Russia’s economic diversiﬁcation potential: the untold story? · Russia’s economic...

9International Business : Research, Teaching and Practice | 7.1

RESEARCH

Russia’s economic diversification potential: the untold story?

Aleksandr V. Gevorkyan Assistant Professor of Economics Department of Economics and Finance The Peter J. Tobin College of Business St. John’s University

CORRESPONDING AUTHOR Aleksandr V. GevorkyanSt. John’s University 8000 Utopia Parkway Bent Hall – Room 391 Queens, NY 11439��[email protected]://agevorkyan.com

ABSTRACT Russia’s economic model is under a major sustainability test. Posting solid real growth in the early 2000’s it earned its “BRICs” designation. Later, surviving the worst of the crisis relatively unscathed, the economy XQYHLOHG� LWV� SHUHQQLDO� VWUXFWXUDO� ÁDZ� RI� HQHUJ\� H[SRUWV� GHSHQGHQFH��Interpreting Russia’s macroeconomic troubles as the “bottle half-empty” analogy is tempting, while the “bottle half-full” dimension is challenging. :LWKRXW�GLPLQLVKLQJ�VLJQLÀFDQFH�RI�WKH�UHDO�FRQFHUQV��DQG�UHIUHVKHG�ZLWK�most recent data, this article attempts to analytically lay out Russia’s QDVFHQW� HFRQRPLF� GLYHUVLÀFDWLRQ� SRWHQWLDO� YLD� HYROYLQJ� LQVWLWXWLRQDO�EXVLQHVV�VWUXFWXUH�DQG�QHZ�ÀUP�DQG�VHFWRU�GHYHORSPHQWV�

INTRODUCTION Approximately 16,000 books, articles, and other near-academic materials produced between 1991 and 2013 appear in Google Scholar for search phrase “Russian economy”. Compared to ´$PHULFDQ� HFRQRP\µ� UHVXOW� RI� ��³DQ\� VFLHQWLÀF� SUHWHQVH�aside in such comparisons—one might infer that the topic of Russia’s economic development may have been widely covered in recent academic and policy papers. Adding substantial non-English language literature, the volume of academic work increases even more. Yet, one should still expect a jump in new publications analyzing Russian economy as its sustainability and GLYHUVLÀFDWLRQ�SRWHQWLDO�DUH�XQGHU�PXFK�VFUXWLQ\�WKHVH�GD\V�

To begin with, early in 2000’s Russia earned its BRIC[s] GHVLJQDWLRQ� �H�J�� 2·1HLOO�� .HRKDQH�� ODUJHO\� GXH� WR�impressive post 1990s shock-therapy reforms turnaround. Real *URVV�'RPHVWLF�3URGXFW��*'3��JUHZ��SHUFHQW�LQ��ZLWK�

KEYWORDS | Russian economy; BRICS; emerging markets; economy GLYHUVLÀFDWLRQ��´JD]HOOHµ�ÀUPV��ÀVFDO�SROLF\�

10 International Business: Research, Teaching and Practice | 7.1

RESEARCH Gevorkyan | Russia’s economic diversification potential

VXEVHTXHQW� SUH�� JURZWK� RVFLOODWLQJ� DURXQG� DYHUDJH� �� ²� �� SHUFHQW� �,0)��7KH�HFRQRP\�VHHPHG�WR�KDYH�DYRLGHG�WKH�ZRUVW�RI�WKH��JOREDO�FULVLV�LPSDFWV��preventing immediate severe real sector deterioration and forestalling currency fall and ÀQDQFLDO�FULVLV��0RUH�UHFHQWO\�JURZWK�KDV�IDOOHQ�EHORZ�PRVW�SURMHFWLRQV�DQG�HFRQRP\·V�GHSHQGHQFH� RQ� WKH� HQHUJ\� PDUNHW� ODFNLQJ� VLJQLÀFDQW� LQGXVWULDO� GLYHUVLÀFDWLRQ� KDV�become more pronounced. Without the prior years’ fanfare, macroeconomic results for late 2012-early 2013 seem to reinforce the doomsday scenarios rhetoric. Yet, the negative verdict may not be that straightforward. Focusing on the institutional business structure transformation and without diminishing the macroeconomic concerns this article develops a somewhat alternative look that offers a glimpse of hope for the economy’s sustainable path.

It should be recognized that Russian economy is set on a rough foundation of post-socialist macro-stabilization shocks. The institutional legacy of the previous economic PRGHO� LV� UHLQIRUFHG� E\� HPHUJHQFH� RI� VWDWH� FRUSRUDWLRQV� DQG� VWURQJHU� ÀVFDO� IDFWRU��alongside robust adaptation to new content forms the contemporary political economy PRVDLF� �*HYRUN\DQ�� *DLGDU�� 1DWXUDOO\�� WKHUH� LV� D� KRVW� RI� GHVWDELOL]LQJ�tendencies, from volatility in the energy sector, currency pressures, in part due to ´XQFHQVRUHGµ�IRUHLJQ�H[FKDQJH�ÁRZV��WR�D�PXOWLWXGH�RI�VHHPLQJO\�OLPLWOHVV�GRPHVWLF�LQHIÀFLHQFLHV��$W�WKH�VDPH�WLPH��WKHUH�DUH�VLJQLÀFDQW�DSSHDUDQFHV�RI�LQVWLWXWLRQDOO\�QHZ�TXDOLWDWLYH�G\QDPLFV� LQ� WKH�GRPHVWLF�PDUNHW�RSHUDWLRQV�� WKRXJK�RQO\� MXVW�EHFRPLQJ�visible.

5XVVLD� LV� WKH� ODUJHVW�HFRQRP\�LQ�WKH�&RPPRQZHDOWK�RI� ,QGHSHQGHQW�6WDWHV� �&,6��in relative and absolute terms. It is also the largest in outward foreign investment and cross-border M&A deals in the region. Private consumption, accompanied by a rise in a typical modern day consumerism has set its deep roots. This is then followed by too familiar individualism and property dynamics—an integral occurrence in modern capitalist society. Corporate management and growth in new innovative industries are real and are gaining dominance, though somewhat minimal. Despite some setbacks, for entrepreneurs those institutional factors open up yet untapped markets that aside from willing growing middle class consumers offer tenacity of well-educated labor IRUFH��7KH�PDFURHFRQRPLF�SROLF\�PRPHQWXP� IRU�SURDFWLYH� HFRQRPLF�GLYHUVLÀFDWLRQ�drive appears to be just right. But it is not and cannot be an overnight transformation.

The rest of the paper is structured as follows. The following section touches upon LQVWLWXWLRQDO� GHYHORSPHQW� DQG� VRPH� PDFURHFRQRPLFV�� 6HFWLRQ� ,,� SURÀOHV� GRPHVWLF�investor and outward investment activity. Section III challenges the skeptical assessments from an industry development view. Section IV deals with challenges LQ� VSHFXODWLYH� ÀQDQFLDO� VHFWRU� DQG� FRQFHSWXDOO\� JRHV� RYHU� UHOHYDQW� WR� HFRQRPLF�GLYHUVLÀFDWLRQ�JRDO�SROLF\�FRQFHUQV��$OO�DFURVV��WKH�VWXG\�LV�EDODQFHG�DW�ÀUP�DQG�VHFWRU�level discussion within a larger macroeconomic context in sight. The paper ends with conclusion and references list.


RESEARCHGevorkyan | Russia’s economic diversification potential

THE UNBEKNOWNST STORY OF INSTITUTIONS AND MACROECONOMICS 0RGHUQ�GD\�5XVVLD�LV�D�SRVW�VRFLDOLVW�HFRQRP\�WKDW�KDV�E\�QRZ�IXOO\�́ WDVWHGµ�WKH�ÁDYRU�of the 1990s shock-therapy and macroeconomic stabilization reforms. A reference to time limitation may not be valid, as legacy formations and institutions by their very GHÀQLWLRQ�QHFHVVDULO\�UHPDLQ�YLVLEOH�LQ�QHZO\�HPHUJLQJ�IRUPDWLRQ�WKDW�IROORZV��

Why bring this up here? Institutional economics, as in the role of institutions in economic process (e.g. private property, private enterprise, functioning capital PDUNHWV��KRXVLQJ�PDUNHW��ODERU�PDUNHW��SXEOLF�ODZ��GHPRFUDWL]DWLRQ��HWF��KDV�JURZQ�LQ�VLJQLÀFDQFH�LQ�PDLQVWUHDP�DQG�KHWHURGR[�HFRQRPLF�WKHRU\�DQG�SROLF\�RYHU�WKH�SDVW�GHFDGHV� �H�J��1RUWK�� DQG� �� ,Q� WKH� FRQWH[W� RI� HFRQRPLF� GHYHORSPHQW� �DQG�WUDQVLWLRQ³RI�ZKLFK�5XVVLD�LV�SDUW�� LQVWLWXWLRQDO�GHYHORSPHQW�KDV�EHHQ�OLQNHG�ZLWK�progress in market reform and sustainability of emerging capitalist economies (e.g. 5RGULN��$FHPRJOX�HW�DO��

%ODFN� DQG� 7DUDVVRYD� �� LQ� WKHLU� FRPSUHKHQVLYH� FRQFHSWXDOL]DWLRQ� RI� WKH�institutional reform in transition, and Russia in particular, address these issues. The authors take a critical step back and propose a more gradual implementation framework as opposed to what appeared to be common anticipation of immediate change. The authors rightfully emphasize the complexity and interconnectedness of various reform HOHPHQWV�WKDW�JUDGXDOO\�EHFRPH�VHOI�HQIRUFLQJ��+DYU\O\VK\Q�DQG�YDQ�5RRGHQ��ÀQG�HIÀFLHQW�LQVWLWXWLRQDO�IUDPHZRUN�WR�KDYH�D�VLJQLÀFDQW�SRVLWLYH�HIIHFW�RQ�JURZWK�LQ�transition economies, but they also stress the role of pragmatic macroeconomic policy for sustainable growth.

Commenting on the needed institutional change in the Russian economy, Gaidar �� VXJJHVWHG� WKH� HIIHFW� RI� VWURQJ� SRVLWLYH� IHHGEDFN� RI� HPHUJLQJ� DQG� HYROYLQJ�institutional structure as it replaces outdated norms with new business and market culture. He also pointed to a lacking foundational tradition for the newly established institutions in the post-socialist context. Hence, a solid institutional base and economic GLYHUVLÀFDWLRQ�ZRXOG�RQO\�EH�SRVVLEOH�LQ�D�ORQJHU�WHUP�SHUVSHFWLYH��7KLV�VHHPV�WR�EH�LQ�OLQH�ZLWK�1RUWK·V��JHQHUDO�YLHZ�RI�HFRQRP\·V�VKDSH�DW�DQ\�JLYHQ�WLPH�EHLQJ�the outcome of an evolving web of institutional tendencies. In that sense how long the longer term is for Russia, or any other post-socialist economy for that matter, would remain unclear. And it would be so, for economic development is necessarily a dynamic and self-regenerating social process the path of which is probably guided by a mix of pragmatic policy and endogenous macro and micro tendencies.

So at bare minimum, one sees the post-socialist markets slowly churning through concepts of private property, contractual agreements, taxation regulation (e.g. expanded WD[�EDVH�� FRUSRUDWH�ÀQDQFLDO� UHSRUWLQJ�� DQG� WKH� LQVWLWXWLRQ�RI� IRUPDO�DGPLQLVWUDWLYH�system for business operations. Russia is no exception, and in some cases is leading the SDFN��7KH�(XURSHDQ�%DQN�IRU�5HFRQVWUXFWLRQ�DQG�'HYHORSPHQW� �(%5'�� WUDFNV�institutional reform in the post-socialist economies across six initiatives: Large scale privatization; Small scale privatization; Governance and enterprise restructuring; Price liberalization; Trade & Forex system; and Competition Policy. Figure 1 reports Russia’s


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JRYHUQDQFH�DQG�HQWHUSULVH�UHVWUXFWXULQJ�LQGH[�DV�KLJKHU�WKDQ�WKH�&,6��ZLWK�*HRUJLD��average and the Net Exporter’s group (Russia’s peers based on current account SRVLWLRQ��VHH�*HYRUN\DQ��IRU�GHWDLOHG�WD[RQRP\��

One should beware, however, of overly optimistic view, as Russia is not really gaining top scores on all benchmarks seen for example in a six-point movement in the rank of doing business, from 118 to a 112 position per the World Bank Doing Business VXUYH\��6WLOO��DV�)LJXUH��VKRZV��E\�WKDW�EHQFKPDUN��5XVVLD�LV�DKHDG�RI�%UD]LO�DQG�India, yielding to China of the original BRIC group.

Are these and similar benchmarks accurate objective indications of the institutional FKDQJH�DQG�KHDOWKLHU�HFRQRP\�LQ�5XVVLD��RU�DQ\ZKHUH�"�$FWXDOO\��LQVWLWXWLRQDO�PHDVXUHV�

DUH�QRWRULRXVO\�GLIÀFXOW�WR�FDSWXUH�DQG�WUDFN��7KH\�DUH�QHFHVVDU\�EXW�SUREDEO\�DUH�QRW�VXIÀFLHQW�LI�WDNHQ�RXWVLGH�RI�JHQHUDO�PDFURHFRQRPLF�FRQWH[W��7KH�DQDO\VLV�LV�OHVV�HYLGHQW�due to the vagueness of approximation and assumption made in such surveys, despite their directional use. So far the obvious conclusion seems to be that Russia has made dramatic progress over the past few years in some areas given its shaky foundation of WKH��V��,I�*DLGDU·V��SURYHUELDO�DVVHVVPHQW�RI�VHOI�UHLQIRUFLQJ�LQVWLWXWLRQDO�EDVH�is right, there may perhaps be more ground for optimism than was previously thought.

Turning to more concrete discussion, Russian economy remains only partially

Figure 1

Governance and enterprise restructuring, EBRD Index

Source: EBRD, 2013 and author’s calculations

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Figure 2

The original BRIC ranking by county, 2012 vs. 2013

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Gevorkyan | Russia’s economic diversification potential


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GLYHUVLÀHG��'HFRPSRVLQJ�YDOXH�DGGHG�WR�*'3�E\�VHFWRU�WKH�ZHLJKW�RI�WKH�WUDGLWLRQDO�FRUH�VHFWRUV��L�H��PLQLQJ�DQG�LWV�VXEFRPSRQHQWV��UHPDLQV�GRPLQDQW��)LJXUH��FRPSDUHV�proportions of each sector’s value added as percent of total GDP composition between 2005 and 2011.

7KH� VWRU\� KHUH� LV� TXLWH� LQWHUHVWLQJ�� PLQLQJ� KDV� JLYHQ� ZD\� WR� VWURQJHU� JDLQV� LQ�JRYHUQPHQW��SRVLWLYH��SRLQWV�FKDQJH��FRQVWUXFWLRQ��SRLQWV��ÀQDQFH�DQG�UHDO�HVWDWH� �),5(�� SRLQWV�� DQG�RWKHU� VHFWRUV� ��SRLQWV�� 7KHUH� LV� D� YLVLEOH�GHFOLQH�in trade, though later we point to the consumer factor in the economy. The curious

aspect about the above results is that we are able to compare before and after crisis sector distribution. The rise in government services and FIRE corroborates the story of SURDFWLYH�ÀVFDO�SROLF\�GXULQJ�WKH�FULVLV�DQG�VROLGLI\LQJ�SRVLWLRQ�RI�WKH�ÀQDQFLDO�VHFWRU�as well as expanding real estate market in the economy. New sectors, concentrated in tech-industries, are gradually rising as evidenced in the manufacturing improvement, WKRXJK� VWLOO� VORZ� LQ� JURZWK� WR� HVWDEOLVK� D� VLJQLÀFDQW� IRRWSULQW�� 7KLV�ZDV� HVSHFLDOO\�true in the early transition era with newly introduced institutional framework as the HFRQRPLF�FROODSVH�HQGHG�WKH�SHULRG�RI�ÀQH�WXQHG�FRPSOH[�SODQQLQJ�V\VWHP��5HOLDQFH�on the primary commodities exports drove much of the early economic growth in VXEVHTXHQW�\HDUV��&RQFHQWUDWHG�LQ�LVRODWHG�VHFWRUV��JURZWK�PD\�HYHQWXDOO\�SXOO�RWKHU�VHFWRUV�DFURVV�HFRQRP\��/RRNLQJ�DW�WKH�ODVW�GHFDGH·V�ÀUP�DQG�VHFWRU�OHYHO�GDWD�WKHUH�may be some ground for conservative optimism.

Before we turn to sector level discussion, let’s address some stylized macroeconomic facts. Taking a sharp dive in 2009, the economy recovered to its pre-crisis levels, with UHDO�*'3�&$*5�OLNHO\�WR�DYHUDJH�DURXQG��SHUFHQW�RYHU�WKH�QH[W�ÀYH�\HDUV��,0)��7KH�JRRG�QHZV�LV�WKDW�JURZWK�UHPDLQV�SRVLWLYH��7KH�EDG�QHZV�LV�WKDW�LW�LV�VLJQLÀFDQWO\�ORZHU� WKDQ�ZKDW�HFRQRP\�QHHGV� IRU�D� IDVWHU�PRGHUQL]DWLRQ�DQG�GLYHUVLÀFDWLRQ� �H�J��<DVLQ��6WLOO��WRJHWKHU�WKH�IRXU�%5,&V��%UD]LO��5XVVLD��,QGLD��DQG�&KLQD��ZLOO�FOLPE�over $15.6 trillion in current prices of combined GDP in 2013 (compare to the combined ��WULOOLRQ�LQ��

With slightly over $2 trillion estimated 2012 GDP, Russia is ranked third, following China and Brazil, while economy’s GDP per capita is projected to reach $15,700 in

Figure 3

Russia’s value added by sector, % to total 2005 vs. 2011

Source: FSSS, 2013 and author’s calculations

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In 2012, manufacturing productivity has rebounded to 8.3 percent annual growth in 2010 catching up to pre-crisis 2007 levels. The export-aimed energy sector, challenged by new industries domestically, has also declined from the previous highs, following volatility in the global oil demand and lower prices. Still, labor productivity across all sectors has grown 3.2 percent in 2010, and 3.8 percent in 2011—a post-crisis come back �)666��2YHUDOO��WKH�GDWD�WKURXJK��DQG�HDUO\��VHHPHG�WR�KDYH�FRUURERUDWHG�the general story of gradual improvement and impressive post-crisis recovery in the Russian economy. In fact, the list can go on and data available from the Russian and international sources simply says that these are good indicators and may be the best macroeconomic indicators on Russian economy yet.

But is Russia’s positive macroeconomic performance of the past years sustainable? 0RVW� HFRQRPLVWV� LQ�5XVVLD� DUH� FULWLFDO� RI� WKDW�� EODPLQJ� WKH� FXUUHQW� OLWWOH� GLYHUVLÀHG�HFRQRPLF�PRGHO��H�J��<DVLQ��3RSRY��HWF��,Q�IDFW��DGGLQJ�WR�WKH�SHUVSHFWLYH�PRUH�UHFHQW�PDFUR�OHYHO�GDWD��VHH�)LJXUHV��D��E��F��G��WKH�DQVZHU�WR�WKH�VXVWDLQDELOLW\�TXHVWLRQ�LV�D�WHPSWLQJ�´QR�µ�7KH�FKDUWV�FRPSDUH�DYHUDJH�LQGLFDWRUV�IRU�WKH��with the 2011-2012 period.

It appears that after the initial upward pull immediately after the crisis the economy entered a period of macroeconomic decline as pre-crisis gains are being wiped out by the less so impressive performance in late 2012 and early 2013. This is seen across a range of macroeconomic indicators, most visibly in declines in current account, WUDGH��LQFRPLQJ�IRUHLJQ�GLUHFW�LQYHVWPHQW��)',��DQG�RWKHUV�DV�SURSRUWLRQV�RI�FRXQWU\·V�GDP. At the same time gross capital formation has improved between the two sample SHULRGV��GHVSLWH� WKH�VKDUS��PRUH� WKDQ�GRXEOH��GURS� LQ�DQQXDO�JURZWK�EHWZHHQ��and 2012.

A bit of positive news can be seen in labor force participation (improving 1.6 SRLQWV��ZLWK�JURZWK�LQ�VHUYLFHV�VHFWRU�HPSOR\PHQW�E\��SRLQWV��$GGLWLRQDOO\��WRWDO�investment as a share of GDP increased 2.4 points as net outward investment went up approximately 0.1 points. These facts are well documented in available statistics and across few recent studies. For additional and comprehensive commentary on Russia’s FXUUHQW�PDFURHFRQRPLF� SRVLWLRQ� WKH� UHDGHU� LV� UHIHUUHG� WR� WKH�PRVW� UHFHQW� TXDUWHUO\�UHSRUW�E\�WKH�:RUOG�%DQN��:%��

Moving on, much more nuanced is the business performance that has evolved as LQVWLWXWLRQ�LQ�LWVHOI�TXLWH�VLJQLÀFDQWO\�RYHU�WKH�SDVW�GHFDGH�LQ�PRUH�UHFHQW�\HDUV�LQ�5XVVLD��The details of this development remain largely unknown to outside observers but, in RXU�YLHZ��PD\�SOD\�DQ�LPSRUWDQW�UROH�LQ�VSHDUKHDGLQJ�WKH�HFRQRP\·V�GLYHUVLÀFDWLRQ�



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Figure 4(a)

Changes in Russia’s capital flows and services trade, % of GDP

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Changes in Russia’s trade and business activity indicators, % of GDP

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Changes in Russia’s labor market components, % of total

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Gross capital formation in Russia, % annual change

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push. We address some of the key related concepts below.

PROFILING DOMESTIC INVESTOR

Flexing Cross-Border Economic Pull

Russia’s success in transforming as a market economy is often viewed in the context of the country’s tradable sectors’ export performance. According to the latest revised GDWD�IURP�5RVVWDW��)666��DQG�)LQDQFH�0LQLVWU\��0)��WRWDO�H[SRUWV�JUHZ��percent CAGR between 2005 and 2008. Taking a steep dive in 2009, exports rebounded to 23.2 percent annual change between 2010 and 2011, only to slip again to mere 1.3 percent growth between 2011 and 2012. The downward trend has continued so far in WKH�ÀUVW�KDOI�RI��7KLV�LQGHHG�LV�VRPHZKDW�D�GLIIHUHQW�SLFWXUH�FRPSDUHG�WR�VLPLODU�reports through 2011 data.

2I� WKH� WRWDO� YROXPH�� H[SRUWV� WR� WKH�&RPPRQZHDOWK� RI� ,QGHSHQGHQW� 6WDWHV� �&,6��economies accounted for 15.7 percent shrinking 1.3 percent in 2012 compared to a 25 percent 2010 to 2011 growth. Perhaps not surprisingly, non-CIS directed exports, i.e. mainly to Western Europe, reached $446 billion in 2012, corresponding to a positive 1.7 percent growth in 2012 versus a more encouraging 23 percent growth in the year before. The dominance of energy products in the total exports has led to the economy’s net exporter title (along with Azerbaijan, Belarus, Kazakhstan, and Ukraine as in *HYRUN\DQ�� 6WLOO� YROXPH�ZLVH� 5XVVLD� UHPDLQV� WKH� ODUJHVW� H[SRUWHU� LQ� WKH�&,6�space.

2QH�ÀQGV�D�ELW�PRUH�RSWLPLVP�LQ�LQFUHDVLQJ�HFRQRPLF�PDWXULW\�RI�RXWZDUG�IRUHLJQ�GLUHFW� LQYHVWPHQW� �2)',�� IURP�5XVVLD� LQWR� WKH� HFRQRPLHV� RI� WKH�&RPPRQZHDOWK�RI�,QGHSHQGHQW� 6WDWHV� �&,6�� DQG� LQ� VRPH� GHYHORSHG� PDUNHWV�� 1HW� 2)',� KDV� VWHDGLO\�JURZQ�RYHU�WLPH�DV�D�VKDUH�RI�*'3��DSSUR[LPDWHO\��SHUFHQW�EHWZHHQ��DQG��outpacing inward FDI, sustaining high levels in recent years as well.

&DSLWDO� ÁLJKW� FRQVLGHUDWLRQV� DVLGH�� HYLGHQFH� LV� DEXQGDQW� LQ� H[DPSOHV� RI� WKH�Russian-based companies participating in wide-scale M&A projects (Kalotay and 6XOVWDURYD��7KHVH�LQLWLDWLYHV�DSSHDU�WR�EH�WKH�GRPLQDQW�VWUDWHJLHV�LQ�WKH�IRUHLJQ�PDUNHW�DFFHVV�E\�5XVVLDQ�FRPSDQLHV��3DQLEUDWRY��81&7$'��QRWHV�D�ULVH�in cross-border M&A deals from $4.5 billion in 2010 to $33 billion in 2011, for now due primarily to few large transactions. Here Russia is the originator and the receiver LQ�0$� WUDQVDFWLRQV� �IRU� H[DPSOH�� .D]DNK*ROG� *URXS·V� �� ELOOLRQ� DFTXLVLWLRQ� RI�5XVVLD·V�3RO\XV�*ROG��5HSRUW� DOVR�QRWHV�DQ� LQFUHDVLQJ�SURSRUWLRQ�RI�0$�GHDOV� LQ�the Russia’s consumer market, non-natural resource based sectors, particularly with participation of the EU members (e.g. Russian-based enterprises active in retail trade, DXWR��DQG�WH[WLOH�LQGXVWULHV��GLVFXVVHG�EHORZ��

In the post-socialist bloc of countries, Russian companies rely on existing legacy physical capital facilities and access to a relatively skilled labor force. The pattern complicates cross country comparisons, especially with other emerging markets (e.g.



RESEARCH

%5,&6��ZKHUH�VXFK�SUHH[LVWLQJ�UHODWLRQVKLSV�DUH� OHVV�GHYHORSHG�RU�QRQ�H[LVWHQW��)RU�some of the smaller CIS economies, such OFDI coming in from Russia has been a VLJQLÀFDQW�IDFWRU�LQ�WKHLU�*'3�JURZWK��H�J��$UPHQLD�RU�%HODUXV��VHH�GDWD�DQG�WUHQGV�LQ�*HYRUN\DQ��

Large Russian MNCs also participate in the M&A deals outside of CIS, including LQ� ÀQDQFLDO� VHUYLFHV� VHFWRUV� �H�J�� 6EHUEDQN·V� DFTXLVLWLRQV� RI� VRPH� RI� WKH� $XVWULDQ�9RONVEDQN·V� (XURSHDQ� RSHUDWLRQV�� 6XFK� DFWLRQV� IROORZ� WKH� JHQHUDO� GHPDQG� RI� WKH�Russian banks’ corporate customers who expect access to their banks while running EXVLQHVV� RSHUDWLRQV� DEURDG�� 81&7$'� �� FLWHV� DV� DQRWKHU� H[DPSOH� WKH� 5XVVLDQ�71.�%3·V� DFTXLVLWLRQ�RI� D� ��SHUFHQW� VWDNH� LQ� WKH�%UD]LOLDQ�$PD]RQ�RLO� H[SORUDWLRQ��IURP� %UD]LO·V� +57� 3DUWLFLDSRHV�� ZRUWK� �� ELOOLRQ�� DQG� 5XVVLDQ� WHFKQRORJ\� ÀUPV·�VL]DEOH� LQYHVWPHQW� LQ� ODUJH� ÀUPV� LQ� GHYHORSHG� FRXQWULHV� �H�J�� 6N\� 7HFKQRORJ\·V�SXUFKDVH�RI��SHUFHQW�RI�7ZLWWHU��

,Q�QXPEHUV��DFFRUGLQJ�WR�5XVVLD·V�&HQWUDO�%DQN��&%5��WRWDO�2)',�DW�WKH�HQG�RI��UHDFKHG�WKH�SUH�FULVLV��OHYHOV�RI�86'��ELOOLRQ�IRU�WKH�\HDU��7KLV�LV��WLPHV�more than the year 2000 levels. Much of this growth has been driven by a handful RI� WKH� ODUJHVW�5XVVLDQ�PXOWLQDWLRQDO�FRUSRUDWLRQV� �01&V�� LQ� WKH�HQHUJ\�� WHFKQRORJ\��GHIHQVH�� DQG� WHOHFRPPXQLFDWLRQV� VHFWRUV�� )RU� H[DPSOH�� 6SLJDUHOOL� �� RIIHUV� D�GHWDLOHG�FDVH�VWXG\�DQDO\VLV�RI�UHFHQW�VFDOLQJ�XS�RI�LQYHVWPHQWV�E\�5XVVLDQ�ÀUPV�LQ�WKH�Italian economy across diverse sectors. Some other examples include such companies DV�$HURÁRW��$OID�*URXS��(YUD]��*D]SURP��/XNRLO��1RULOVN�1LFNHO��6HYHUVWDO��EXW�DOVR�Kaspersky, Abbyy, MTS, VimpelCom, Yandex, and a growing list of others. Could this WUHQG�EH�D�VWURQJ�FRQWULEXWLQJ�IDFWRU�WR�5XVVLD·V�HFRQRPLF�GLYHUVLÀFDWLRQ"�

&RPPHQWLQJ�RQ�WKH�RXWZDUG�G\QDPLF��.DORWD\�DQG�6XOVWDURYD��REVHUYH�WKDW�during most of 1990s the push factor for outward investment was the search for safety-QHWV� RI� GHYHORSHG�PDUNHWV� �2OHLQLN�� 2QO\� IHZ�SULYDWHO\�RZQHG�ÀQDQFLDO� DQG�energy sector companies were able to capitalize on this strategy at the time, as state-RZQHG� FRQJORPHUDWHV� ZHUH� DPRQJ� WKH� ÀUVW� PRYHUV�� .DORWD\� DQG� 6XOWDQRYD� ��also suggest that domestic macroeconomic performance and policies, as well as host-market size, access to resources, and longer-term ownership advantages in the nearest foreign markets are strongly correlated with the recent growth of Russian OFDI.

Access to regional markets by larger conglomerates, while retaining Russian presence, is often followed by relatively smaller Russia-based businesses seeking H[SDQVLRQ�LQ�QHZ��QRQ�HQHUJ\�RU�KHDY\�LQGXVWU\�VHFWRUV��)RU�ERWK��FRQWURO�RI�WKH�ÀQDO�SURGXFW·V� HQWLUH� YDOXH� FKDLQV� DQG� RYHU� UHYHQXH� ÁRZV� DUH� FULWLFDO�� 7KLV� VHHPV� WR� EH�FRQVLVWHQW�ZLWK�HDUOLHU�VXJJHVWLRQV�E\�$QGUHII��KLJKOLJKWLQJ�WKH�PLQLPDO�UROH�LQ�OFDI determination of the short-term variables (e.g. domestic currency volatility and VKRUW�WHUP�*'3�JURZWK�ÁXFWXDWLRQV��RU�SUHYDLOLQJ�DFFHVV�WR�WHFKQRORJ\��HLWKHU�DW�ÀUP�OHYHO�RU�LQ�WDUJHW�PDUNHW��

Today even in the Russia’s state-capitalism mode, strategic business drivers are at the forefront. In part this is due to ongoing privatization efforts (EBRD, 2011 and 81&7$'��$FFRUGLQJ�WR�WKH�(%5'�UDQNLQJ�5XVVLD�KDV�VFRUHG�WRS��SRLQWV�LQ�



RESEARCH

VPDOO�VFDOH�DQG��SRLQWV�LQ�ODUJH�VFDOH�SULYDWL]DWLRQ��ZLWK��EHLQJ�WKH�KLJKHVW��7KLV�roughly corresponds to 2,600 federal and municipal entities privatized between 2005 and 2012 according to FSSS, 2012. Interestingly, privatization in Russia has followed three stages, two of which were largely due to shock therapy-adopted policies during WKH� ��V�ZLWK� WKH� WKLUG�EHLQJ�PRUH� FDXWLRXV� DQG� V\VWHPLF� RYHU� WKH�ÀUVW� GHFDGH�RI�2000’s and recent reinitiating of the privatization debate at policy levels.

Above trends serve as positive contributions to Russian economy’s entrepreneurial G\QDPLF�� KXPDQ� FDSLWDO�� PDQDJHULDO� FDSDFLW\�� DQG� VLPSO\� DV� SURÀWV� GLYHUVLÀFDWLRQ�strategies. But as experience shows much of these happen under environment of fundamental uncertainty. Under these conditions different investors will assume varying positions vis-à-vis country investment.

A strategic investor

The above consideration leads us to two types of structural agents in the Russian PDUNHW�WKDW�UHTXLUH�H[DPLQDWLRQ��%RWK�GRPHVWLF�DQG�IRUHLJQ�LQYHVWRUV�LQ�WKH�5XVVLDQ�market can be split between two categories:

�� VWUDWHJLF�DQG�� VSHFXODWLYH�6WUDWHJLF�SOD\HUV�VHH�D�XQLTXH�RSSRUWXQLW\�LQ�WKH�5XVVLDQ�PDUNHW��,\HU�$KUHVWDQL��

�� $GYDQWDJHV� DUH� GXDO�� D�� RSSRUWXQLW\� WR� FDSLWDOL]H� RQ� UHODWLYHO\� ORZHU� FRVW�UHVRXUFHV�DQG�VNLOOHG�ODERU�DQG�E��SRVVLELOLW\�RI�HQWHULQJ�QHZ�DQG�ZLOOLQJ�FRQVXPHU�PDUNHW�� :H� FDQ� IXUWKHU� EUHDN� GRZQ� WKH� ÀUVW� RSWLRQ� DV�� L�� UH�HVWDEOLVKLQJ� EXVLQHVV�IDFLOLWLHV�ZLWKLQ�H[LVWLQJ�VHFWRUV�RU�LL��HVWDEOLVKLQJ�QHZ�HQWHUSULVH�LQ�D�QHZ�LQGXVWU\��

Complementary to such consideration is the boom in the consumer market in recent \HDUV�PHQWLRQHG�DERYH� �H�J��RQ�FRQVXPHULVP��VHH�$ULV�� ,PSRUWDQWO\�� WKH�ELUWK�and maturity of the Russian economy’s consumer culture has also nourished new ÀQDQFLDO�VHUYLFHV��H�J��FRQVXPHU�FUHGLW��PRUWJDJH��DQG�VPDOO�EXVLQHVV�ORDQV³PRUH�RQ�WKLV�EHORZ��ZKLFK�LQ�WXUQ�EHFRPH�LQWHJUDO�LQ�WKH�FRXQWU\·V�GLYHUVLÀFDWLRQ�DJHQGD�

Figure 5

Household consumption in Russia, % of GDP and annual % growth

6RXUFH��:',��DQG�author’s calculations

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RESEARCH

By the end of 2010 household expenditure as a proxy for consumer demand, given lower cost utilities and healthcare compared to other economies, has recovered and surpassed 2008 levels averaging 49.4 percent of GDP for the year. Despite earlier forecasts of topping the 50 percent of GDP mark the actual data through 2012 shows a clear reduction in the more recent years. This is consistent with the overall story of the last two years slip across most indicators. The positive spillovers of crisis management policies are now exhausted and economy is readjusting to a new normal trajectory.

Nevertheless, as seen in Figure 5, relative annual growth in consumer expenditure has gone from single digits in 1990s to double digits extensive expansion in more recent years. Real consumer demand growth is also fed by a 15 percent annual real wage growth, declining private savings, and expansive growth in consumer credit. All these factors become relevant for a medium to long term entrepreneur, or what we refer to as strategic investor.

Early in the transition period, entry by strategic foreign investors was, predictably, in the raw-materials and energy sectors. Recently growing business cooperation in IT-, retail, auto-, and large scale construction industries, including partnerships with large foreign conglomerates has been gaining momentum as well. The geography is as widespread as the brands of the foreign companies operating in Russia these days. Almost every known brand is present in the Russian economy: from Mercedes Benz to Ikea and certainly Coca Cola. Some (like many automakers, e.g. Hyundai, Daewoo, 5HQDXOW��*0��HWF��KDYH�HVWDEOLVKHG�GRPHVWLF�DVVHPEO\�OLQHV�WR�SURPRWH�XQLTXH�PDNHV��H�J�� VHH� .UDPHU� DQG� %URRNH�� RU� SDUWQHUHG� ZLWK� WKH� 5XVVLDQ� DXWR�LQGXVWU\�to develop joint vehicles. Some foreign corporations in Russia are putting up retail SUHVHQFH� IRU� QRZ� �LQFOXGLQJ� DOO� WKH� EUDQG� QDPHV� RI� UHWDLO� WR� LQYHVWPHQW� EDQNLQJ��,QFLGHQWDOO\�VRPH�RI�WKH�ÀUVW�IRUHLJQ�FRPSDQLHV�WR�HQWHU�WKH�5XVVLDQ�PDUNHW�ZHUH�WKH�ELJ�DFFRXQWLQJ�DQG�FRQVXOWLQJ�ÀUPV��H�J��.30*��'HOORLWWH�7RXFKH��3ULFHZDWHUKRXVH��HWF��

,Q� IDFW� WKH� QXPEHU� RI� 5XVVLD� EDVHG� ÀUPV� ZLWK� VRPH� GHJUHH� RI� IRUHLJQ� FDSLWDO�increased 93.9 percent between 2005 and 2011 as new entities entered the market. The WRS�ÀYH�ZLQQHUV�ZHUH�TXLWH�SUHGLFWDEOH�UDSLGO\�JURZLQJ�VHFWRUV�RI�WUDGH��UHDO�HVWDWH��WUDQVSRUWDWLRQ��FRQVWUXFWLRQ��DQG�PDQXIDFWXULQJ��VHH�)LJXUH��

Figure 6

Number of Russian companies with foreign capital participation, 2005 vs. 2011

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RESEARCH

For Russia to attract such global heavyweights and continue to increase foreign capital presence in large and medium enterprises is an unprecedented — compared WR�WKH��V�³�DFKLHYHPHQW��,W�LV�XQHTXLYRFDOO\�D�SRVLWLYH�WUHQG�DV�WKH�LPSURYHPHQWV�are seen what is typically characterized as real sectors of the economy offering real employment and feeding off real aggregate demand. For the large MNCs and similar companies, despite obvious and well-documented business risks, the opportunity costs of not going into the Russian market seem to largely outweigh the old business model alternative of simply feeding remainder produce as exports into Russia. Perhaps this also says something about growing sophistication of the Russian consumer, yet another component of a larger institutional change.

0RUH� VLJQLÀFDQW� LV� WKH�JURZWK� LQ�5XVVLD·V�KRPHJURZQ�´QHZµ� LQGXVWULHV��7KDW� LV�driven by both companies established early in the transition period and those that are more recent entrants to the vast market. Being able to satisfy domestic industrial DQG�FRQVXPHU�GHPDQG�KDV�GHÀQHG�VXFFHVV�RI�WKHVH�FRPSDQLHV·�RSHUDWLRQDO�PRGHOV��/RRNLQJ�DW�ÀUPV·�VXUYLYDO�UDWHV��ZH�DJDLQ�ÀQG�PRUH�SRVLWLYH�VWRU\�LQ�WKH�\HDUV�EHIRUH�DQG�LPPHGLDWHO\�DIWHU�WKH�FULVLV��)LJXUH��

In Figure 7 the pre-crisis and post-crisis years are colored in different tones to illustrate the magnitude of the conundrum when analyzing Russia’s enterprise SHUIRUPDQFH��2Q�WKH�RQH�KDQG�WKHUH�LV�D�VWHDG\�LQFUHDVH�LQ�ÀUPV·�IRUPDWLRQ��LQFOXGLQJ�DV�UHSRUWHG�DERYH�D�JURZLQJ�QXPEHU�ÀUPV�ZLWK�IRUHLJQ�FDSLWDO��2Q�WKH�RWKHU�KDQG�WKH�SRVW�FULVLV�\HDUV��DQG��KDYH�VKRZQ�ÀUPV·�GHDWK�UDWHV�DW��DQG��SHUFHQW�of the birth rate respectively. This may be due, as is discussed below, to a changing VWUXFWXUH�RI�ÀUPV�ÀQDQFLQJ�DQG�LQDELOLW\�RI�RXWULJKW�PDMRULW\�RI�ÀUPV�WR�FRPSO\�ZLWK�VWULQJHQW�ÀQDQFLQJ�UHTXLUHPHQWV�RI�WKH�EDQNLQJ�V\VWHP��$VLGH�IURP�VRPH�LQVWLWXWLRQDO�EDUULHUV��LW�DSSHDUV�WKH�SURFHVV�LV�TXLWH�HYROXWLRQDU\�ZLWK�D�YDULDQW�RI�QDWXUDO�VHOHFWLRQ�being in place. There remains some core of businesses and those around them that are able to adapt to the changing environment.

Figure 7

Firms’ survival rates: number of firms per 1000, birth vs. death rate by year.

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RESEARCHGevorkyan | Russia’s economic diversification potential

Indu

stry

2006

3.1%

26.2

%

14.1%

10.9

%

13.2

%

10.7

%

5.7%

12.3%

25.6

%

43.3%

7.8%

23.8

%

7.4%

4.8%

21.9

%

-6.1%

13.6

%

25.4

%

17.9

%

30.0

%

11.8

%

19.8

%

10.0

%

10.0

%

28.1%

17.3

%

2007

18.0

%

28.1%

12.1%

24.5%

17.1% 7.7%

4.0%

23.6

%

23.6

%

13.7

%

14.0

%

-7.2

%

10.3%

19.4

%

6.8%

-23.5

%

9.7%

33.6

%

12.0

%

13.7

%

21.0

%

21.8

%

20.9

%

12.1%

54.1%

17.4

%

2008

4.5%

18.6

%

2.5%

8.8%

3.0%

7.8%

6.6%

26.2

%

7.7%

-24.

9%

11.3%

-1.2%

-13.6

%

-6.3%

20.5%

13.2

%

21.6

%

0.3%

0.6% 2.5%

2.5%

1.1%

10.5%

8.9%

-30.

2%

8.0%

2009

-8.1%

-27.3

%

-2.7

%

-28.

2%

10.2

%

-25.0

%

-14.5%

-12.9

%

-23.2

%

1.6%

-8.4

%

-15.0

%

-6.0

%

-28.

8%

-30.

4%

-8.4

%

-21.3

%

-22.

6

-37.1

%

-29.

6%

-36.

3%

7.6%

-12.9

%

-3.2

%

-31.9

%

-19.

3%

2010

6.8% 7.1%

1.5%

10.2

%

-0.1%

21.8

%

20.2

%

12.9

%

11.5%

-1.6%

4.7%

13.9

%

14.9

%

12.8

%

12.7

%

37.8

%

22.2

%

28.0

%

30.4

%

22.5%

28.8

%

11.7

%

12.7

%

2.1%

6.9%

13.1%

2011

7.4%

4.1%

6.2%

15.5%

9.0%

18.0

%

22.6

%

3.9%

13.0

%

9.0%

6.2%

10.7

%

7.5%

15.6

%

14.1%

29.1%

21.7

%

20.8

%

12.8

%

10.7

%

29.3%

8.5%

11.7

%

6.4% 5.5%

13.0

%

2012

7.0%

4.5%

5.9%

11.1%

13.4

%

4.8% 3.5%

6.1%

7.8%

2.2% 5.5%

2.3%

-6.3%

4.0%

11.3% 6.1%

1.9%

5.5%

-5.5%

6.9%

13.7

%

-0.6

%

31.6

%

9.5%

-3.8

%

6.1%

2013

-19.9

%

-23.2

%

-12.0

%

-20.

7%

23.3%

-5.7

%

-10.1%

-15.6

%

-21.8

%

-7.7

%

-9.5%

-10.1%

-10.2

%

-14.2

%

-10.4

%

14.3%

-3.8

%

-16.3%

-12.2

%

-29.

0%

-3.9

%

1.4%

2.1%

-3.8

%

0.7%

-13.

5%

2005

-20

07

6.8%

17.3%

8.6%

11.3% 9.8% 6.1%

3.2%

11.5%

15.8

%

17.7

%

7.1%

4.7%

5.8%

7.8%

9.2%

-10.5%

7.6%

18.8

%

9.7%

13.9

%

10.6

%

13.4

%

10.0

%

7.2%

25.4

%

11.3

%

2010

-20

12

4.7%

2.9%

4.0%

8.7% 7.3%

7.4%

8.2%

3.3%

6.8%

3.7%

3.9%

4.2%

0.2%

6.3%

8.3%

11.1% 7.4%

8.4% 2.1%

5.8%

13.7

%

2.6%

13.7

%

5.2%

0.5%

6.2%

2011

-20

13

-5.0

%

-7.0

%

-2.3%

-4.1%

11.8

%

-0.4

%

-2.4

%

-3.6

%

-5.5%

-1.9%

-1.6%

-2.8

%

-5.6

%

-3.7

%

-0.1%

6.6%

-0.7

%

-4.1%

-6.0

%

-8.8

%

3.0%

0.3%

10.3% 1.7%

-1.1%

2.8%

Agric

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Real

est

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Reta

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sale

trad

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Fish

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Food

and

bev

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Text

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Pape

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duct

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Chem

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oduc

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Rubb

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last

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rodu

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Met

allu

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Elec

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al e

quip

men

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Tran

spor

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s an

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uipm

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gas

and

wat

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strib

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and

rest

aura

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com

mun

icat

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Util

ities

Tota

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Table 1: Real revenue turnover in Russia, annual % change and CAGR for year groups, by sectors

Source: FSSS, 2013 and author’s calculations.Note: Real rates are based on constant 2012 revenue data. Information for 2013 is through May 2013 only. The remainder of the year was pro-rated based on the first half of the year. Therefore 2013 growth rates should be treated with caution and as indicative only.


RESEARCH

For example, indicative of overall medium-business trend are such Russia born-raised-operating companies as Gloria Jeans, Sady Pridon’ya, Polyplastic, Evrodon, and PDQ\�RWKHUV�WKDW�KDYH�GLUHFWHG�VLJQLÀFDQW�VKDUHV�RI�WKHLU�HDUO\�SURÀWV�DQG�ERUURZHG�funds to capital investment and branch expansion from their modest beginnings. ,QFRUSRUDWLQJ�QHZ�SURGXFWLRQ�DQG�PDQDJHPHQW�WHFKQLTXHV�WKH\�ZHUH�DEOH�WR�HQKDQFH�and solidify their own internal resource and operational foundations. Their goal, as suggested by one study, is to meet the market needs using “superproduction” methods that effectively combine technology and modern management organization (Krasnova DQG�0DWYHHYD��

Those companies’ ambitious plans included competition with cheaper imports �PDLQO\� IURP�&KLQD�� LQ�D�VWUXJJOH� IRU�5XVVLD·V�PDVVLYH�PDUNHW� LQ� WH[WLOH��EHYHUDJHV��meat, plastic, and other products. Setting high internal standards, and adopting strict corporate accountability, has yielded near-absolute control over the full production FKDLQ�EXW�DOVR�DQ�RSSRUWXQLW\�IRU�WKRVH�FRPSDQLHV�WR�ÀOO�WKH�GRPHVWLF�PDUNHW�DW�OHDVW�SDUWLDOO\�ZLWK�KLJKHU�TXDOLW\�SURGXFH�RQ�PDVV�VFDOH�DQG�DW�FRPSHWLWLYH�SULFHV��

In the context of the above, two factors are of interest. We addressed total capital investment earlier; additional more micro data may be pulled to illustrate the sector distribution of the dynamic. However, perhaps more indicative would be a view of revenue turnover by sector in the Russian corporate sector’s revenue evolution (see 7DEOH��

The story should by now be all too familiar. One sees an impressive growth in real revenues before crisis and a dramatic recovery immediately after the sizeable drop in 2009, followed by drop in more recent years. Similarly, real CAGR for the year groups inspire a strong degree of optimism right through 2012 only to reverse in estimated 2013. Another observation based on Table 1 data is the relatively strong average growth LQ�QRQ�HQHUJ\�VHFWRUV��8QGRXEWHGO\�LW�LV�QRW�VXIÀFLHQW�\HW�WR�RYHUWDNH�WKH�HQHUJ\�VHFWRU�IXOO\��EXW�LW�FDQQRW�EH�GHQLHG�WKDW�VRPH�VHFWRUV�HLWKHU�RUJDQLFDOO\�RU�YLD�YDULRXV�ÀVFDO�stimulus packages have been improving. This brings us to the next point in the strategic investor discussion: what are some of the types of companies that are expanding in 5XVVLD�WKDW�PD\�EH�XQLTXH�WR�WKLV�PDUNHW"

NURTURING DIVERSIFICATION

The Gazelles and How Fast They Run

Before we turn the discussion any further, few words must be said about the so-FDOOHG� ´JD]HOOHµ� ÀUP� IDFWRU�� $V� DUJXHG� EHORZ�� WKDW� DGGV� D� VWURQJ� LPSHWXV� IRU� WKH�GLYHUVLÀFDWLRQ�PRGHO��7KH�JD]HOOH�ÀUP�FRQFHSW�ZDV�ÀUVW�LQWURGXFHG�E\�%LUFK��LQ�the analysis of the U.S. business and job growth. The concept is now widely discussed in Russian academic and business media (e.g. Polunin & Yudanov, 2013; Expert, 2012; <XGDQRY��HWF��

Any fast growing private medium-size company with 30 percent revenue growth



RESEARCH

RYHU�IRXU�\HDUV�LV�FRQVLGHUHG�D�´JD]HOOHµ��3ROXQLQ�DQG�<XGDQRY��EDVHG�RQ�WKH�5XVVLDQ� ÀUP� OHYHO� GDWD�� QRWH� WKDW� DFWXDO� DYHUDJH� UHYHQXH� RI� WKH� IDVW�JURZWK� VPDOO�private companies between 2007 and 2010 increased an impressiv 79 percent. At the same time a typical Russian public company with reported data showed revenue growth around 19 percent.

6SHFLÀF�WR�WKH�5XVVLDQ�´JD]HOOHVµ��IXOO� OLVW�RI�FRPSDQLHV�E\�VHFWRU�LV�DYDLODEOH�YLD�([SHUW��RU�3ROXQLQ�DQG�<XGDQRY�� LV� WKHLU�DEVROXWH�SULYDWH�RZQHUVKLS�DQG�UHOLDQFH� RQ� RZQ� IXQGV� �9LQNRY�� 7KH� JURXS� LWVHOI� LV� QRW� VWDWLF� DQG� FKDQJHV� LQ�composition over the short-term as new companies enter and others leave, based on the business performance. But as a group they exhibit continuous growth retaining �DQG�PXOWLSO\LQJ��WKHLU�SK\VLFDO�DQG�KXPDQ�FDSLWDO�SRWHQWLDO��

Approximated estimates suggest these companies range between 1 and 6 percent of Russia’s entire pool of business entities, private and semi-privately owned (extrapolated IURP�)666��DQG�([SHUW��GDWD��)LQDOO\��WKHVH�FRPSDQLHV�DUH�SHQHWUDWLQJ�OHVV�traditional sectors of the Russian economy: information technology, pharmaceuticals, nano-technologies, real estate, food processing, telecommunications, construction, infrastructure, ship-building, and small scale manufacturing. Interesting results were REWDLQHG�LQ�WKH�3ROXQLQ�DQG�<XGDQRY��VWXG\�EDVHG�RQ�SULYDWHO\�DFFHVVLEOH�ÀUP�level dataset. The authors compared middle-sized (with revenues between 200 million WR��ELOOLRQ�5XVVLDQ�UXEOHV��HQWHUSULVHV·�ZDJH�VKDUH�GLVWULEXWLRQ�E\�VHFWRU�EHWZHHQ��DQG��VHSDUDWLQJ�WKH�JD]HOOHV� LQ�GLVWLQFW�FDWHJRU\��7KH�VWXG\�ÀQGV�DQ� LQWHUHVWLQJ�UHYHUVDO�RI�IRUWXQHV�EHWZHHQ�JD]HOOH�W\SH�FRPSDQLHV�DQG�DOO�PLG�VL]H�ÀUPV�EHIRUH�DQG�DIWHU�WKH�FULVLV��VHH�)LJXUH��D��E��(IIHFWLYHO\�JD]HOOHV�WUDQVIRUPHG�LQ�IRXU�\HDUV�IURP�market underperformers to market leaders in every sector and especially trade (though \LHOGLQJ�VXEVWDQWLDOO\�PRUH�LQ�ÀQDQFH�DQG�UHDO�HVWDWH��

Information Technology Sector and “Gazelles” Survival Tactics

A growing “gazelle” sector of recent years has been the Information Technology industry. There are three core segments within Russia’s IT market. Hardware leads the group with sales of 52 percent of the entire IT market, followed by 28 percent in services, and remainder allocated in services sales. Most expert reviews agree on continued positive growth in all three sectors, despite market’s clear geographical segmentation and dominance of few large companies in larger cities. In terms of proportion to the national GDP, Russia’s IT market is roughly 1 percent of the economy, forecast to reach ��ELOOLRQ�E\��IURP�FXUUHQW��ELOOLRQ��

As an example, the IT sector, led by the larger telecommunications and software JLDQWV� �H�J�� 076� DQG� .DVSHUVN\� /DEV�� KDV� EHHQ� RQH� RI� WKH� PRVW� G\QDPLFDOO\�developing industries. Early in 2006, Russia’s outsourcing industry was valued close WR��ELOOLRQ��6DWLQVN\��:LWK�YHU\�ORZ��SHUFHQW�YV��SHUFHQW�LQ�,QGLD��DWWULWLRQ�rate, a typical IT software/outsourcing company is usually a small private business with niche targeting operational platform, customized software and individual client



RESEARCH

collaboration projects. Various industry reports and client testimonies indicate Russian software engineers holding a competitive edge over their counterparts, such DV�,QGLD��GXH�WR�5XVVLD·V�VWURQJ�WHFKQLFDO�EDFNJURXQG�DQG�ÁH[LEOH�DSSURDFK�LQ�VHDUFK�IRU�FRPSOH[�SUREOHP�VROXWLRQV��6RIWZDUH5XVVLD��

Strong government backing and demand for IT infrastructure and services by various state-corporations provide a strong backbone support for the private IT market. There has been a rise in IT technoparks that have offered special tax treatments to new businesses (e.g. technopark expenditures in Moscow growing from $6.4 million between 2006 and 2007 up to $220 million between 2008 and 2010. However, demand comes from a diverse set of businesses niches, both private and semi-private organizations as businesses push to optimize their operations to remain competitive and under pressure of maturing consumer market. Experts place much hope on the growth in IT services sector, which may evolve as Russia’s competitive advantage in the global IT market due to an optimal balance of labor costs and developed human capital and professional skills. The leading companies include such staples in the global IT market as Abbyy, Kaspersky, R-Style, Sitronics, and others. Considering that Russia’s IT industry started from bare bottom of nothing, these are impressive achievements in business management, enterprise development, and institutional transformation of the marketplace. For a more rigorous discussion the reader is referred to Gevorkyan ��VWXG\�

1RW� HYHU\� QHZ� FRPSDQ\� �RU� IRU� WKDW� PDWWHU� VHFWRU�� TXDOLÀHV� IRU� ´JD]HOOHµ�

Figure 8(a)

Wage share of mid-size firms, % of total, 2007 vs. 2011

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Figure 8(b)

Wage share of gazelle-type firms’, % of total, 2007 vs. 2011

Source: extrapolated from Polunin and Yudanov ��DQG�DXWKRU·V�calculations.

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RESEARCH

GHVLJQDWLRQ��0RVW�ÁRFN�LQWR�LQGXVWULHV�ZLWK�ORZHU�HQWU\�EDUULHUV�DQG�FDSLWDO�LQYHVWPHQW�UHTXLUHPHQWV³IRU� H[DPSOH� XS� WR� �� SHUFHQW� RI� WKH� TXDOLÀHG� DUH� LQ� WKH� UHWDLO� DQG�wholesale trade with another third in construction sectors. Yet the general trend and what appears to be existence of managerial and operational capacity is that necessary IRXQGDWLRQDO� VWDJH� LQ� WKH� HFRQRPLF� GLYHUVLÀFDWLRQ� SDWK�� 0RUHRYHU�� LQ� DGGLWLRQ� WR�WDSSLQJ�LQWR�QHZ�VHFWRUV��WKH�JD]HOOHV��LQ�SDUWLFXODU�WKH�VPDOOHU�RQHV��VHHP�WR�EH�VROHO\�focused on domestic consumer. The newcomers appear to have caught the wind in their sails, but will the conditions last?

1RWH� KHUH� WKDW� GXULQJ� WKH� LQLWLDO� FULVLV� VKRFN� LQ� ODWH� �� ODUJHU� �WRR�ELJ�WR�IDLO��private and those with some state participation businesses, seeing disruption to WKHLU�ÀQDQFLDO�ÁRZV��FXW�WKHLU�FRPPHUFLDO�RUGHUV�DQG�GRZQVL]HG�SURGXFWLRQ�OHDGLQJ�to overall economic decline or relied on state-administered bailouts to withstand the crisis. But the top-performing “gazelles” facing drying-out demand orders and GHFOLQLQJ�FRQVXPHU�VSHQGLQJ�KDG�OHVV�URRP�IRU�PDQHXYHU��2QO\�D�TXDUWHU�RI�WKH�SUH�crisis “gazelles” survived. The old top-performers relied on own-capital approach or VKRUW�WHUP�ORDQV�IRU�WKHLU�RSHUDWLRQV�ÀQDQFLQJ��WKH�PRGHO�WKDW�OHG�PDQ\�WR�VKXWGRZQ�during the crisis. In fact their pre-crisis overall indebtedness was lower across entire PHGLXP�HQWHUSULVH�EXVLQHVVHV��SHUFHQW�YV��SHUFHQW�RI�UHYHQXHV��7KLV�FRXOG�DOVR�partially relate to the point of improving own competitiveness by smaller private FRPSDQLHV��DV�RSSRVHG�WR�WKH�ODUJHU�HQWHUSULVHV��H�J��.X]QHWVRY�HW�DO��

Majority of the surviving and new additions to the “gazelles” were those that proactively procured business loans, contributed to capital formation, and developed �QHZ� IRU�5XVVLD�� FRQVXPHU� FUHGLW� VFKHPHV�ZHDWKHULQJ� WKH� FULVLV� �([SHUW�� 7KH�QHZ� ´JD]HOOHVµ� VWULFW� ÀQDQFLDO� DFFRXQWDELOLW\� �DV� LQ� HDUOLHU� PHQWLRQHG� H[DPSOHV� RI�*ORULD�-HDQV�DQG�RWKHUV��UDLVHG�WKHLU�RYHUDOO�LQGHEWHGQHVV�SRVW�FULVLV��XS�WR��SHUFHQW�RI� UHYHQXH� LQ� �� 'XULQJ� DQG� LPPHGLDWHO\� SRVW�FULVLV� SHDN�� WKH\� ´ERUURZHG� WR�EXLOGµ�WKHLU�EXVLQHVVHV�DQG�FXVWRPHU�EDVH��3ROXQLQ�DQG�<XGDQRY��)XUWKHUPRUH��([SHUW� �� VWXG\�VXJJHVWV� WKDW� VXUYLYLQJ� WKH�SHDN�RI� WKH�FULVLV�KDV� OHG� WR�D�PRUH�effective managerial pool formation in the Russian-based companies. But the future yet still remains uncertain.

DEALING WITH CHALLENGES

The Speculative Investor

7KH�VSHFXODWLYH�LQYHVWRU��RU�DJHQW��LQ�WKH�5XVVLDQ�HFRQRP\�FRPHV�YLD�WKH�ÀQDQFLDO�V\VWHP��5XVVLD·V�ÀQDQFLDO�PDUNHW�LV�RSHQ�LQ�WHUPV�RI�FDSLWDO�ÁRZV��7KHUH�ZDV�D�IHDU�RI�D�VXGGHQ�FDSLWDO�ÁLJKW�DW�WKH�WLPH�RI�WKH��FULVLV�DQG�WKH�&HQWUDO�%DQN�RI�5XVVLD�dipped into foreign reserves pool, reducing the balance by 65 percent (from highs of ��ELOOLRQ�LQ�$XJXVW��WR�WKH�ORZHVW��ELOOLRQ�LQ�0DUFK��7KH�HYHQWV�DQG�WKH�HYHQWXDO�PRQHWDU\�DQG�ÀVFDO�SROLF\�LQWHUDFWLRQ�DUH�FDSWXUHG�LQ�*HYRUN\DQ��among others. The action was one of the largest in relative scale compared to similar



RESEARCH

ÀVFDO�ERRVWV�LQ�RWKHU�FRXQWULHV��+DQVRQ��DQG�(%5'��Eventually, the Russian ruble depreciated over 40 percent in relation to the USD

from pre-crisis August 2008 levels to mid-2009, though it later regained some of its strength, only to fall under devaluation pressures again in late 2012-early 2013. The ODWHVW�HSLVRGH�ZDV�GXH�WR�XQHYHQ�FDSLWDO�ÁRZV��DQG�PRVWO\�RXWÁRZV��RYHU�WKH��That might have more to do with uncertainties about the global economy and the U.S. )HGHUDO�5HVHUYH·V�PRQHWDU\�SROLF\�GLUHFWLRQ��,Q�IDFW�)LQDQFLDO�7LPHV��)7��UHSRUWHG�on a correlation between markets’ reaction to the policy advisements from the U.S. )HGHUDO�5HVHUYH� DQG� LQYHVWRUV·� DSSHWLWH� IRU� KROGLQJ� IXQGV� �DOEHLW� DW� KLJKHU� UHWXUQV��LQ� HPHUJLQJ� PDUNHWV�� WKH� %5,&� JURXS� VSHFLÀFDOO\�� %H� LW� DV� LW� PD\�� 5XVVLD� HVFDSHG�immediate, 1998-like, forced devaluation, averting sudden economic collapse and SURYLGLQJ�PXFK�QHHGHG�ÀQDQFLDO�VWDELOLW\�WR�WKH�HFRQRP\�

$QDO\WLFDOO\�� 5XVVLD·V� ODWHVW� HFRQRPLF� DQG� ÀQDQFLDO� IULFWLRQV� RULJLQDWHG� QRW� LQ�the domestic subprime market dealing with toxic assets. Macroeconomic structural LVVXHV�DVLGH��LQVWDELOLW\�LQ�5XVVLD·V�ÀQDQFLDO�V\VWHP�GHULYHG�IURP�GHFLVLRQV�E\�IRUHLJQ�and domestic institutional and private investors to pull out of the market based on worsening risk perceptions at the time..

Russia’s total number of banks has fallen from highs of 1,300 in 2004 to 1,060 in ��DV�VWDWH�RZQHG�EDQNV�FRQWLQXHG�WR�FRPPDQG�D�VLJQLÀFDQW�VKDUH�RI�WRWDO�DVVHWV��XS�WR��SHUFHQW��1RWH�DOVR�WKH�ULVLQJ�QXPEHU�RI�IRUHLJQ�RZQHG�EDQNV�VLQFH�WKH�FULVLV��DFFRUGLQJ�WR�(%5'��DV�WKHLU�DVVHW�VKDUHV�KDYH�H[SDQGHG�IURP��SHUFHQW�in 2004 to 18.3 percent of the market in 2009. In addition, new banking services (e.g. credit provision to the private sector: over 45 percent of GDP; and to households: over 9 percent of GDP, including rising provision of mortgages and associated banking VHUYLFHV��KDYH�FRQWULEXWHG�WR�D�UDSLG�PDWXULQJ�RI�WKH�5XVVLDQ�ÀQDQFLDO�V\VWHP�WKDW�QRZ�serves as the main vessel for a range of loans and investment initiatives. Figure 9 traces TXDUWHUO\� WRWDO� IRUHLJQ�SRUWIROLR� �,1B3,��DQG�GLUHFW� LQYHVWPHQWV� �,1B)',�� LQ�5XVVLD·V�EDQNLQJ�VHFWRU�RYHU�WKH�ÀUVW�GHFDGH�RI��V��

Figure 9

Russia’s banking sector’s portfolio and foreign direct investment, $mlns

Source: Central Bank of Russia, 2013

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RESEARCH

Following a jumpstart in late 2005 peaking in late 2007, portfolio investment UHDFKHV� LWV� ORZ� SRLQW� �GHFOLQLQJ� WR� �� OHYHOV�� LQ� PLG� �� ,W� WKHQ� EHJLQV� WR� ULVH�DJDLQ��RQO\�WR�VHW�RQ�\HW�DQRWKHU�IDOOLQJ�WUDMHFWRU\�LQ�WKH�VHFRQG�TXDUWHU�RI��ZLWK�D�VKDUS�UHERXQG�WR�SUH�FULVLV�OHYHOV�LQ�WKH�VHFRQG�TXDUWHU�RI��IROORZHG�E\�HYHQ�OHVV�VWDEOH�UHFHQW�TXDUWHUV��:KLOH�WKH�DEVROXWH�OHYHOV�DUH�LPSUHVVLYH�IRU�5XVVLD·V�PDWXULQJ�ÀQDQFLDO�PDUNHW� �L�H�� LQZDUG�SRUWIROLR� LQYHVWPHQW�DFFRXQWLQJ�IRU�URXJKO\��SHUFHQW�RI�WKH�WRWDO�DQG�)',�ÁRZV�LQWR�WKH�EDQNLQJ�VHFWRU��LWVHOI�DFFRXQWLQJ�IRU��SHUFHQW�RI�WKH�WRWDO�LQZDUG�)',�IRU�WKH�\HDU�RI��DFFRUGLQJ�WR�WKH�&%5��D�SUREOHPDWLF�IDFWRU�LV�WKH�VLJQLÀFDQW�YRODWLOLW\�LQ�IRUHLJQ�FXUUHQF\�GHQRPLQDWHG�FDSLWDO�ÁRZV��7KLV�LV�ZKHUH�LQGLYLGXDO��VSHFXODWLYH��DV�LQ�VHHNLQJ�KLJK�DQG�IDVW�UHWXUQ��LQYHVWRU·V�SRUWIROLR�GLYHUVLÀFDWLRQ�VWUDWHJ\�JRHV�KHDG�WR�KHDG�ZLWK�FRXQWU\·V�GHYHORSPHQW�SDWK��

For an economy that relies on hard currency as an asset this can be a problem VSDQQLQJ�IURP�ÀQDQFLDO�LQWR�WKH�UHDO�VHFWRU��ZKLFK�ZDV�H[DFWO\�WKH�FDVH�LQ�5XVVLD��7KH�problem is common for post-socialist economies, but is particularly relevant for Russia where on average 70% of short-term debt in the banking system is denominated in foreign currency (at approximately USD27.5 billion as of January 1, 2011, according WR� WKH�&%5��)RU�SULYDWH�5XVVLDQ�EDQNV� WKDW�GR�QRW�KDYH�)',�� VKRUW�WHUP�GHEW�comprised 34 percent of total debt obligations at the beginning of 2011. Hence, there LV�OLNHO\�PRUH�LQVWDELOLW\�LQ�WKH�ÀQDQFLDO�VHFWRU�LQ�5XVVLD�WKDQ�LQ�WKH�UHDO�VHFWRU��DV�WKH�former attracts highly speculative and mobile investors that do not necessarily need to physically cross borders to establish or abolish their presence in the market.

Why All is Not Lost (Yet)

7KH�QDVFHQW�DQG�JURZLQJ�VHFWRUV��VXFK�DV�´JD]HOOHVµ��IRU�H[DPSOH��UHTXLUH�D�VWURQJ�HIÀFLHQW�ÀQDQFLDO�V\VWHP��7KH�WZR�PXVW�JR�KDQG�LQ�KDQG�HVWDEOLVKLQJ�QHZ�HFRQRPLF�IUDPHZRUN��5HFHQW�FDSLWDO�ÁRZV�LQ�DQG�RXW�RI�5XVVLD��RIIHU�MXVW�RQH�VXFK�LQGLFDWRU�RI�how uncertain this tandem may be.

Russian business leaders are looking for “tail winds” to sustain and develop their EXVLQHVVHV��9LQNRY��'HVSLWH�PDFURHFRQRPLF�VXFFHVVHV��WKRVH�UHVXOWV�DUH�XQDEOH�to effectively spread growth across sectors, hence drawing criticism of the country’s economic model. Proposals for stronger transparency and improving competitiveness DUH�MXVW��EXW�LQVXIÀFLHQW��7KHUH�QHHGV�WR�EH�DQ�DGGLWLRQDO�SXVK�IDFWRU�WKDQ�RZQ��RUJDQLF��industry growth.

,Q�WKLV�VLWXDWLRQ�WKH�EOHQGHG�PRQHWDU\�DQG�ÀVFDO�SROLF\�PL[��H�J��*HYRUN\DQ��becomes a norm for an immediate term. In fact, “gazelles” operating in new technology sector niches, specialized construction, engineering, and mass scale food processing �KXQGUHGV�RI�QHZ�FRPSDQLHV�WKDW�HQWHUHG�WKH�PDUNHW�SRVW�FULVLV�SHDN��GHSHQG�RQ�WKHVH�macroeconomic conditions, fostering their organic growth. This is evident in a 22.5 percent CAGR innovation spending by the Russian enterprises between 2009 and 2011, DFFRUGLQJ�WR�)666��<HW��PRUH�LV�QHHGHG��,W�LV�SUREDEOH�WR�HQJDJH�D�SURDFWLYH�ÀVFDO�SROLF\�JLYHQ�FXUUHQW�EHQHÀFLDO�PDFURHFRQRPLF�SRVLWLRQ�ZLWK�IRUZDUG�RXWORRN�RI�



RESEARCH

GHYHORSLQJ�D�UHVSRQVLEOH�ÀVFDO�UXOH�EDODQFH��$W�WKH�RIÀFLDO�OHYHO��ZLWK�DOO�VXEVHTXHQW�SROLWLFDO�ULVN�DVSHFWV�WKDW�DUH�EH\RQG�WKH�

VFRSH�RI�WKLV�SDSHU��SURSRVDOV�KDYH�YDULHG�IURP�DOORFDWLQJ�VXUSOXVHV�DERYH�IRUHFDVW�RLO� SULFH� LQWR� WKH� 5HVHUYH� )XQG� RU� 1DWLRQDO� :HDOWK� )XQG� �.RPPHUVDQW�� WR�HPEHGGLQJ�VSHFLÀF�´DQWL�FULVLVµ�SROLF\�LQ�WKH�DQQXDO�JRYHUQPHQW�EXGJHW��

0RUH�JHQHUDOO\��WKHUH�LV�VWLOO�D�XQLTXH�RSSRUWXQLW\�WR�FDSLWDOL]H�RQ�5XVVLD·V�GLYHUVH�KXPDQ�FDSLWDO�DQG�LQWHOOHFWXDO�FDSDFLW\��LQFOXGLQJ�OHJDF\�VFLHQWLÀF�LQIUDVWUXFWXUH�DQG�VFLHQWLÀF�FDSDFLW\��7KLV�LQFOXGHV�JURZWK�LQ�QDQR��ELR��LQIR��DQG�FRJQLWLYH�WHFKQRORJLHV�and others. The consensus is one of expected growth in private enterprises and WHFKQRORJLFDO�VHFWRUV�� UHIHUUHG�WR�DV�´PRGHUQL]DWLRQµ��*RUEDWRYD��/DUJH�VWDWH�RZQHG� FRUSRUDWLRQV� �H�J�� 5RVQDQR�� 5XVVLDQ� 5DLOZD\V�� 9QHVKHNRQRPEDQN�� HWF�� DUH�beginning to develop partnerships cross-sectors via either direct funding or more often business collaboration with “gazelle”-linked companies, projects, sectors (e.g. IT VHUYLFHV�DQG�VRIWZDUH�GHVLJQ��

Eventually, that may help address the problem of spreading the capacity across Russia’s immense market and raising labor force participation in the new sectors. The GDWD�DVVHPEOHG�E\�3ROXQLQ�DQG�<XGDQRY��VXJJHVWV�WKDW�RYHU��SHUFHQW�RI�DOO�Russian companies saw average annual revenue growth of over 30 percent (25 percent H[SHULHQFHG�UHYHQXH�JURZWK�RI�RYHU��SHUFHQW��EHWZHHQ��DQG��,Q��WKH�FRUUHVSRQGLQJ� ÀJXUH�ZDV� �� SHUFHQW� �ZLWK� �� SHUFHQW� JURZLQJ� RYHU� �� SHUFHQW� D�\HDU��7KHUH�LV�QR�GDWD�IRU�ODWHU�\HW��EXW�LI�PDFURHFRQRPLF�LQGLFDWRUV�UHYLHZHG�DERYH�may serve as any guide, we are likely to see more modest results.

6WLOO��WKHUH�LV�LQGHHG�D�VLJQLÀFDQW�SRWHQWLDO��DV�WKH�́ JD]HOOHµ�OLQNHG�LQGXVWULHV�HPHUJH�and maintain such entrepreneurial, professional, and skills capacity, solidifying their presence. In turn this has a direct effect on the positive institutional change, which to UHFDOO�*DLGDU��PD\�EH�VHOI�UHLQIRUFLQJ��SDYLQJ�WKH�ZD\�IRU�IXUWKHU�LPSURYHPHQW��Yet, the uncertainty of still largely one-sector economy, problems in the labor market PRELOLW\��LQIUDVWUXFWXUH��DQG�DGPLQLVWUDWLYH�LQHIÀFLHQFLHV�FRXSOHG�ZLWK�ÀQDQFLDO�ÁRZ�instabilities, may upset this fragile chessboard.

$Q� H[WHQVLRQ� WR� FXUUHQW� SURSRVDOV�� PLJKW� LQFRUSRUDWH� D� GHÀQHG� LQWHUQDWLRQDO�reserves target level (or as a ratio of net foreign currency borrowing in the banking V\VWHP��PLWLJDWLQJ�ÀQDQFLDO� ULVNV��7KHVH�VWRFNSLOHV�RIIHU�D�UHDG\�VRXUFH�RI�UHVHUYHV��accessible for traditionally-perceived as low return projects implemented via public SROLF\��6WLPXODWLQJ�LQIUDVWUXFWXUH��LQ�WKH�PRVW�ZLGH�GHÀQLWLRQ�RI�WKH�WHUP�DQG�QRW�MXVW�URDGV�DQG�EULGJHV��LQYHVWPHQWV��KXPDQ�FDSLWDO�GHYHORSPHQW�DQG�JUHDWHU�ODERU�IRUFH�SDUWLFLSDWLRQ� LV�DFKLHYDEOH�YLD�SUDJPDWLF�ÀVFDO�SROLF\�PL[� �H�J�� VHH�*HYRUN\DQ��on Infrastructure Development Fund in and international reserves targets as part of a SROLF\�PL[��

It follows, then, that for the economy in general, relieving dependence on the energy VHFWRU� �WKRXJK� LW�ZRXOG� EH� GLIÀFXOW� WR� DUJXH� IRU� DQ\� VL]HDEOH� VKLIW� DW� WKH�PRPHQW��along with other institutional factors, will clearly be driven by profound structural HFRQRPLF� VKLIWV�� IRU� ZKLFK� GHYHORSPHQWV� LQ� JD]HOOH�OLNH� �L�H�� QHZ�� VHFWRUV� DFW� DV�



RESEARCH

proxy. More substantively, among others these changes include evolution of business SUDFWLFH� LQVWLWXWLRQV�� VWDELOL]DWLRQ� RI� FDSLWDO� ÁRZV�� ZLGHU� DFFHVV� DQG� FRPIRUW� ZLWK�FUHGLW��D�FRQÀGHQW�FRQVXPHU�PDUNHW��HPHUJHQFH�RI�GRPHVWLFDOO\�SURGXFHG�FRPSHWLWLYH�consumer goods, and continuation of sustained business growth across non-energy sectors. In turn, those rely on improved domestic macroeconomic environment. And ÀVFDO� DQG� PRQHWDU\� DXWKRULWLHV� VWLOO� KDYH� WKH� VWUDWHJLF� FDSDELOLW\� WR� ÀQH�WXQH� WKDW�dynamic. Finally, added to the mix is the government’s explicit assumption of certain social responsibilities via provisions of public goods and accommodative pro-business policies of economic activity. Combined with external factors, this diverse mix of G\QDPLF�WHQGHQFLHV�GHÀQHV�WKH�FRXQWU\·V�FXUUHQW�SRVW�VRFLDOLVW�FRQWH[W�

CONCLUSIONIt is premature to claim a victory over Russia’s energy dependence. Recent macroeconomic data may even suggest a much gloomier scenario. Still even if the energy sector may remain dominant in Russia’s exports for some time, the important dynamic, often omitted in popular commentaries, is elsewhere. It is more domestic oriented in nature and breeds positive institutional change, set to play out as a net EHQHÀW�LQ�WKH�ORQJHU�WHUP�

Rather than absolute exports, the relative focus must be on Russia’s domestic market RSHUDWLRQV�DQG�SRWHQWLDO��GHVSLWH�SHUVLVWHQW�LQHIÀFLHQFLHV�DQG�ULVNV��5HJDUGOHVV�RI�ZKLFK�industry is the absolute leader, Russia is ready to capitalize on its human and physical FDSLWDO�UHVRXUFHV�DQG�WHFKQRORJLFDO�EDVH�IRU�IXUWKHU�GLYHUVLÀFDWLRQ��1HZ�VHFWRUV�DQG�EXVLQHVVHV�KDYH�VSUXQJ�HLWKHU�RXW�RI�QDWXUDO�HYROXWLRQ�RU�EHQHÀWLQJ�IURP�VL]HDEOH�VWDWH�FRQWUDFWV��H�J��,7�VHUYLFHV��7KH�FDSDFLW\�WKDW�OHG�WR�HDUOLHU�VXFFHVVHV�LV�VWLOO�WKHUH��7KH�business structure change then stays in close interrelationship with innovation across sectors, as IT services sector seems to suggest by leveraging intellectual capacity and newly formed managerial pool.

6WUHDPOLQLQJ� ÀQDQFLDO� DQG� WHFKQRORJLFDO� DFWLYLW\� RI� QRZ� SUROLIHUDWLQJ� 5XVVLDQ�01&V� WR� EHQHÀW� GRPHVWLF� HFRQRPLF� DQG� LQVWLWXWLRQDO� EDVH� GHYHORSPHQW� LV� DQRWKHU�component. Foreign ventures targeting newly emerging sectors and setting a platform IRU�UHJLRQDO�H[SDQVLRQ�FRQWLQXH�WR�ÀQG�DEXQGDQW�RSSRUWXQLWLHV�RI�D�UDSLGO\�H[SDQGLQJ�PDUNHW�� 6XVWDLQLQJ� DOO� WKLV� LQ� WKH�PHGLXP� WHUP� UHTXLUHV� SUDJPDWLF� DQG� QHZ� ÀVFDO�SROLF\��WKH�´WDLO�ZLQGµ�RI�WKH�QHZ�VHFWRUV�WKDW�VSHDUKHDG�HFRQRPLF�GLYHUVLÀFDWLRQ�

Russia’s new landscape is in sharp contrast to once economic chaos and demands a non-cliché, approach. It is still undergoing the structural transformation launched back LQ�WKH�HDUO\��V�VKRFN�WKHUDS\�UHIRUPV��7KH�SDWK�LV�ÀOOHG�ZLWK�SRWKROHV��SXGGOHV��EXW�also patches of dry, smooth land. The transformation is a socially dynamic process that does not necessarily conform to the standard economics. Capitalizing on the ongoing LQVWLWXWLRQDO�FKDQJH�LQ�WKH�QHZ�VHFWRUV�ÁDQNHG�E\�HPHUJLQJ�GRPHVWLF�FRQVXPHU�DQG�ULVLQJ�PDQDJHULDO�WDOHQW�UHTXLUHV�D�SUDJPDWLF��DOO�HQFRPSDVVLQJ�DQDO\WLFDO�DSSURDFK�LQ�policy and research. Such perspecitve may offer some allowance for cautious optimism. And so, that is the untold story of Russian’s economy.



RESEARCH

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ABOUT THE AUTHORDr. Aleksandr V. Gevorkyan is Assistant Professor of Economics at The Peter J. Tobin College of Business at St. John’s University in New York City. Dr. Gevorkyan is a professional economist with extensive research and teaching experience in PDFURHFRQRPLF� SROLF\�� HFRQRPLF� GHYHORSPHQW�� ÀQDQFLDO� HFRQRPLFV�� DQG� FRUSRUDWH�ÀQDQFH��'U��*HYRUN\DQ�KDV�SXEOLVKHG�DQG�KDV�DUWLFOHV�IRUWKFRPLQJ�LQ�DFDGHPLF�



RESEARCH

journals and reference volumes. He is the author of Innovative Fiscal Policy and (FRQRPLF�'HYHORSPHQW�LQ�7UDQVLWLRQ�(FRQRPLHV��5RXWOHGJH��

ACKNOWLEDGEMENTSThe author would like to thank Francesca Spigarelli, Matthew C. Mitchell, Daniel Rottig, Irina Naoumova, Anna Alon, the editors of the International Business: Research, Teaching

and Practice, participants and anonymous referrers at the 2012 Annual Academic of International Business – Southeast Conference in Fort Lauderdale, FL for useful comments on earlier drafts of the paper. Arkady Gevorkyan provided exceptional research assistance tracking down some hard to get data. The views expressed in this paper are solely those of the author and not those of the institutions with which he is DIÀOLDWHG�


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