Russia's Economic Pipeline

Lee Hudson Teslik
Council on Foreign Relations
Monday, March 3, 2008; 10:42 AM

Russia's next president, Dmitri Medvedev, is a businessman. Before entering politics, Medvedev worked at a timber company, then sat on the board of a major Russian paper producer. He is currently the chairman of Gazprom, the energy giant that is Russia's largest company and the world's leading producer of natural gas. Some analysts, like CFR's Stephen Sestanovich, say Medvedev's business background may explain why Russian President Vladimir Putin seems so keen on him. Medvedev has no explicit KGB connections, Sestanovich says, which extracts him from Russia's political turf wars. But Medvedev also makes a case for himself on economic grounds (Moscow Times). Following a sweeping victory (Reuters) in Russia's March 2 vote, which some election monitors criticized for irregularities (BBC), Medvedev stands poised to assume power at a time when Russia's economy is at a crossroads. Booming wealth from natural resources has put the country in a newly powerful position, but a host of lingering problems threaten to undermine Moscow's new buoyancy.

Spiking oil and natural gas prices account for much of Russia's boom. Global oil prices have increased nearly tenfold since 1998, when they hit lows under eleven dollars per barrel (PDF). Data from the International Monetary Fund (IMF), displayed below, shows how this trend has steadily lifted Russia's per-capita gross domestic product (GDP) from a point where it was well below the global average to having now surpassed it. In 2007, Russia showed GDP growth between 6.5 percent and 8.1 percent, depending whose numbers you use. In either case, that was at least double the 2007 growth rate of the United States, though the U.S. economy still dwarfs that of Russia in overall size. The Russian economy has also benefited from a flood of foreign investment. A commentary in Forbes notes that more than $200 billion flowed into Russia in 2007, marking an annual foreign investment growth rate of 2.5 percent -- higher than that of any of the world's fifteen biggest economies (Russia ranks eleventh, by 2007 IMF data).

This boom has brought increased political power, which analysts say the Kremlin has eagerly flexed. The row over Kosovo's independence provides an example. After threatening to block UN recognition of Kosovo, Moscow negotiated a natural gas deal that gives the Kremlin substantial control over Serbia's natural gas industry (Eurasia Monitor). At the same time, Russia threatened to cut gas shipments (ChiTrib) to regional rivals like Ukraine. The BBC credits newfound Russian economic stability for Putin's "confident swagger" in regional politics. The Economist quotes one unnamed European leader as saying, "Russia is getting stronger; we are getting weaker." The same article features a graphic demonstrating Russia's chokehold on Europe's natural gas industry.

Yet for all Moscow's recent gains, economic storm clouds loom on the horizon for the next Russian president. In the first place, Russian growth is slowing. The Economist Intelligence Unit projects real GDP growth will drop from 7.5 percent in 2007 to 4.3 percent in 2012. The country's inflation rate, which jumped to 11.9 percent in 2007, also poses a major problem (Bloomberg). The World Bank's latest report on the Russian economy cites a slew of short- to medium-term challenges, from developing critical infrastructure to improving fiscal policy. A recent Foreign Affairs article adds another pessimistic note, arguing that many Russians now credit Putin's firm-fisted style for the country's prosperity. Yet this growth, the article says, has been shadowed by worsening social and political benchmarks -- including growing violent crime, an eroding health care system, and ingrained corruption.

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