencies (the survey wage) would still require offering higher wages.
Figure 2. Relative Wage Distribution, IT Professionals (ISCO-88 Code: 213)
Source: Authors’ calculations based on Rostrud 2010
For further analysis, the migration dataset was mapped to the ORBIS (a dataset assembled by Bureau van Dijk) firm observations using the unique national tax identification code (so called INN). The ORBIS data includes information on firms’ balance sheets and simple performance data such as output per employee.
When looking only at demand from firms that lie in the top 10-20% of the productivity distribution (productivity is calculated as output per worker in the narrowly defined industry), the picture looks somewhat different: wage offers tend to lie above the average (Figure 3). It is likely that the most productive firms tend to offer wages higher than both regional average for the occupation and the survey-based search wages. This implies that the scarcity of skills on the domestic labor market is one of the more important motives behind the demand for migrants from high-productivity firms.
Figure 3. Relative Wage Distribution, Production and Operation Department Managers (ISCO-88 Code: 122), 10% Most Productive Firms
Source: Authors’ calculations based on Rostrud 2010 and Orbis-Roslana
To control for other firm characteristics, we run regressions relating the relative wage of a migrant to a set of firm and region characteristics, including measures of size and ownership, a measure of recent growth in the region, as well as the level and change in foreign direct investment in a given region since 2007. We also control for the tightness of the local labor market, using a measure of search wages raised in the EBRD survey compared to average wages in a region. The estimates are run with and without region, industry and occupation controls. The results show that relatively high wages tend to be associated with large and/or foreign-owned firms. Growth in a region or the level of FDI per capita are not systematically associated with the relative wage once controls enter the regression, suggesting that the relative wage is largely determined by firm-level features. The measure of labor market tightness enters positively but is insignificant whencontrolling for industry, region and occupation.
Overall, the data from the Russian Ministry of Labor that documents all applications for migrants to Russia in 2010 and allows matching the migrant to the sponsoring firm, show that there is very limited evidence of firms using migrants to fill high-skill jobs. In fact, the overwhelming majority of migrants, skilled or unskilled workers, were mostly originating from other states of the CIS. Furthermore, most were hired at relatively low wages in comparison to the occupation/region averages or the wages reported in the EBRD survey of recruiting firms. At the same time, there is a sizeable portion of demand for skilled migrants, which are offered wage premiums. The demand originates mostly from highly productive firms. Migration policy should acknowledge these different motives behind the demand for migrants.
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References
- Simon Commander and Irina Denisova “Are Skills a Constraint on Firms? New Evidence from Russia”, IZA Discussion Paper No. 7041, November 2012
The crisis in Ukraine and the Georgian economy
We analyze how the crisis in Ukraine will likely impact the Georgian economy and distinguish between short-run and long-run effects. We argue that the short-run effects are transmitted through trade and capital flows and that they are rather negative for Georgia and can hardly be bolstered. In the long-run, however, the crisis could improve the competitiveness of the Caucasus Transit Corridor, an important trading route between Europe and Central Asia Georgia participates in. We give recommendations how political decision makers could support such a development in the wake of an impairment of the northern Ukrainian transit routes.
Introduction
When Ukrainian President Victor Yanukovich decided not to sign the association agreement with the European Union and instead opted for a Russian package of long-term economic support, many Ukrainians perceived this not to be a purely economic decision. Rather, they feared this to be a renunciation of Western cultural and political values, and – to put it mildly – were not happy about this development.
The Russian political system, characterized by a prepotent president, constrained civil rights, and a government controlling important parts of the economy through its secret service, is not exactly the dream of young Ukrainians. Russia can offer economic carrots, but these do not count much against the soft power of Europe that comes in the form of political freedom, good governance, and economic development to the benefit of not just a small group of oligarchs.
Hence, it was all but surprising when many young Ukrainians took their anger about Yanukovich to the streets. After protests that lasted for nearly three months, President Yanukovich fled the country, a temporary government took over, and chaos broke out on the Crimean peninsula.
The dispute about the Crimea has the potential to impede the relations between Russia and the West for a long time to come, in particular if Russia enforces an annexation of the territory. Moreover, the tensions could quickly turn into a military conflict. The aircraft carrier USS George H.W. Bush was moved into an operational distance to the Crimea, accompanied by 20 smaller U.S. warships, and 12 additional fighter planes will be stationed in Poland. Yet even if there will be no direct confrontation between official Russian and U.S. forces, Ukraine could become the battleground of a proxy war, a kind of conflict that was common in the Cold War era. In this respect, one can already read the writing on the wall: the new Ukrainian government begs the U.S. for supplying arms and ammunition, and while the Obama administration is still reluctant to give in to such requests, the call is supported by hawkish U.S. congressmen who might finally prevail.
Ukraine is a country that is geographically close to Georgia and, like Georgia, has vital economic stakes in the Black Sea area. Georgia will not be unaffected by whatever happens in Kiev and Simferopol. In this policy brief, we will inform policy makers about the likely short-run and long-run economic consequences of the turmoil in Ukraine, discuss the challenges and opportunities that may arise, and derive some policy recommendations.
Short-run economic consequences
The crisis in Ukraine will almost instantaneously affect trade and capital flows between Georgia, Ukraine, and Russia. The effects will likely be negative and hit Georgia in a situation of economic recovery.
The Georgian real GDP growth rates were 6.3% in 2010, 7.2% in 2011, and 6.2% in 2012, and the real GDP per capita evolved from about 2,600 USD to about 3,500 USD in this time, but the upsurge discontinued in 2013 (if no other source is mentioned, figures presented in this policy brief (including those in the graphs) come from the Georgian statistical office GeoStat). ISET-PI, in its February 2014 report on the leading GDP indicators for Georgia, estimates the GDP in 2013 to be 2.6%, while GeoStat, the statistical office of Georgia, believes it to be 3.1%.
The unsatisfactory performance of the Georgian economy in 2013 was arguably caused by political uncertainties resulting from the government change that took place in late 2012, and as these uncertainties are largely overcome, most economists believe that Georgia will get back to its remarkable growth trajectory in 2014. The IMF, in its Economic Outlook, predicts a real GDP Growth of 6% in 2014, and the government of Georgia expects this number to be 5%. With an escalating crisis in Ukraine, it is questionable whether these rosy forecasts are still realistic.
Effects on imports
In 2013, Ukraine and Russia were the 3rd and the 4th largest importers to Georgia, respectively. Graph 1 shows the top five importers to Georgia, which together make up about 50% of total imports. The imports from Ukraine and Russia are mainly comprised of consumption goods: of all goods that were imported between 2009 and 2013 from Ukraine and Russia, about 30% were foodstuff. The ten main import goods in this time (in order of monetary volume) were cigarettes, sunflower oil, chocolate, bread, cakes, meat other than poultry, poultry, and sugar.
If the supply of these goods would be reduced through a breakdown of production and logistics, roadblocks, damaged infrastructure etc., the consequences for Georgia would not be utterly severe. From Ukraine and Russia, Georgia receives few goods that are (1) needed for investment projects and (2) cannot be produced domestically (an example of sophisticated investment goods that need to be imported would be ski lifts for tourism projects). Moreover, as Ukraine and Russia supply primarily standard goods that are produced almost everywhere, it is unlikely that a cutback in their imports would lead to sharp price rises in Georgia. Very quickly, increased imports from other countries would close any supply gaps. In addition, many imported consumption goods, like Ukrainian orange juice, are but luxury for ordinary Georgians, who buy their food in cheap domestic markets that sell almost exclusively local products.
Effects on exports
A small anecdote may illustrate the status of Georgian products in the Russian market. In the late 1940s and early 1950s, Stalin used to invite his comrades to his Kuntsevo dacha almost every night. At these occasions, he drank only semi-sweet Georgian red wine. His clique, usually preferring Russian vodka, adopted this habit out of fear to displease the dictator. Yet the real highlight of these nightly gatherings took place after midnight, when an opulent feast began, featuring all the delicacies of the Georgian cuisine. Through Stalin (and the fact that Georgia was a preferred destination of Soviet tourism), Georgian food obtained an excellent reputation in most countries of the former Soviet Union, and, to the dismay of Georgians, some younger Russians even do not know that Khinkali is not an originally Russian dish.
As can be seen in Graph 2, Russia and Ukraine are among the top 5 destinations for Georgian produce, together absorbing about 14% of total Georgian exports in 2013. In 2006, two Georgian products that are traditionally highly popular in Russia, namely wine and mineral water (the famous “Borjomi” brand), were banned from the Russian market. Yet in the wake of the diplomatic thaw that set in after the new government assumed power last year, this ban was lifted, and in 2013, the export of these goods regained momentum. In 2013, 68% of all wine exported from Georgia was sold in Russia and Ukraine (44 and 24 percentage points, respectively). In both countries, Georgian wines are sold at the higher end of the price range and are typically consumed by people with middle and high income. It is likely that these exports, in particular those to Ukraine, will be affected considerably by the crisis. This may happen through decreased demand for luxury foods and through a possible depreciation of the Ukrainian hryvna and the ruble vis-à-vis the Georgian lari.
Another sector that may be affected by the situation in Ukraine is the car re-export business. Georgia imports huge numbers of used cars from the U.S., Europe, and Japan, and passes them on to countries in the region. While this business hardly yields potential for real economic progress, it accounts for roughly 25% of Georgian exports! Of these 25%, about 7 percentage points go to Russia and Ukraine. Moreover, many cars are imported to Georgia on the land route from Europe through Ukraine and Russia (often driven by private, small-scale importers). If it will become more difficult to cross the border between Russia and Ukraine, this business, providing income to many low-skilled Georgians, may be at risk.
It should also be noted that Ukrainians and Russians make up an ever-increasing share of the tourists coming to Georgia (though the biggest group of tourists are Israelis). Also through this channel, an economic downturn in Ukraine and Russia will have unpleasant consequences for Georgia.
Effects on capital flows
According to the National Bank of Georgia, in 2013 a total of 801 mln USD was flowing in from Russia (see Graph 3). Ukraine contributed 45 mln USD to the money inflows, still significant for an economy as small as Georgia’s. An economic downturn in Russia and Ukraine would hit many Georgian citizens, often pensioners and elderly people, who depend on remittances of their children and other family members sent from these countries. This may aggravate a trend that already exists: in January 2014, money inflows decreased by 4% from Russia and by 5% from Ukraine (compared to January 2013).
Long-run economic consequences
Most of the economic dynamics Georgia experienced since 2003 was “catch up growth”. A country permeated by corruption, with a dysfunctional police and judicial system, without protection of property rights and contract enforcement, will grow almost automatically when the government restarts to fulfill its basic functions. Yet once this phase of returning to normal economic circumstances is over (Georgia probably is already in this situation), high growth rates can hardly be achieved without a strong export orientation of the economy, in particular when an economy is as small as Georgia’s. Most economists concerned with Georgia are therefore struggling to identify economic sectors where Georgia is in a good position to develop export potential. The National Competitiveness Report for Georgia, written in 2013 by the ISET Policy Institute on behalf of USAID, therefore extensively discusses the question what Georgia can deliver to the world. Though not related to export in a classical sense, the report points out that one of the advantages Georgia has is its geographical location, providing for possibilities to transform Georgia into a logistics hub.
There are three main routes to transport goods from Europe to the Central Asian countries (e.g. from Hamburg to Taraz in Kazakhstan). One route goes via the Baltic ports of Klaipeda or Riga, and then through Ukraine and Russia, and another route goes overland through Ukraine. A third one, the so called Caucasian Transit Corridor, has the Georgian port city of Poti and Turkey as its Western connection points, then goes through Georgia, Azerbaijan, and the Caspian Sea, and further east it splits up into a Kazakhstan and a Turkmenistan branch.
According to the Almaty based company Comprehensive Logistics Solutions, the fastest and cheapest route is the one through the Baltic ports. The transport from Hamburg to Taraz takes around 33 days and costs 6,220 USD per standard container. The overland transport via Ukraine takes around 34 days and costs 7,474 USD. Finally, transport through the CTC currently takes the longest time, namely around 40 days, and costs 6,896 USD.
Unlike many other economic activities, competition for transportation is more or less a zero-sum game played by nations. If transport through Ukraine and Russia will be restrained due to closed borders and political and economic instability, the total transport volume will not change substantially. Rather, instead of going through the northern routes, the goods will flow through the CTC. A similar development could be observed when the embargo against Iran was tightened and shipping goods through Iranian ports became increasingly difficult for Armenia and Azerbaijan. As a result, Azerbaijan, traditionally importing through Iran and exporting through Poti, now facilitates both its imports and exports through Poti.
This is a great chance for Georgia if it wants to become serious about transforming into a logistics hub. In our policy recommendations, we will speak about how to utilize on this opportunity.
Policy recommendations
Georgia can do little to bolster the short-run effects that are transmitted through the trade and capital flow channels. Political decision makers should be aware of problems that might arise for particularly vulnerable groups in the population, like pensioners who lose income in case remittances from Russia and Ukraine run dry, and help out with social support if necessary.
Regarding the long-run impact, Georgia should use this opportunity for gaining ground in the competition with northern transit routes. The Caucasus Transit Corridor can become much faster and cheaper if (a) a deepwater port and modern port facilities with warehouses will be built in Poti, (b) the road and train infrastructure will be improved, and (c) it will be easier to bring cargo over the Caspian Sea. Regarding the latter point, it would be important to assist Azerbaijan in improving the port management at Baku (in particular reducing corruption), and in reforming the monopolistic Azerbaijani State Caspian Sea Shipping Company.
Azerbaijan invests 775 mln USD into the Georgian part of the Baku-Tbilisi-Kars railway, proving their serious interest to upgrade CTC. Given this impressive commitment of Azerbaijan, Georgia should not stand back.
Conclusion
The crisis in Ukraine yields short-run risks and long-run opportunities for the Georgian economy. While there is little that can be done about the risks, the opportunities call for courageous steps to improve the Caucasus Transit Corridor. If the countries that hold stakes in the CTC are now further reducing the cost of transportation and make the route faster and more customer-friendly, the CTC may establish itself as the main trading route connecting Europe and Central Asia. Once critical investments have taken place, CTC’s advantage could be sustained beyond the current crisis. It is a competitive route that simply needs upgrading, which can happen now as a fallout of the conflict between Ukraine and Russia.
References
- Leading GDP Indicators for Georgia, The ISET Policy Institute, February 2014, http://www.iset-pi.ge/index.php?article_id=711
- The National Competitiveness Report for Georgia, The ISET Policy Institute, 2013, http://www.iset-pi.ge/index.php?article_id=713
- World Economic Outlook, The International Monetary Fund, October 2013, http://www.imf.org/external/pubs/ft/weo/2013/02/
The Application of Composite Leading Indicators on the Single Economic Space Economies
This brief is based on a CEFIR research project aimed at the short-term forecasting of socio-economic development of the member-countries of the Single Economic Space (SES), conducted for the Eurasian Economic Commission in 2013. This project focused on compiling composite leading indicators that could allow policymakers to identify phases of a business cycle and to forecast its turning points. We suggest a methodology for the selection of components of the Composite Leading Indicators (CLIs) for industrial production, and apply this methodology to predict industrial production in SES member states. Our methodology performs well for Russia and Kazakhstan, and slightly less so for Belarus.
Putting the “I” Back in Team: The Rise of International Teams in Science
In this policy brief, I discuss the increasing prevalence of international teams in the production of scientific knowledge. I outline several potential factors that may explain these trends and discuss recent evidence from an original survey of coauthors on scientific papers regarding their collaboration behavior. Finally, as a notable example of increased international collaboration, I discuss the increase in scientific collaboration between Russia and the US after the end of the Cold War.
The Increase in Collaboration and Internationalization of Teams
Teams are becoming more prevalent in science. Both the share of papers produced by teams and the number of scientists working on scientific papers has increased in recent decades (Wuchty, Jones and Uzzi, 2007). Economic theory suggests that scientific research is becoming increasingly collaborative since the frontier of scientific knowledge has become more complex and specialized so that more researchers are needed to combine their expertise to make advances (Jones, 2009). Team members are also becoming more geographically dispersed: the share of papers resulting from international collaborations has increased, and within the US, scientists today are more likely to have coauthors located in a different city than before (Freeman, Ganguli and Murciano-Goroff, 2014).
These trends can be seen clearly in the graph below from the National Science Board’s Science and Engineering Indicators 2012. It shows the share of both world papers and US papers from 1990-2010 that are coauthored, coauthored with domestic coauthors only, and coauthored with at least one international coauthor. Collaboration in general and international collaboration have been increasing steadily since 1990 both in the world and in the US. However, for the US, the share of domestic-only collaborations has plateaued, while it is increasing in the rest of the world. In a recent Nature article, Adams (2013) shows that this trend similarly holds for other Western countries (United Kingdom, Germany, France, the Netherlands, Switzerland), while for emerging economies (China, India, South Korea, Brazil, Poland), domestic collaborations are also increasing.
Figure 1. World and US Trends in Scientific Collaboration, 1990-2010
Source: From National Science Board (2012)
Why has Science Become More International?
There are many potential reasons for the recent increases in international collaboration. An important factor has likely been the spread of the scientific workforce and R&D activities throughout the world (Freeman, 2010). The growing number of science and engineering PhDs in developing countries, some of whom are international students and post-docs returning to their home countries has expanded the supply of potential collaborators around the world (Scellato, Franzoni, and Stephan, 2012). Another factor is funding that has shifted scientific production towards international teams, as increased government and industry R&D spending in developing countries and grant policies by the European Union and other countries have supported international cooperation.
The lower cost of travel and communication in recent decades has also reduced the cost of collaborating with people in different locations. For example, Agrawal and Goldfarb (2008) show how the expansion of Bitnet, the precursor to the Internet, led to increased collaboration between institutions within the US. Finally, the location of scientific equipment and materials, such as the CERN Large Hadron Collider, telescopes, or climatological data available only in certain parts of the world, have increased international collaboration, and in some fields, has made international collaboration a necessity.
Survey Evidence on Scientific Collaborations
In a recent paper, my coauthors and I present the results of an original survey we conducted of scientists regarding collaboration (Freeman, Ganguli and Murciano-Goroff, 2014). In August 2012 we conducted a web-based survey of the corresponding authors of scientific papers with at least one US coauthor published in 2004, 2007, and 2010 in the fields of Nanotechnology, Biotechnology, and Particle Physics.
We customized each survey to ask the corresponding author about the collaboration and individual team members. The survey questions asked about how the team formed, how it communicated and interacted during the collaboration, the contribution of each coauthor, types of research funding, and the advantages and disadvantages of working with the team. We received 3,925 responses, so that our response rate was approximately 20%.
The survey also asked the respondent which country each coauthor was “primarily based in during the research and writing” of the article. This gives us a more accurate measure of whether teams are international than can be typically gleaned from publication data, which are based on author affiliations at the time of publication. Defining international teams from author affiliations alone can produce errors if affiliations change between the time the research was undertaken and the time of publication, or because some people have affiliations from more than one country.
Our analysis of the survey data uses the respondents’ information to define US collocated, US non-collocated and international teams. One of our key results is that face-to-face meetings continue to play an indispensible role in collaborations: most collaborators first met while working in the same institution. Teams also reported that while carrying out the research, they communicated often through face-to-face meetings, even with coauthors from distant locations.
Figure 2 below displays how the corresponding author responded about how they first met their team members. It shows that former colleagues play a very important role in the formation of international teams, followed by former students, conferences and institution visits, which equally contribute. The graph also shows the similarity between international teams and US non-collocated teams in how coauthors met. For other survey questions, our analysis also shows similarities between international teams and US non-collocated teams, suggesting that the salient issues are more about geography in general rather than necessarily about national borders.
Figure 2. How Coauthors First Met
Source: From Freeman, Ganguli and Murciano-Goroff (2014)
Another key finding from our survey is that the main reason for most collaborations, whether domestic or international, is to combine the specialized knowledge and skills of coauthors. We also asked the corresponding authors their views of the advantages and challenges of their collaboration. The most often cited advantage for all types of collaborations was “Complementing our knowledge, expertise and capabilities” and “learning from each other”. For the challenges, US non-collocated and international teams tended to agree more that there was “Insufficient time for communication”, “Problems coordinating with team members’ schedules”, and “Insufficient time to use a critical instrument, facility or infrastructure”, but international teams did not report these problems more often than US non-collocated teams. Where international teams differed is that these teams were the most likely to agree that their “research reached a wider audience”.
International Collaboration After the End of the USSR
A small but significant part of the increase in international collaboration since the 1990s can be attributed to the end of the Cold War. In “Russian-American Scientific Collaboration” (Ganguli, 2012), I examine trends in international collaboration by Russian and US scientists since the end of the USSR. Given the nature of the Cold War and restrictions on travel and communication with the West, I show that there was a dramatic increase in the number of publications with at least one Russian and a US coauthor from 1985 to 2005.
In addition to the lifting of travel and communication restrictions, there are several factors that contributed to the surge in collaborations between American and Russian scientists after the end of the USSR. First, at the level of the Russian government, there was a switch to a more open and collaborative approach to science. Part of this effort included establishing international centers for research in Russia aimed at integrating Russia into the global science community. Another important factor facilitating collaborations with Western researchers were foreign grant programs. The large increase in the emigration of Russian scientists in the 1990s to the West also contributed to international collaboration. After emigrating, many Russian scientists maintained close links to their colleagues in Russia, and coauthored papers with their former colleagues, which are counted as internationally coauthored publications.
While many of these factors have aided international cooperation after the end of the USSR, there have also been significant challenges that made cooperation difficult. Some of these challenges in the early 1990s included the political instability, organizational turnover making long-term funding agreements difficult to implement, difficulty transferring funds due to the underdeveloped banking system, high taxation and customs duties, lack of effective intellectual property rights, poor infrastructure, lack of a shared language (both linguistic and cultural), and external regulations (see further discussion in OECD, 1994). However, many of these challenges have now been overcome, leading to the continued increase in international collaboration between Russian and US scientists.
My analysis in Ganguli (2012) shows that the increase in Russian-American collaboration was more pronounced in some fields of science versus others, particularly in Physics. Figure 3 shows that the bulk of the articles published with Russian and American coauthors were Physics articles, with a sharp increase occurring immediately after 1991.
Figure 3. Russia-United States Publications By Field, 1985-2005
Source: From Ganguli (2012)
While some of the differences across the fields can be attributed to the number of scientists active in these fields, there are also other potential contributing factors. For example, it may be that there was greater emigration of scientists from certain fields abroad, and links between emigrants and those who remained in Russia persisted. Graham and Dezhina (2008: 24) suggest that over 50 percent of emigrants were physicists and mathematicians. Another reason may be that international collaboration was more important in some fields due to the knowledge or resources needed to conduct research during the economic crisis of the 1990s. As Wagner Brahmakulam, Peterson, Staheli, and Wong (2002) point out, physics research received significant amounts of US government funding for international collaboration, partly because expensive equipment that is needed and through collaboration, countries could share costs. Also, physicists from many countries often meet and work together at international research centers like CERN. Moreover, in some fields, the US and Russian governments shared priorities in funding international cooperation, like biomedical and health sciences, energy, physics, while there were gaps in some areas where Russia devoted resources and the US did not, like chemistry (Wagner et al. 2002: 24). Graham and Dezhina (2008: 141) also discuss how Western colleagues benefited from working with Russians especially in fields like zoology, botany and the earth sciences, since the Russian colleagues provided access to data from unique regions not available previously.
Support for International Teams?
This policy brief has discussed some reasons for the increase in international scientific collaboration and related empirical evidence, including insights from collaboration after the end of the USSR. The growth in collaboration and the geographic dispersion of teams is likely to continue; the frontier of scientific knowledge will become more complex and specialized, so that an even greater numbers of researchers will be needed to combine their expertise, and they are likely to be spread across increasingly distant locations.
These trends raise many complex issues for policymakers. For some countries, international collaboration may be the only way to sustain the science sector as the frontier of knowledge becomes more complex and resource-intensive. For some, international collaborations may increase the emigration of home-grown talent to wealthier countries. To what extent international collaboration should be supported, and how, will be important policy questions going forward. Typically, funding for international projects has been the main policy lever, and the Russian experience suggests that grant programs did play a critical role in that case. As our survey evidence in Freeman, Ganguli and Murciano-Goroff (2014) suggests, face-to-face meetings are especially important in forming and sustaining international collaborations. Thus, funding mechanisms that include provisions for research stays and face-to-face meetings may be the most effective means for fostering international collaborations.
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References
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