Dec 10, 2006

Russia: How Long Can The Fun Last?

Business Week published an analysis of Russia's economy asking the million dollar question. Is the recent boom that has made Russia the fastest growing emerging market the last two years for real?

There's little doubt that a major driver of the newfound bounty is oil and other natural resources. Without the runup in commodity prices, economic growth would have been two to three percentage points lower during the last three years, estimates the Organization for Economic Cooperation & Development. Developing countries, meanwhile, don't have a very good track record of using windfall profits from commodity booms to lay the foundations for sustainable growth.

To his credit, Putin has used much of the cash to build up financial reserves. Russia has created a $90 billion fund—equivalent to 9% of gdp—to protect against a drop in oil prices. Fiscal policy remains tight, with the Kremlin expecting a budget surplus equal to 7% of GDP this year. And Russia is well ahead of most other resource-rich countries in its economic development, with a long tradition of education, science, and industry.

Economists warn that high oil prices have bred complacency. The OECD cautions that economic reforms have largely stagnated. Worse, corruption and bureaucratic interference continue to impede business: Russia ranks alongside Gambia and the Philippines near the bottom of think tank Transparency International's annual list of corrupt countries.

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