Sustainable Economic Growth in Russia: A Structuralist Approach [1st ed. 2023] 9783031388736, 9783031388743, 3031388739

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Sustainable Economic Growth in Russia A Structuralist Approach Ararat L. Osipian

Sustainable Economic Growth in Russia

Ararat L. Osipian

Sustainable Economic Growth in Russia A Structuralist Approach

Ararat L. Osipian Elliott School of International Affairs George Washington University Washington, DC, USA

ISBN 978-3-031-38873-6 ISBN 978-3-031-38874-3 (eBook) https://doi.org/10.1007/978-3-031-38874-3 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. Cover image: © Alex Linch/shutterstock.com This Palgrave Macmillan imprint is published by the registered company Springer Nature Switzerland AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

The goal of this book is to identify the possibility of initiating sustainable economic growth in Russia’s market-type post-transitional economy. This study defines structural specifics of the national economy in the process of transition from exogenous to endogenous forms of economic growth and socioeconomic development . A substantial part of the book is devoted to the integrative scholarly synthesis of economic growth literature. This study considers Russia’s economic transition within the set of theories of economic growth. At the same time, this study considers the phenomenon of sustainable economic growth in the context of the post-Soviet transition. Such a contextualization allows for finding and highlighting certain features and processes within economic transition that were earlier neglected by the scholars, including primarily the possibility of not only recovering after economic and financial crises, but also initiating sustainable economic growth. This book would be very helpful not only for students and scholars interested in Russian economy, but also for those who plan on investing, working, or being involved in other business activities in Russia in the future. This book is for those who plan on a long-term involvement with Russia and need to better understand Russia’s current and likely future economic processes and developments. To the 75th anniversary of the Association for Slavic, East European, and Eurasian Studies (ASEEES).

Preface

The process of economic growth is traditionally considered as a quintessence of an increased scale of economic reproduction, socioeconomic development, and social progress. Sustainable economic growth is viewed as a prime guarantor of sustainable development within the limits of particular countries, regions, and entire continents. Often considered as a universal recipe against global poverty, sustainable economic growth will remain on the economic and political agenda for decades, if not centuries, to come. In studying economic growth, some countries present interesting cases over the years and decades of their economic development and socio-economic transformation. One such country is Russia. The largest country in the world by territory, Russia holds a strategic geographic location between Europe and Asia, while occupying the largest portions of both continents. Being in top ten countries in the world by the population and running the world’s sixth largest economy, Russia continues its struggle for modernizing its national economy and achieving sustainable economic development and growth. Despite its vast territories, Russia remains geopolitically squeezed between the developed West and the growing Asia. This geopolitical position predetermines a high interest in the country. Furthermore, economic growth in Russia has always been based primarily on the exploitation of vast natural resources—the richest in the world. The major players of the

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PREFACE

global economy—both well-established and the newly emerging ones— continue searching for additional natural resources. Being exceptionally rich in natural resources, Russia simply cannot be missed in this search. Russia itself has every chance and every duty to re-emerge as a major global economic player. Scholars in the West and increasingly so in other parts of the world pay a great deal of attention to Russia in their works. This attention is paid for both fortunate and unfortunate reasons. There is no lack of literature on Russia published in the West, including scholarly literature, as numerous books and scores of articles are published every year. These studies usually focus on political, ethnic, ethnographic, literary, anthropological, historical, sociological, geopolitical, and military aspects of Russia. Surprisingly, little has been said about Russia’s economy after the disintegration of the Soviet Union in 1991. There is plenty of literature on Solzhenitsyn, Tolstoy, and Dostoyevsky, but not much to read on sustainable development and economic growth in Russia. Strategic developments in the post-Communist Eurasia, including interests of the European Union, NATO, and China, warrant more focus on Russia in the near future. Russia’s own geopolitical ambitions in the Eastern Europe, the Black Sea region, Transcaucasia, Central Asia, the Far East, and the Arctic constitute a self-sufficient and solid base for such an interest. More attention to the country’s economic development may be expected over the next few decades. Russia—without any doubt— is of interest not only for the outside players, but first and foremost for Russians themselves. Quite naturally, economic growth impacts the nation’s well-being and changes a lot in the lives of ordinary Russians. Naturally, the Russian people want sustainable economic development and growth, although most probably never even heard of this term, let alone its meaning. This study attempts to rediscover the post-Soviet transition that Russia has been undergoing over the last 35 years. The meaning of this rediscovery is in its attempt to dig deeper into the nature of economic transformation and possibility of initiating sustainable economic growth in order to understand the possible underlying causes, incentives, and moving forces behind this complex process. Washington, DC, USA

Ararat L. Osipian

Acknowledgments

I would like to acknowledge the Department of Political Science and the Center for Russia, East Europe, and Central Asia (CREECA) at the University of Wisconsin-Madison, the Terrorism, Transnational Crime and Corruption Center (TRACC), Schar School of Policy and Government at George Mason University, the Institute for European, Russian, and Eurasian Studies (IERES), Elliott School of International Affairs at George Washington University, the New University in Exile Consortium at the New School University, and the Institute of International Education in New York, where I served as a visiting professor, associate researcher, and fellow. It is in these scholarly settings that this book was completed.

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Contents

1

Introduction: Mosaics of the Post-Soviet Economic Transition in Russia Mosaics of the Post-Soviet Transition Economic Transition and Growth Structure of the Book References

1 1 7 12 17

Early Concepts of Economic Growth and Implications for Russia Early Concepts of Economic Growth Economic Growth in the Classical Political Economy Implications for Post-socialism Concluding Remarks References

21 21 27 32 38 39

3

Endogenous Economic Growth and Human Capital Endogeneity of Human Capital Endogenous Economic Growth Models Human Capital Models and Implications Concluding Remarks References

43 43 49 54 59 59

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Sustainable Economic Growth and Development Economic Growth and Development Sustainability, Inequality, and Human Development

63 63 66

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Sustainable Economic Growth Concluding Remarks References

70 74 75

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Economic Crises and Sustainable Growth in Russia Economic and Financial Crises Fossil Fuel Dependency and Revenue Transition to Sustainable Growth Concluding Remarks References

81 81 86 89 94 96

6

Economic Growth in Russia in the 1990s and 2000s Economic Growth in Russia in the 1990s Economic Growth in Russia in the 2000s Concluding Remarks References

99 99 107 116 117

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Economic Growth in Russia in the 2010s and 2020s Economic Growth in Russia in the 2010s Prognosis of Economic Growth in Russia in the 2020s Concluding Remarks References

119 119 132 135 137

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Consumption, Investment, Debt, Inflation, and Unemployment in Russia Growth in Real GDP, Consumption, and Investment Foreign Debt Inflation and Unemployment Concluding Remarks References

139 139 144 149 155 157

9

Structure of Foreign Trade in Russia Growth in Real GDP and Foreign Trade Total and Principal Exports Total and Principal Imports Concluding Remarks References

159 159 162 166 176 178

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Conclusion: Transition to Sustainable Economic Growth

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Index

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About the Author

Ararat L. Osipian is a Founding Fellow of the New University in Exile Consortium at the New School University, New York, and a Fellow of the Institute for European, Russian, and Eurasian Studies (IERES), Elliott School of International Affairs at the George Washington University, Washington, DC. He previously served as The Alexander Mirtchev visiting professor and scholar, Terrorism, Transnational Crime and Corruption Center (TRACCC), Schar School of Policy and Government at the George Mason University, Washington, DC, associate researcher, Department of Political Science and the Center for Russia, East Europe, and Central Asia (CREECA), the University of WisconsinMadison, and fellow of the Institute of International Education (IIE), United Nations Plaza, New York. Dr. Osipian holds a Ph.D. in Economics of Education and Human Development from Peabody College of Education at Vanderbilt and an M.A. in Economics from Vanderbilt University, where he came as a fellow of the US Department of State. Dr. Osipian is the author of The Economics of Growth in Russia: Overcoming the Poverty Trap (Routledge, 2023), Political and Economic Transition in Russia: Predatory Raiding, Privatization Reforms and Property Rights (Palgrave Macmillan, 2019), The Political Economy of Corporate Raiding in Russia (Routledge, 2018), and The Impact of Human Capital on Economic Growth: A Case Study in Post-Soviet Ukraine, 1989– 2009 (Palgrave Macmillan, 2009). His articles and reviews appear in Asian Politics & Policy, Brigham Young University Education and Law

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Journal, Canadian and International Education Journal, Capital & Class, Communist and Post-Communist Studies, Comparative Education Review, Comparative Sociology, Compare: A Journal of Comparative and International Education, Computational & Mathematical Organization Theory, Contemporary Politics, Critical Policy Studies, Democratization, Demokratizatsiya: The Journal of Post-Soviet Democratization, East European Politics, East European Politics and Societies, Economics of Education Review, Europe-Asia Studies, European Education: Issues and Studies, European Journal of Sociology, Global Crime, Higher Education: The International Journal of Higher Education and Educational Planning, Innovation: The European Journal of Social Science Research, International Journal of Educational Development, International Journal of Sociology and Social Policy, Journal of Comparative Policy Analysis: Research and Practice, Journal of Economic History, Journal of Economic Issues, Journal of Eurasian Studies, Journal of Peace Research, Nationalities Papers: The Journal of Nationalism and Ethnicity, Political Studies Review, Prospects: Quarterly Review of Comparative Education, Region: Regional Studies of Russia, Eastern Europe, and Central Asia, Research in Comparative and International Education, Slavic Review, Social Anthropology, Soviet and Post-Soviet Review, Transition Studies Review, FedUni Journal of Higher Education, and Laboratorium: Russian Review of Social Research, and Global Corruption Report: Education by Transparency International. His op-eds appear in The National Interest, Times Higher Education, Inside Higher Education: The World View, University World News, International Higher Education, New Eastern Europe, Rights Views Columbia University, The Conversation, Channel News Asia, International Policy Digest, Alter Net, Scroll.in, Salon, Public Radio International, CIES Perspectives, and 21st Century Scholar. He is also a winner of several awards, including grants from Edmund Muskie/FSA, Institute of International Education, Soros Foundation, Open Society Institute, Yale, Vanderbilt, University of Wisconsin-Madison, George Washington University, Volkswagen Stiftung New Europe College-Institute for Advanced Study, and Central European University. His research interests include corruption in higher education and inequalities in access to higher education in international perspective, corporate, property and land raiding, nexus of education and economic growth, modern welfare states, and political economy of transition. His countries of experience include USA, Armenia, Azerbaijan, Canada, Georgia, Hungary, Kazakhstan, Moldova, Romania, Russia, and Ukraine.

List of Figures

Fig. 5.1 Fig. 7.1 Fig. 8.1 Fig. 8.2 Fig. 8.3 Fig. 9.1 Fig. 9.2 Fig. 9.3 Fig. 9.4 Fig. 9.5

Crude oil production in Russia, average thousand barrels per day, 1980–2022 Growth rates for real GDP and domestic demand in Russia, 1990–2019 Growth rates for real GDP, private consumption, and government consumption in Russia, 1990–2019 Growth rates for real GDP, gross fixed investment, and stock-building in Russia, 1990–2019 Foreign currency exchange rate in Russia, RUB to US$, 1990–2024 Growth rates for real GDP, exports of goods and services, and imports of goods and services in Russia, 1990–2019 Total and principal exports of goods in Russia, billion US$, 1990–2016 Total and principal imports of goods in Russia, billion US$, 1990–2016 Foreign trade volume and prices in Russia, % change per annum, 1990–2022 Share of oil, fuel & gas in the structure of total exports in Russia, %, 1994–2016

87 131 140 141 141 160 165 169 174 176

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List of Tables

Table 6.1 Table 6.2 Table 7.1 Table 7.2 Table 8.1 Table 8.2 Table 9.1 Table 9.2 Table 9.3

Expenditure on GDP in Russia, real percentage change per annum, 1990–1999 Expenditure on GDP in Russia, real percentage change per annum, 2000–2009 Expenditure on GDP in Russia, real percentage change per annum, 2010–2019 Expenditure on GDP in Russia, real percentage change per annum, 2020–2029 Foreign debt and interest arrears in Russia, billion US$, 1990–2022 Inflation and unemployment in Russia, 1990–2024 Total and principal exports of goods in Russia, billion US$, 1994–2016 Total and principal imports of goods in Russia, billion US$, 1994–2016 Foreign trade volume and prices (%) in Russia, 1990–2022

100 101 120 133 146 150 163 166 171

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CHAPTER 1

Introduction: Mosaics of the Post-Soviet Economic Transition in Russia

Mosaics of the Post-Soviet Transition The Russian economy has undergone a significant transformation over the last three decades. Russia’s transition from a totalitarian to an authoritarian regime and from a planned economy to an economy based to a large extent on market principles caused major changes in political and social life. Majority of writings on contemporary Russia focus on its political life, which no doubt, has become much more vivid, interesting, open, and accessible for researchers after the end of the Soviet era. Sociologists are also attracted to major societal changes taking place in Russia, including the shift from an externally imposed collectivist ideology to the Wild West style of striving for personal enrichment at any price. At the same time, there is a clear lack of purely economic research on Russia, including economic growth, with its theories, applications, and data analysis. The issue of economic growth has been one of the key issues of economic theory and macroeconomics in particular for many decades, if not centuries. The discussion around economic growth theories continues, with evolutionary and new growth theories involved (see, for instance, Castellacci, 2007; Greenwood & Uysal, 2005; Sengupta, 1998). A section on Economic growth remains one of the key parts of any Macroeconomics textbook, as economic growth indicators remain an immanent part of a standard macroeconomic analysis. Rate of economic © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 A. L. Osipian, Sustainable Economic Growth in Russia, https://doi.org/10.1007/978-3-031-38874-3_1

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growth serves as one of the key macroeconomic indicators in presenting economic dynamics and analyzing any national economy. Economic growth is not only one of the fundamental issues in economics, but also a topic of applied value, policymaking, political analysis, and a subject of vivid political discussion. One of the key questions in modern Russia is whether the country’s national economy is capable of shifting to sustainable economic growth. At present, characteristics of Russia’s economy and economic growth capabilities are mixed. Russia’s GDP growth rates continue to fluctuate widely. By international standards, Russia’s economy is large and plays a significant role for the world economy, but its prospects for sustainable economic growth are not so clear. Here is one of such characteristics, presented by Trading Economics (2022, p. 1): Russia is the largest country in the world and the eleventh biggest economy. The Russian economy is commodity-driven. Russia is the world’s largest producer of oil (14 percent of world output), natural gas (18 percent) and nickel (12 percent). The energy sector is the most important, it contributes 20-25 percent of GDP, 65 percent of total exports and 30 percent of government budget revenue.

Nothing in this passage points to a perspective of sustainable economic growth in Russia. Instead, there is an image of a resource-dependent, commodity-driven, state-heavy national economy. In order to consider these perspectives for sustainable economic growth in Russia of the 2020s, one has to step back and delve into Russia’s transitional economic crisis of the 1990s. It is hard to find any characteristics of the Russian economy and society of the 1990s as anything remotely hinting at any slightest possibility of initiating and maintaining sustainable economic growth. At one point, the national economy seems to be doomed, indeed. Just one vignette with the rapid commercialization and dollarization of the Russian economy points to the complexity of the problem and the distance the country would have to go in order to achieve sustainable economic growth. A different, broader, approach, not limited to economic postulates, may be needed to address issues previously addressed in the scholarly literature, but under different angles. For instance, in order to investigate post-Soviet logics of normality, rationality, and practice, and their change, Hass (2011, p. 128) uses “a narrative of the duality of marketing:

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marketing as a logic of interpretation and practice, and marketing as transition culture myth and practice to signal legitimacy and normality.” Moral dimensions are also important here, as the military and economic might of the Soviet Union was supplemented with the unusually low levels of income inequality, substantively strong elements of the welfare state, universal access to education and healthcare, and a relatively low level of street-level bureaucratic corruption. The dismantling of this Soviet socialist construct brings to the fore new—survivalist—attitude, much reminiscent of social Darwinism. This new attitude of the Russian population now surviving in the drastically changing economic environment may well be described in terms of early and ruthless capitalism. The description comes from the very idol of the Soviet socialist ideology. In Rostow’s (1959, p. 15) words: The exact form of the function relating economic interest to non-economic behaviour varies in Marx’ writings and in the subsequent Marxist literature. Much in the original texts-and virtually all the operational conclusions derived from them-depends on a view of the function as simple and direct as the dictum in the Communist Manifesto that capitalism ‘left no other nexus between man and man than naked self-interest, than callous “cash payment”’.

The Russian economy of the 1990s is built around commercial exchange. During the 1990s, many strata of the society make commercial exchange their way of living. There are whole local cultures of commercial exchange that emerge and thrive in Russian regions, especially in large cities. Despite all the factors defining the Soviet industry-driven economy, the development of retail trade in the Russian economy gains momentum. This process starts in the late 1980s and continues during the period of socio-economic transition in the early 1990s. This trend remains characteristic of the post-Soviet economy during the entire decade of the 1990s. During that period, Russians literally rediscover trade as a form of commercial exchange and a major commercial and economic activity done for a living. With the level of production in most industries declining rapidly, many households find their new sources of income in wholesale and retail trade and, later, in the growing service sector. The newly emerged Russian market-based economy is characterized by the process known as dollarization. This process—an economic phenomenon, indeed—characterizes struggling developing countries with

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rapid dollarization being one of the major features of the national economy. Although not backed by gold or other precious metals, the U.S. dollar remains the major global currency, as it was in the 1990s. During the entire period of the post-Soviet transformation, the U.S. dollar is considered as a replacement for the national currency. Initially the Soviet ruble and then the Russian ruble are being replaced by the U.S. dollar. All large transactions are conducted in U.S. dollars. Just a few years prior to the Soviet Union collapse, dealing with the U.S. dollar could cause the penalty of execution or at least a lengthy prison term with the confiscation of all personal possessions and private property. When the new Russian economy emerges, the U.S. dollar suddenly becomes a currency of choice for Russians. Russians prefer to keep their personal savings in U.S. dollars. In this way, they safeguard their savings against the galloping inflation, national currency volatility, and economic uncertainty, so characteristic of the Russian economy in the 1990s. Private companies and even households appraise their assets in U.S. dollars. National statistics, officially presented in the Russian ruble, is considered as confusing, since everyone prefer to see the charts in U.S. dollars. Both economic agents and scholars find it more convenient to make economic and business measurements and calculations in U.S. dollars. This foreign currency partially replaces the national currency. For some reason, Russian economic agents, including businesses and households, believe that U.S. dollars do not suffer of inflation. The U.S. dollar becomes a near-universal means of economic transactions, observed in the Russian economy. The process of massive dollarization that takes place in the post-Soviet Russia points to the transition from material assets as means of exchange to the monetary exchange. The analogy with mercantilism becomes obvious. The system of bimetallism, including silver and golden coins, proposed by mercantilists, reminds the suggestion for a gradual reform of the monetary system in Russia. The need for the reform of the monetary system becomes more and more obvious as the hyperinflation goes on in the early- and mid-1990s and destabilizes the newly emerged and quite weak financial system. Initially, a few post-Soviet economists suggest the need to implement the monetary reform not overnight, but gradually, through the introduction of a parallel currency. This parallel currency would be by analogy with the Soviet golden chervonets, a parallel currency implemented in

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the Soviet Russia during the New Economic Policy. Mostly known by its abbreviation NEP, the New Economic Policy is implemented by the Bolsheviks in the 1920s. The Policy is formulated and implemented in order to pool the Russian economy from a truly catastrophic situation, known as the military Communism. This second or alternative national currency would be backed by the gold standard or hard currency, such as the U.S. dollar. This suggestion is later dismissed on the ground that it does not take into consideration the credit nature of the modern money and the specifics of money circulation. Historically, true-weight golden and silver coins are being pooled out from the monetary exchange, saved by the households, while cheaper copper coins continue in the monetary circulation. Simply put, the good money is being washed out of the system, while the bad money stays in. The process of dollarization of the Russian economy leads to remarkable changes in post-Soviet urban landscape. In addition to advertisement posts, numerous currency exchange offices, booths, and kiosks emerge in along major streets, as well as being located in subways, bus stations, farmers’ markets, banks, grocery stores, supermarkets, and many other locations. The medieval imagery of merchants exchanging different coins becomes a reality in the post-Soviet Russia, except for the coins that are replaced with banknotes. The weight scales of medieval merchants used in exchange of metal coins are replaced with electronic equipment that controls for counterfeit banknotes as well as simple calculators. Such a shift in monetary policy has a significant impact on household revenues and social prestige, characteristic of the Russian economy. Working in a currency exchange booth or kiosk becomes more economically beneficial and socially prestigious than being a physician, school teacher, or engineer. The profession of meniala, literally exchanger, emerges and becomes both widespread and widely popular in a matter of just a few months. An occupation of currency exchange dealer working on the street suddenly becomes more economically and socially attractive than that of a qualified industrial engineer. Not less interesting is that the legality of this street-held foreign currency exchange is of no concern at all, as the state seemingly relieves itself from many legal enforcement duties. In Russia of the 1990s and 2000s, one can develop an impression that everyone is moving away from real production into trade, currency exchange, and other commercial activities. These economic activities have little to do with the accumulation of national wealth in terms of production of material values.

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The post-Soviet socio-economic transition in Russia also brings natural exchange, i.e., exchange in kind instead of monetary exchange. This form of exchange takes place not only in informal economic relations between households, but also between private businesses, including both small firms and large corporations. Paradoxically, inflation brings in a shortage of cash, experienced by enterprises in the Russian economy. Accordingly, they exchange not in money, but in products and raw materials. Due to the high inflation, commodities become valued more than money. Natural exchange, known as barter, becomes a dominant form of exchange in the economic life of Russia during the 1990s. The old Soviet enterprises, earlier protected from bankruptcy by the socialist system of production are now struggling for survival, disregarding the profitability issue. Soon after the start of the post-Soviet economic transition in Russia, certain commodities acquire features of money. At one point, bottles of vodka acquire the same level of liquidity as the national currency. In many instances, a bottle of vodka is valued much higher than the national currency, as the former is fully protected from inflation, while the latter is subject to a fast depreciation due to the hyperinflation of the 1990s. The importance of trade in the Russian economy manifests itself in the phenomenal growth of small street traders, salespeople, and merchants, called chelnoki, which literally means shuttles. These petty Russian merchants or chelnoki start traveling within the country and abroad in order to buy ready-to-wear clothes, textiles, electronics, and other consumer goods and then re-sell these goods on the local flea markets, known as bazaars. The flea markets themselves grow into huge and diversified enterprises, sometimes swallowing farmers’ markets, occupying hectares of urban land, and bringing huge revenues. Some of these flea markets become larger than industrial enterprises, employ more people than large industrial enterprises, and overcome large industrial enterprises in both total revenues generated and profitability. Owners of the largest flea markets become billionaires and join the ranks of Russian oligarchs. Parts of the economic landscape in the post-Soviet Russia become reminiscent of late medieval era, making mercantilism ever more important in understanding the economic transition and its consequences. This flea market phenomenon that develops and proliferates in the Russian economy during the late 1980s and reaches significant proportions in the 1990s and in many cases causes an erosion of the industrial and professional workforce. Many high-skilled employees in Russia lose

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their qualifications as they leave their work and start making living out of street trade and shopping tours abroad. The notorious deficit of consumer goods, dominant during the Soviet era, suddenly gives way to the liquidity crisis. This crisis occurs when the combination of large amounts of imported consumer goods and high prices in the Russian economy underlines the lack of money on the side of potential consumers. Dollarization, menially, chelnoki, and vodka liquidity standard enrich the mosaics of Russia’s new post-Soviet medievalism, observed during the period of post-socialist economic transition of the 1990s. This is just one aspect of Russia’s economic life during the post-Soviet era, which makes it clear how challenging it may be to even think of the possibility of initiating sustainable economic growth. And yet the Russian economy and society somehow manages to overcome this medieval-like arrangement of economic life and moves to a much higher state of economic equilibrium, where the issue of initiating sustainable economic growth no longer appears as irrelevant. This study does not address institutional change and institutional dynamics to the extent that other scholars do, as they focus their work on Russia’s socio-economic changes, political economy, and economic development. The study presented in this book is certainly more structural than institutional. The explanation for this choice of dominance of structural over institutional is very simple. Over the decades of post-socialist development, a substantial block of scholarly literature was formed on Russia distinct with the major emphasis on politics, and rightly so: it is hard to analyze Russia without its politics. At the same time, economic analysis of Russia’s post-socialist evolution remains in short supply. Taking the politics and policies as given, the scholars and the public need to know more about what was really going on in the national economy, in relations to production, exchange, and investment.

Economic Transition and Growth Nothing appears to be more distant from the concept of sustainable economic growth than Russia of the 1990s. Furthermore, the size of Russia’s unofficial economy in the 1990s arguably exceeded the size of the officially recorded economy. As the shadow economy continued to grow, regulating the national economy was becoming more and more challenging. Moreover, this dramatic increase in the size and share of the

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unofficial economy made it nearly impossible to follow the dynamic of the Russian economy in terms of macroeconomic data collection and analysis. Nevertheless, a strong performance of the Russian economy starting in the early 2000s ignites a good hope for continuous economic growth. As a result, starting in the mid-2000s, economists and policymakers demonstrate the increasing interest to the rapidly growing Russian economy and prospects for its long-term economic growth (see, for instance, Beck et al., 2007). Lomonosov Moscow State University, the flagship of Russian higher education, produces annual Collection of works entitled “Reproduction and economic growth” (see, for instance, MGU, 2001). Research and scholarship on post-Soviet economic transition brought quite a few works on economic development and economic growth. Market transition and failed democratization in Russia has been described before. There is no shortage in conceptually strong and thoughtful analysis of the post-Soviet transformation. Scholarly works attempting to answer the questions of how it was and why it happened the way it did are a plenty, indeed. Hass (2012) calls for rethinking the post-Soviet experience in the framework of newly emerged markets, moral economies, and cultural contradictions of post-socialist Russia, formulating and applying concepts of moral economy, norms, trust, and social capital. Unlike many other scholarly works on the topic of Russia’s socioeconomic transition and post-transitional economic development and growth, including Åslund et al. (2010), Åslund (2002, 2013), Brück and Lehmann (2012), Laruelle and Peyrouse (2013), Robinson (2013), Sutela (2012), and Myant and Drahokoupil (2011) group together the successor states to the USSR, former socialist countries in Eastern Europe, and the newly formed countries of the former socialist Yugoslavia. The authors also make some references to the formerly socialist countries of Albania and Mongolia, thus demonstrating a rather unusually wide geographic scope in their research. The process of transforming the Soviet plan-and-directive economy into a market-based economy anticipates a dramatic liberalization of economic life. Blanchard (1997), Fisher et al. (1996), Havrylyshyn (1999), Havrylyshyn et al. (1999), Havrylyshyn et al. (2002) examine several key measures for the market reforms in transition economies, where liberalization is of key importance, trying to predict possibilities for economic growth. These measures include price and market liberalization; macroeconomic stabilization; liberalization of the exchange and trade system. The Russian population in general perceives such economic

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measures and economic liberalization in general as something alien, injected externally and carrying a negative connotation. This is of no surprise, since Russia experiences a high mortality demographic crisis in the 1990s that may be directly linked to major changes in the economy and society (see, for instance, Shkolnikov et al., 1998). The post-Soviet state in this new economic system is expected to fulfill several major tasks, including those to be done once at the beginning and those done on a continuous basis. These tasks include privatization of state-owned enterprises and establishing a competitive environment for the newly emerged private businesses with few obstacles to market entry and exit. These tasks also include redefining the role of the state as the provider or guarantor of macroeconomic stability, reconstructing a stable legal framework, introducing enforceable property rights, and occasionally correcting market imperfections. Based on such economic concepts, Blanchard (1997) anticipates the following implications for economic growth that differentiate the postsocialist transition economies from developed market economies. Initially, economic output will necessarily decline. Economic growth in the newly formed market-based system will not take place until the new economic incentives are in place and made credible. The proximate mechanisms in the early economic recovery period are most likely a variety of efficiency improvements rather than expansion of factor inputs, such as investment and labor. Not only the character of the socio-economic transition, or the process of transition as a sequence of certain steps and reforms, but the speed with which transition is done, also matters (see, for instance, Aghion & Blanchard, 1993). Equally so important is a speed of economic recovery. Gavrilenkov (2002) points out to a quick recovery of the Russian economy after the negative consequences of 1998 world economic and financial crisis, referring to the data from Russian State Statistical Agency Goskomstat. Some studies of the post-Soviet transition and economic development in Russia are very wide in scope. For instance, the scope of the volume by Åslund et al. (2010) is impressive, as it stretches from the Russian state-owned oil and gas behemoth Gazprom, to Russia’s interests in Manas air base in Kyrgyzstan, and touches on the then Russian President Dmitriy Medvedev’s address on environmental issues. Chapters of the volume would also serve as good Encyclopedia entries about the Russian economy, as well as politics, regionalism, and society. The

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authors conclude that the current economic strategy that Russia demonstrates may be productive in the short run, but in the long run it lacks perspective. They point to the need of substantial structural changes in the economy. Economic structuralism and the derived dependency theory are directly applied to the post-Soviet socio-economic transformation that takes place in Russia. Paolo Guerrieri (1998) studies post-Soviet economic transformation and comments on the applicability of dependency theory. The author suggests that the successful outcome of the transition to new market-type economies in the post-socialist countries of the former Soviet Bloc depends on their ability to achieve an increase in both medium- and long-term economic growth. For this to happen, postSoviet economies would have to invest heavily in both organizational restructuring and technological modernization of national production. Former Soviet production capacities would have to be reconfigured in such a way so as to generate endogenous sources of principal capital investment, technological and organizational innovation, and economic growth. In addition to massive investment in principal capital, structural changes in the national economy become absolutely necessary. Similar to Guerrieri (1998), Salvatore Babones (2013) also studies post-Soviet economic transformation with the help of economic structuralism and dependency theory. The author uses a structuralist approach to the economic trajectories of Russia and the countries of Eastern and Central Europe since 1900. He introduces geographical specificity to the dependency theory of core and periphery in order to develop a structuralist approach on semi-peripheral development model in the global economy. Babones (2013, p. 514) offers the following passage on the issue of relating Russia to Eastern and Central Europe: I introduce geographical specificity to world-systems concepts of core and periphery to develop a structuralist approach on semiperipheral development in the world-economy. I apply this approach to the historical trajectory of economic growth in Russia and east-central Europe since 1900. I find circumstantial support for Wallerstein’s classic assertion that mercantilist semi-withdrawal is a potentially effective development strategy for semiperipheral countries and show that Russia raised its economic output above historical trend levels during the Soviet period. In contrast, east-central Europe fell short of historical trends during the Soviet period, suggesting that Russia’s gains may have been made at the expense of its

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satellite empire. With the end of communism, both Russia and the countries of east-central Europe quickly returned to their long-term historical output levels relative to the core countries of western Europe.

As follows from this passage, Babones (2013) generally supports Wallerstein’s (1974) assertion that mercantilist semi-withdrawal is a potentially effective development strategy for semi-peripheral developing countries. The author concludes that Russia raised its economic output above historical trend levels during the Soviet era. Babones (2013) suggests that these economic scissors may be the product of the coreperiphery relations. Simply put, Russia plays the role of the center and exploits its periphery. When the Soviet era comes to an end, Russia and the countries of Eastern and Central Europe quickly return to their longterm historically observed levels of output. At this point, according to the author, former Soviet republics and Eastern and Central European countries became a periphery relative to the core countries of Western Europe. Conducting structural economic reforms in transition economies is not a simple task, something that Scherbakov (2002) calls a restructuring trap. The major problem with the existing research on economic growth in Russia is that it remains fragmented, mostly limited to small journal articles, book chapters, thematically rich edited volumes (see, for instance, Becker & Oxenstierna, 2018; Sergi, 2019a, 2019b), and a handful of dissertations. Furthermore, virtually no complex studies of sustainable economic growth have been presented by Russian scholars. As a result, there is a gap in the scholarly literature concerning economic growth in Russia, and the possibility of initiating sustainable economic growth in particular. The goal of this study is to fill this widening gap between the steady economic growth in Russia experienced for the most part during the 2000s and 2010s and the lack of scholarly literature on the issue. This study points to the increasing well-being of Russian society as a result of economic growth as well as an indication of economic development in macroeconomic terms. At the same time, the focus of this study is on the positive and at times significant economic growth experienced by the Russian economy, possible causes of this growth, the need for endogenous growth, and the role of human capital in this growth. This study perceives a potential for sustainable economic growth in Russia as an opportunity rather than an economic phenomenon of a deterministic nature.

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This study presents a theoretical and empirical investigation of economic growth in Russia. The structure of the Russian economy is distinct with the tilt to the side of raw materials exploitation. This economic exploitation of rich natural resources finds its expression in the dependency in terms of both production capacity and revenue streams. This dependency also to a significant extent determines the structure of the Russian economy. The economic dependency on raw materials in foreign trade is inherited from the Soviet economy, but becomes more significant in the Russian economy. The Russian economy benefits significantly from exporting raw materials in terms of revenue streams. This continuing process of the natural resources exploitation is combined with the slow process of accumulation of human capital in the Russian economy. The slow human capital accumulation and utilization become to a certain extent definitive for the structure of the national economy, and find their reflection in the structure of foreign trade, including imports and exports of goods and services. The main task appears to be the channeling of the revenues received from the trade in natural resources, so that the new reconfiguration would allow for a faster human capital accumulation. This study argues that next economic advancement in Russia will become possible based on the process of massive renovation of principal capital. An accumulation of human capital will be needed in order to utilize the newly renovated principal capital. Skilled laborers will operate new machinery and equipment based on modern technologies. If Russia is unsuccessful in developing new high-tech industries, it can instead focus on modernizing already existing industries. The extraction industry requires new technologies and human capital. Instead of exporting raw materials, the Russian economy would be better off in trading intermediary and final products, structuring its industries based on the value-added principle.

Structure of the Book This section briefly discussed the structure of the book. In particular, Chapter 2 offers an integrative scholarly synthesis of the pre-modern literature on economic growth. The literature review follows the chronology of changes in economic thought as related to theories of economic growth and the analysis of major problems of economic growth through centuries. This review of major developments in economic thought as

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related to economic growth helps better understand economic processes that take place in Russia. The review includes views and ideas that precede classical economic thought. The review presented in Chapter 2 helps locating the main processes that take place in the Russian economy within the framework elements designed in the early economic thought. With the help of thoughts and views of early mercantilism, late mercantilism, Physiocrats, and quite a few major representatives of classical political economy, this review offers inferences for modern Russia. These inferences touch upon such key characteristics of the post-socialist transitional economy as commercialization, unemployment, dollarization, entrepreneurialism, and the new role of the state. Chapter 3 contains an integrative scholarly synthesis of the major contributions to the modern theory of economic growth. This integrative scholarly synthesis is drawn from the abundance of literature on economic growth, developed over the last few decades. This chapter concentrates on the discussion of major ideas of economic growth, expressed by the leading economists in this field. Integrative scholarly synthesis employed in Chapter 3 is focused on endogenous theories of economic growth. Such a synthesis appears to be especially appealing, since it allows following the process of development of different models of economic growth that leads to qualitative changes and competition between exogenous and endogenous theories of economic growth. Chapter 4 compares economic growth and economic development and draws distinctions between the two. Economic growth is more specific and focused exclusively on the economic dynamics, while economic development is more inclusive, considering poverty reduction, equity, equality, and human development. Sustainability is defined as something being not harmful and continuous. In this sense, sustainable economic growth may be interpreted as continuous or stable economic growth maintained at a certain rate or level for a continuous period of time and is not harmful to humans or the environment. Sustainable economy does not mean selfsufficient economy that eliminates the need for international trade and capital flow, nor does sustainable economic growth mean self-sufficiency in terms of resource input. Sustainable economic growth characterizes a stable low-volatility national economy offering a favorable business environment in the long run. Annual rates of sustainable economic growth may be low both in the short run and in the long run, especially when adjusted for inflation.

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In this sense, economic stability may be a result or a manifestation of economic sustainability. Human capital, while being considered endogenous for the national economy, does not depend on the degree of exploitation or depletion of natural resources. Accumulated human capital may be used in production for decades and thus makes the national economy move on the path of sustainable economic growth. The study then proceeds to considering economic and financial crises of 1997–1998, 2008, and 2014 that negatively impact the Russian economy. The negative consequences of these three crises for the Russian economy prevent a rapid post-transitional shift to initiating sustainable economic growth in the country. More significant is Russia’s dependency on the revenue flow coming from the export of oil, gas, and other natural resources. Chapter 5 points out that the strong dependency on oil, gas, and other natural resources defines not only the structure of the national economy, but also the significant role of the state in the national economy and the strong influence that the state has on economic agents. Economic dependency on fossil fuel generated revenues also known as a resource curse is traditionally considered as an antipode of sustainable economic growth. This dependency or resource curse in turn makes the economy dependent on prices volatility, international markets, and vulnerable to global economic and financial crises. Sustainable economic growth and development may bring a solution for the oil-dependent Russian economy. Instead of exporting massive amounts of natural resources, the Russian economy should invest more in industries that use these natural resources to produce consumer products. For that to happen Russia would have to invest in human capital and technologies. This study conditionally splits the process of economic growth in Russia into three distinct stages. These three distinct stages are the 1990s, 2000s, and 2010s. The socio-economic and demographic crisis of 2020–2022, related to the global pandemic and health issues, carries an idiosyncratic nature rather than a purely economic one. Thus, the period of the global pandemic is not considered in this study. The three stages of economic growth in Russia reflect the difference in economic growth trends during the three decades of the post-Soviet socio-economic transition and development. The main criteria applied in delineating these three stages include values and trends in such economic indicators as real GDP growth, private consumption, government consumption, gross fixed investment, stock-building, exports and imports of goods and services, and domestic

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demand, predicted or observed dynamic in these macroeconomic indicators, and estimates and values of overall economic performance, observed in Russia during the studied period. Each of the three stages ends with economic crisis and post-crisis recovery years of 1998–1999, 2008–2009, and 2014. The economic data for the analysis is split accordingly to these three stages. The macroeconomic data used in this chapter reflects changes in the structure of GDP growth by expenditures in Russia. Chapter 6 presents a macroeconomic data analysis for the Russian economy from 1990 to 2009. The first stage of economic growth in Russia is characterized by the dominance of negative trends. This predominant negativity is indicated in the steady and significant decline in real GDP. Private consumption usually plays a major role in real GDP growth, but in Russia of the 1990s it falls continuously. The second stage differs drastically from the first stage. The Russian economy experiences a significant increase in business activities and demonstrates positive real GDP growth rates throughout the 2000s. This growth may be considered as a steady economic growth in Russia, achieved in the post-crisis period. The third stage of economic growth in Russia, described in Chapter 7, clearly indicates the dominance of positive trends in the value of domestic demand. Nevertheless, this positivity is nowhere near the dominance of positive trends in domestic demand, observed in the national economy during the previous decade. The 2010s demonstrate lower rates in positive economic dynamics than do 2000s. This chapter also considers economic prognosis about the Russian economy, and specifically growth in GDP and related macroeconomic indicators, covering the period of 2020–2029. Chapter 8 follows the dynamic in the values of private consumption and real GDP growth rate and demonstrates that private consumption has a lead in real GDP growth during both the increases and downfalls that characterize the Russian economy. In distinction of private consumption, government consumption does not have a lead in real GDP growth rates during both the economic increases and downfalls. Similar to private consumption, gross fixed investment has a lead in real GDP growth rates during both the increases and downfalls. At the same time, the rate of increase in stock-building in the Russian economy stays close to zero during almost the entire studied period of 1990–2020. Chapter 8 also follows the dynamic in the values of such macroeconomic indicators as GDP deflator, long-term bond yield, consumer prices, producer prices, and exchange rate, which are indicative of the major

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inflation trends in the Russian economy. Inflation was most significant in the 1990s. The most significant increase in exchange rate in Russia is observed in the aftermath of the 2014 economic and financial crisis, when the national currency depreciates the most. This indicates a significant inflation. After 2016, the value of the long-term interest rate in the Russian economy stabilizes around 9%. In the long run, the unemployment rate in Russia increases from zero in 1990 to about 5% after 2016, which is typical for developed market economies. However, the officially recorded unemployment may not reflect hidden unemployment and underemployment. Thus, the transition to sustainable economic growth in Russia would generally require a more effective use of human resources. Chapter 9 studies structure and revenues that the Russian economy receives from foreign trade. Contrary to beliefs that Russia suffers of a chronic trade deficit, the country enjoys a significant inflow of revenue from foreign trade. The amplitude in the dynamic of imports of goods and services increases and decreases, recorded in the Russian economy, is clearly much more significant than the amplitude in the dynamic of exports of goods and services and real GDP. This chapter also presents the structure of Russia’s exports and imports, including their major components, such as oil, fuel and gas, metals, chemical products, machinery and equipment, and food and agricultural products. Chapter 10 presents the results of the study, concluding thoughts, and some policy recommendations. This chapter reiterates that the structure of the Russian economy remains to a large extent resource-driven. Revenues received from the export of natural resources, and oil and gas in particular, constitute a significant part of the national income. As a result, a significant portion of the state budget is formed from the oil and gas revenues. At the same time, it would be an overstatement that the Russian state and the economy are addicted to oil and gas revenues. Furthermore, the Russian economy does not have the external dependency in terms of financial resources obtained through foreign loans. Russia is capable of serving its foreign debt, does not default on payments, and carries no interest arrears, counting both interest arrears owed to foreign officials and private creditors. Having no external borrowing addiction problem and being not as dependent on oil and gas export revenues, as is often portrayed, the Russian economy is quite capable of moving onto the trajectory of sustainable economic growth. What prevents Russia from moving to the stage of sustainable economic growth is a clear lack of accumulated human

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capital. This human capital, when accumulated, should serve the industries already in place and bringing the stream of revenue to the national economy. Instead of focusing on extraction industries and trade in raw materials, the Russian economy should accumulate more human capital in the industries that transform raw materials into intermediary and final products.

References Aghion, P., & Blanchard, O. (1993). On the Speed of Transition in Central Europe. NBER Macro Annual. Åslund, A. (2013). How Capitalism Was Built: The Transformation of Central and Eastern Europe, Russia, the Caucasus, and Central Asia. Cambridge University Press. Åslund, A. (2002). Building Capitalism: The Transformation of the Former Soviet Bloc. Cambridge University Press. Åslund, A., Guriev, S., & Kuchins, A. (Eds.). (2010). Russia After the Global Economic Crisis. Peterson Institute for International Economics. Babones, S. (2013). A Structuralist Approach to the Economic Trajectories of Russia and the Countries of East-Central Europe Since 1900. Geopolitics, 18(3), 514–535. Beck, R., Kamps, A., & Mileva, E. (2007, March). Long-term Growth Prospects for the Russian Economy (European Central Bank, Occasional Papers, 58). https://www.ecb.europa.eu/pub/pdf/scpops/ecbocp58.pdf Becker, T., & Oxenstierna, S. (Eds.). (2018). The Russian Economy Under Putin. Routledge. Blanchard, O. (1997). The Economics of Transition in Eastern Europe. Clarendon Press. Brück, T., & Lehmann, H. (Eds.). (2012). In the Grip of Transition: Economic and Social Consequences of Restructuring in Russia and Ukraine. Palgrave Macmillan. Castellacci, F. (2007). Evolutionary and New Growth Theories. Are They Converging? Journal of Economic Surveys, 21(3), 585–627. Fisher, S., Sahay, R., & Vegh, C. (1996). Stabilization and Growth in Transition Economies: The Early Experience. Journal of Economic Perspectives, 10(2), 45–66. Gavrilenkov, E. (2002). Achievements or Missed Opportunities: Factors of Economic Growth in Russia. What Lessons Are Relevant to Ukraine. In S. Cramon-Taubaden & I. Akimova (Eds.), Fostering Sustainable Growth in Ukraine (pp. 13–27). Physica-Verlag.

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Greenwood, J., & Uysal, G. (2005). New Goods and the Transition to a New Economy. Journal of Economic Growth, 10(2), 99–134. Guerrieri, P. (1998). Trade Patterns, FDI, and Industrial Restructuring of Central and Eastern Europe (BRIE Working Paper 124). Center for German and European Studies, University of California, Berkeley. Hass, J. (2011). Power, Culture, and Economic Change in Russia: To the Undiscovered Country of Post-Socialism, 1988–2008. Routledge. Hass, J. (2012). Rethinking the Post-Soviet Experience: Markets, Moral Economies and Cultural Contradictions of Post Socialist Russia. Palgrave Macmillan. Havrylyshyn, O. (1999). Growth Experience in Transition Countries, 1990–98. International Monetary Fund. Havrylyshyn, O., Lissovolik, B., & Shadman-Valavi, M. (2002). Economic Growth in Ukraine: What If Reforms and Economic Recovery Had Started Earlier? In S. Cramon-Taubaden & I. Akimova (Eds.), Fostering Sustainable Growth in Ukraine (pp. 96–115). Physica-Verlag. Havrylyshyn, O., Izvorski, I., & Rooden, R. (1999). Growth in Transition Economies 1990–1997: An Econometric Analysis with Application to Ukraine. In A. Siedenberg & L. Hoffman (Eds.), Ukraine at the Crossroads: Economic Reforms in International Perspective (pp. 22–57). Physica-Verlag. Laruelle, M., & Peyrouse, S. (2013). Globalizing Central Asia: Geopolitics and the Challenges of Economic Development. M.E. Sharpe. MGU. (2001). Vosproizvodstvo i ekonomicheskij rost: Sbornik [Reproduction and Economic Growth: Collection of Works]. Mosk. gos. un-t im. M. V. Lomonosova. Moskva: TEIS. Myant, M., & Drahokoupil, J. (2011). Transition Economies: Political Economy in Russia, Eastern Europe, and Central Asia. Wiley. Robinson, N. (Ed.). (2013). The Political Economy of Russia. Rowman & Littlefield. Rostow, W. (1959). The Stages of Economic Growth. The Economic History Review, 12(1), 1–16. Sengupta, J. (1998). New Growth Theory: An Applied Perspective. Edward Elgar Publishing. Sergi, B. (Ed.). (2019a). Exploring the Future of Russia’s Economy and Markets: Towards Sustainable Economic Development. Emerald. Sergi, B. (Ed.). (2019b). Modeling Economic Growth in Contemporary Russia. Emerald. Scherbakov, A. (2002). A Restructuring Trap in Transition Economies: Where Does It Lead? In S. Cramon-Taubaden & I. Akimova (Eds.), Fostering Sustainable Growth in Ukraine (pp. 276–288). Physica-Verlag. Shkolnikov, V., Cornia, G., Leon, D., & Mesle, F. (1998). Causes of the Russian Mortality Crisis: Evidence and Interpretations. World Development Report, 26(4), 1995–2011.

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Sutela, P. (2012). The Political Economy of Putin’s Russia. Routledge. Trading Economics. (2022). Russia GDP Growth Rate. Trading Economics. Retrieved September 29, 2022, from https://tradingeconomics.com/russia/ gdp-growth Wallerstein, I. (1974). The Rise and Future Demise of the World Capitalist System: Concepts for Comparative Analysis. Comparative Studies in Society and History, 16(4), 387–415.

CHAPTER 2

Early Concepts of Economic Growth and Implications for Russia

Early Concepts of Economic Growth The review of major developments in economic thought as related to economic growth takes the reader back over the last few centuries. While not a historical overview, this review keeps in line with the chronology of economic views presented in the course of forming the discipline of political economy. Such a review is somewhat reminiscent of a historical excursion and presents a combination of chronological changes. This review focuses on particular issues in major and well-known concepts and theories of economic growth. In this way, this study offers an integrative scholarly synthesis of economic growth concepts and theories. This synthesis allows demonstrating incremental development in human understanding of economic growth, its nature, moving forces, and stages. Models transformed into qualitative transitions and rivalry of exogenous and endogenous concepts of economic growth are also part of this integrative scholarly synthesis. The review focused on major shifts in the topic of economic growth is built around the ideas that the economists formulate rather than around the economists themselves. The review also draws some preliminary inferences for the Russian economy. This is done in order to show the high degree of applicability of earlier and modern theories of economic growth to contemporary post-Communist Russia. The explanatory function of the early and modern concepts of economic growth is such that it can be of use in understanding the © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 A. L. Osipian, Sustainable Economic Growth in Russia, https://doi.org/10.1007/978-3-031-38874-3_2

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processes of market-oriented economic transition in Russia. During the post-Communist period, Russia has lived through both economic downfalls and sharp economic rises, demonstrating both negative and positive rates of economic growth. The integrative scholarly synthesis offered in this study is not overloaded with the complex mathematical equations. Instead, this review of scholarly literature focused on the issues of economic growth keeps the major ideas and critiques within the language easily accessible to the reader while placing the topic in the broader scholarly discussion. Deeper understanding of economic growth in Russia requires evaluating the theory of economic growth in an historical perspective. Pre-classical economic thought that lays an initial stone leading to the future fundament of classical political economy is presented primarily by mercantilists and Physiocrats. Commenting on pre-classical economic thought that includes mercantilism and Physiocrats, Lowry (1987, p. 2) notes that, “A social science such as political economy necessarily deals with the conscious effort of human beings to develop ideas that are considered relevant to economic decision-making. It is the beginning of such idea that constitutes the beginning of economics.” Models of exchange and national economy as a whole precede the generalized ideas of the wealth of nations. Given the significant role of mercantilism in the early history of economic thought, this integrative scholarly synthesis starts with mercantilists. Later mercantilists may be considered as founding fathers of the modern theories of economic growth. At the early stages of development of concepts and theories of economic growth, economists consider economic growth as a process of an increase in the national wealth. Theories of economic growth acquire a main direction in the fifteenth–seventeenth centuries, when mercantilism dominates the stage of economic thought in Europe. Later, the initiative is taken by Physiocrats of the eighteenth century (see, for instance, Kregel, 1973). As pointed out by McDermott (1999), mercantilists consider accumulation of wealth as the major source of economic growth and the major goal of economic activities of merchants and the state. The development of mercantilist economic though presents a lengthy process that takes centuries. Mercantilism is usually divided on the early mercantilism and late mercantilism. As Wiles (1987, p. 147) puts it:

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To attempt to generalize too broadly about mercantilist economic thought is to lose its richness and variety as well as its changing mode of analysis over time. Standard interpretations have often missed this aspect in a too facile attempt to fit mercantilism into either a “school” or \ “stream” pattern in the long sweep of economic doctrine and its development. Mercantilist ideas, like most periods and schools of economic thought, did change and develop. Yet a continuity remained.

Representatives of the early mercantilism give their preference to precious metals and metallic money as materials with perfect liquidity. Presence of golden and silver coins in the national monetary circulation is given a status of the necessary ground for economic growth. Presence of a sufficient amount of metal money, including primarily golden and silver coins, offers a necessary access to commercial credit and relatively low affordable borrowing interest rate in the country. For this reason, mercantilists insist on limiting or blocking gold and silver outflow from the country. In distinction of the early mercantilists, the late mercantilists consider economic wealth of a nation as formed by the total volume of produced commodities rather than precious metals and metallic money. The late mercantilists support positive trade balance in international trade. This tendency in departing from precious metals as materials with perfect liquidity and moving toward the total volume of produced commodities can partially be explained by the development of manufacturing and domestic markets in European countries. According to the late mercantilists, opportunities of obtaining profit from commodity production and access to credit resources facilitate multiplication of wealth. The active trade and commerce is considered as a precondition for economic growth. Given the context of economic life in that era, this approach can be considered as historically justified. All the capital in that era was represented by the trade capital, while there was no manufacturing capital present in any substantial quantity. Mercantilists favor export, since export is considered a primary source of precious metal money. At the same time, mercantilists support restrictions on import of goods in the country. Such a policy is intended to maintain a positive trade balance, sufficient amount of metal money in circulation, and hence stable economic growth in the country. Mercantilists do not limit their economic views with gold and silver, precious metal money, commodity exchange, and international trade

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balance. They comment on other aspects of economic life as well. Mercantilists vote for the low wages and think that high wages will lead to a decrease in productivity. According to mercantilists, high wages causing a decrease in productivity will also cause a decrease in the volume of produced goods, and thus slow down the accumulation of wealth in the national economy. Characteristics of both the early and late mercantilism include a weakness of a systemic approach and absence of sufficient theoretical grounds. Considering the main doctrine of mercantilists, Barber (1993, p. 222) says that, Their writings were informed by two common premises: (1) that a nation’s external accounts should be manipulated and not left to the outcomes produced by invisible hands; and (2) that priority in economic policyformulation should be assigned to the wealth of the nation, rather than to wealth of nations in the plural.

Perrotta (1993, p. 18) relates the first analysis of underdevelopment to early Spanish mercantilism: Spanish mercantilism, which chronologically precedes that of the other countries, formulates a more complex analysis: that of underdevelopment. This analysis involves both the strictly economic plane (commercial dependence and unfavorable terms of trade; unproductive channeling of wealth and of work) and the plane of the social structure and culture in which underdevelopment takes root. In economics therefore, the theory of underdevelopment emerges parallel to, and even earlier than, the theory of development.

Mercantilists are not focused on gold as a means of accumulating material wealth for its own sake. Perrotta (1993, p. 17) points out that, “the ‘bullionism’ of Spanish economists was not aimed at hoarding gold. It sought to ensure that gold arriving from America was not rapidly lost on foreign purchases but was instead invested in domestic production.” Perrotta (1993, p. 18) further maintains that historians of mercantilism demonstrate how mercantilists are obsessed by the strengthening of domestic production and closely linked a balance-of-trade surplus with increased production. Mercantilists are protagonists of the policy of protectionism in international trade. Magnusson (1993, pp. 1–2) points out that,

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For Smith, as well as 19th century classical political economists such as James Mill and J. R. McCulloch, the unifying principle of this system was the confusion of wealth and money may manifest in the favorable-balanceof-trade doctrine. It was this mistaken doctrine that led the mercantilists to pursue the erroneous policy of industrial and trade protection. Hence, using a specie-flow argument—earlier suggested, for example, by Vanderlint and Hume—it seemed easy to show that the idea that a net inflow of monetary wealth would lead to economic growth and prosperity was a simple misnormer.

In appreciation of mercantilism, Grampp (1993, p. 59) writes how mercantilists describe the operation of the market: Self-interested individuals want to buy more when price falls and to sell more when it rises; they place their capital and labor where the return is highest; they work more when their wage rises to a certain amount, then less when it rises still more; and they are at cross purposes if prices are fixed above or below what they would be on a free market.

There is always a question of whether one should regard mercantilism as a direction of economic thought equal to or on the same level with classical political economy, given the range of issues addressed by the former. In this regard, Magnusson (1987, p. 174) posits the following questions: In what sense can we speak of mercantilism as a system of thought? Was it a system in the same sense as the classical or neo-classical system, and was it developed to answer the same kind of questions? Shall we regard a “theory” like the famous theory of the favorable balance of trade or statements pointing out that only foreign trade can enrich a country as propositions of the same order as, for example, the labor theory of value in the systems of Smith and Ricardo?

In addition to economic concepts and suggestions, mercantilism also carries political connotations. Magnusson (1987, p. 174) refers to this political entanglement as an economic nationalism: It must be remembered that Mirabeau and Smith created the concept “mercantile system” to define a certain policy which they strongly opposed, while Schmoller and Cunningham on the contrary hailed “Merkantilismus” as a policy of forced industrialization that should be utilized by backward nations striving for economic modernization. Heckscher’s ambition in

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Mercantilism was to oppose this view and to defend laissez-faire against the kind of economic nationalism he saw emerge during the interwar period.

As follows from this passage, Magnusson (1987) regards mercantilism as a doctrine that serves as a platform for the policy of forced industrialization. Developing or underdeveloped countries should focus on industrialization in order to move on the way of economic modernization. Mercantilism does not end with the coming of classical political economy. Historical economics sees the revival of mercantilist thought in Britain during the period from 1870 to 1920 (Koot, 1993), and neo-mercantilism in American economic thinking and politics as well in the 1920s and early 1930s (Barber, 1993). Nevertheless, domination of mercantilist doctrines ends in the early eighteenth century, when mercantilists as leaders of economic thought and economic doctrines are replaced by Physiocrats. Physiocrats oppose interference of the state in economic processes. They consider economic life as a natural process that has its own natural laws and proclaim a principle of “natural law.” The major principles of Physiocrats are expressed in statements about the leading role of agriculture in the national economy, surplus product, and a unified system of monetary and commodity circulation. According to Physiocrats, the real economic product is produced only in agriculture. Other branches of the national economy could only change the form of the real product. Physiocrats also accept the idea about the existence of surplus as a part of the produced product that is not used in consumption or in production. This surplus is accumulated in the society and creates an increase in the national wealth. Francois Quesnay (1694–1774) is known as a leading French Physiocrat for publishing the Tableau économique (Economic Table) in 1758. Quesnay is merited with developing the system of economic reproduction and distribution of national product on the national scale. Hébert (1987) refers to Physiocrats as French predecessors of Adam Smith. According to the author, economic thought in the eighteenth century is far more fruitful than commonly believed by modern economists. Even for Adam Smith’s monumental contribution in the last quarter of the century, peak performances in economic analysis had emerged in France, including works of Boisguilbert (1695, 1705, 1707a, 1707b, 1707c), Vauban (1707), Cantillon (1931), Quesnay (1758, 1766), and Turgot (1766), as well as works of economists from Italy,

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Germany, and Spain (see also Hébert, 1981; Higgs, 1892, 1897; Horn, 1867). Hébert (1987, p. 186) suggests that, “A complete investigation of these and other contributions would convince even the most reluctant skeptic that economics was anything but a product of exclusively British manufacture.” In line with Hébert’s (1987) suggestion, Eltis (2000) considers the main teachings of Physiocrats, and François Quesnay’s Tableau Economique in particular, as part of the classical theory of economic growth.

Economic Growth in the Classical Political Economy The issue of economic growth finds its reflection in the classical political economy. The first economist to write about the correlates of economic growth is David Hume (1711–1776). His writings on economic growth date back to the second half of the eighteenth century. According to Rostow (1990), Hume emphasizes international trade as a primary engine for economic growth. He believes in a mutually beneficial economic cooperation, suggesting that both nations involved in international trade receive an economic advantage from this commodity exchange. Even though Hume is generally known as a British philosopher rather than economist, his contribution to the understanding of economic growth at the early stages of development of economic thought is undeniable. Another classic of British political economy, Adam Smith (1723–1790) focuses on the accumulation of capital as crucial for the development of the early capitalism. His advice is to accumulate capital and to pay for this accumulation by paying workers minimal wages. In this sense, Smith is similar to mercantilists. Accumulation of capital leads to longterm economic growth. Competition is in the nature of a contest and the economy is regarded as being propelled forward by technical progress. The division of labor is considered the driving force of technical progress. According to Reid (1989), Smith viewed the consequences of competition as equilibrating, with the outcome of the process of equilibration being socially desirable for the country (see also Smith, 1776). Hébert (1987) judges Smith’s economic contribution as monumental and the greatest of all time on the subject of economic growth. But there is another side to the issue of economic growth that typically receives less attention, says the author. According to Hébert, (1987, p. 186) “Smith argued that limited government is an efficient way to organize

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an economy. This was a revolutionary view, whose acceptance required a thorough understanding and detailed explanation of an alternative social order.” The author points to Smith’s positive view of restricted role of the state in the national economy. The government has to be limited as a precondition for economic prosperity. French Physiocrats, who also believe in the limited role of the government in the economy, are considered as predecessors of British classical political economists. Hébert (1987, p. 186) describes the economic order in the following manner: By economic order then, I mean the form and function of a system of markets that operates, in the absence of a central authority (be he monarch, dictator, or parliament), to achieve the production and distribution of goods in a way that promotes economic welfare. Smith’s economics is not merely growth economics; it is also welfare economics. And the linchpin of Smith’s welfare economics is the unfettered operation of the market. How did Smith come to understand and appreciate this market view? A complete answer cannot be given here, but it is clear that much of the groundwork for our understanding of the economic order was laid in advance of Smith, a large measure emanating from France.

The issues of the national economy are always closely tied to demographics. Thomas Malthus (1766–1834) is most known for his demographic views, as related to economic growth and poverty. Malthus considers the relationship between the growth of population and the growth in agriculture without accounting for technological change. He also supports the idea of state using tax revenue to fund capital accumulation and investment. Malthus emphasizes proportions in economic development in order to avoid over-saving, idle production capacity, and unemployment. According to this Malthus’ politico-economic view, preserving certain proportions in the process of economic development means proportional increases in population, capital, and savings rates. In Malthus’ understanding, these proportional increases in turn lead to full production capacity utilization and full employment. He suggests that population is affected by economic conditions, and demonstrates a positive connection between income growth and population growth. According to Rostow (1990), Malthus considers country’s population as a noneconomic factor in the production process. To the contrary, he believes that growth

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in population does not affect economic growth (see also O’Rourke & Williamson, 2005). Classical political economy moves to the nineteenth century. David Ricardo (1772–1823), a most prominent representative of classical political economy, suggests the existence of a natural market wage, and writes that introduction of new technology in production leads to a decline in the demand for labor, assuming a particular form of technological change. He also emphasizes economic proportions, as does Malthus, and diminishing and increasing returns on capital (Rostow, 1990). Karl Marx (1818–1883) also makes a significant contribution to classical political economy through systemic understanding of economic development. According to Rostow (1959), Marx derives several of his essential analytical tools from classical political economists, as he interpreted their teachings. Among these are the labor theory of value, an essentially Malthusian law of population and labor supply, and a version of diminishing returns, applied to the capital stock. His most important derivation is the notion of treating human behavior as an exercise in profit maximization. Profit is marked as the single most important human motivation. Marx also addresses economic growth. As Rostow (1959, p. 14) puts it: The analysis of stages of growth summarized here invites comparison with Marxism; for Marxism is also a theory of how societies came to build compound interest into their structures and of what then transpired. Marxism also begins with the impact on feudal (traditional) societies of the new discoveries and the expansion of trade; and it ends with communismthe stage beyond high mass consumption when men need no longer work very hard for the material things they may want.

John Stuart Mill (1808–1873) supports the general idea that output is a function of labor, capital, and land, and suggests that an increase in output depends on an increase in inputs or their productivity. Mill, therefore, distinguishes between the quality and quantity of inputs and between extensive and intensive types of economic growth. Such progressive ideas are logically explained by the fact that he was writing during the industrial revolution in England. A typical production function is presented in Eq. (2.1): Yt = F(K t , L t , Nt ),

(2.1)

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where Y denotes output, N denotes land, which is fixed and exogenous and slowly goes out of the model over time, K denotes capital, with its primary accumulation and then reinvestment, is a factor in extensive economic growth, L denotes labor comes from the outside, but is not generated within the system of production, without consideration of its quality, t denotes time period. Diminishing returns to capital and labor were assumed. The capital stock was modeled as shown in Eq. (2.2): K t (i ) = (1 − δ)K t−1 (−1) + It−1 (i ).

(2.2)

where K denotes capital; I denotes investment, i denotes every unit, t denotes period, δ is not specified. There is a physical capital accumulation rule. The key issue is how the level of investment is determined. According to Rostow (1990), Smith considers investment as related to the level of profit. From the neoclassical point of view, investment is proportional to GNP, assuming that land grows with GNP. Joseph Schumpeter (1883–1950) is most known for his theory of Creative Destruction. Schumpeter (1934, 1939) makes a significant contribution to the theory of economic development and business cycles and considers its historical patterns, in particular. While emphasizing the role of innovator, he supports general equilibrium theory, and at the same time states clearly that in his view such theory could not cope with innovation. Schumpeter (1911, pp. 62–63) writes that the “static analysis is not only unable to predict consequences of discretionary changes in the traditional ways of doing things; it can neither explain the occurrence of such productive revolutions nor the phenomena which accompany them.” Schumpeter suggests that the static economy analysis can only investigate the new equilibrium position after the changes in the national economy have occurred.

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Nelson (1996) notes that Schumpeter is curiously uninterested in where the basic ideas for innovations, be they technological or organizational, come from. This lack of interest equally applies to both technological and organizational innovations. According to Nelson (1996, p. 90), Schumpeter does not see the entrepreneur as “having anything to do with their generation. It would appear that it is this passage that lies at the root of the argument, often made, that Schumpeter considered invention and innovation very different acts.” The entrepreneur is thus to a certain degree taken out of the context of societal and technological progress, capable of offering innovation without the actual invention. Schumpeter (1947, p. 84) emphasizes the role of the new type of organization: But in capitalist reality as distinguished from its textbook picture, it is not [pure competition] which counts but the competition from the new commodity, the new technology, the new source of supply, the new type of organization (the largest-scale unit of control, for instance)—competition which commands a decisive cost of quality advantage and which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives.

Schumpeter connects his thesis of creative destruction directly with competitiveness and organizational changes. Schumpeter (1947, p. 83) writes that the discovery of new markets, both domestic and international, and the organizational development from the craft shop and factory to large corporations “illustrate the same process of industrial mutation— if I may use that biological term—that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.” The author calls this process of creative destruction the essential feature of capitalism. Later, however, Schumpeter realizes the importance of technological change and that the venue for innovation is the large firm with an attached research and development (R&D) laboratory. This R&D laboratory creates new products that the firm introduces to the market. Schumpeter (1947, p. 96) writes: “The first thing a modern concern does as soon as it feels it can afford it is to establish a research department every member of which knows that his bread and butter depends on his success in devising improvements.” It has been typical for many decades for large corporations to fund applied and even fundamental research both

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in their own corporate laboratories and as outsourced to research universities. The concept of Schumpeterian economic growth continues to be used by economists in considering a variety of new economic phenomena (see, for instance, Dinopoulos & Waldo, 2005).

Implications for Post-socialism Much to many modern economists’ surprise, the realities of the postSoviet Russia of the late twentieth and early twenty-first centuries revive and make relevant economic ideas that come from early stages of developing economic thought and date back in centuries. This is thanks, primarily, to the similarity in settings, economic processes, their character and trends, and economic conditions, observed in the Russian economy. A host of issues addressed in the works of classical political economists as well as early economic concepts remains highly relevant to the modernday Russia. These issues include accumulation of wealth, international trade, minimum wages, and many others are all linked to economic growth. Within the boundaries of national economies, the initiation of steady economic growth usually requires a proper economic policy, set by the state. Such economic policy—as any policy for that matter—consists of a set of clearly defined priorities. Starting with the early concepts of economic growth, mercantilists raise the issue of priorities in economic policy that is so important for modern Russia. This issue includes the trade-off between the directions of future economic development, the choice of moving toward export-oriented economy or import substitution, or both. Thus far, the Russian economy is unsuccessful, or at least mostly unsuccessful, in its attempts of pursuing the import substitution strategy, as directed by the central government. The Russian economy remains largely dependent on foreign technologies. Mercantilists are the first among the early economic thinkers who point out the need for economic policy. At the same time, mercantilists’ major emphasis is made on foreign trade. The balance of payments, foreign debt, trade deficit, and achieving a positive trade balance in foreign trade, emphasized and advocated for by mercantilists appear to be as important for the post-Soviet Russia as they were in the era of early trade and no industrial production whatsoever. The idea that wealth is created in commercial exchange made its way from mercantilists to the rapidly and

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critically transforming Russia. The Russian economy of the 1990s starts refocusing on commercial exchange. The idea that wealth is created in the process of trade appears to be utterly alien for a society absolutely oriented on the industrial might. Such is the characteristic of the Communist Russia. The Soviet Union signifies a unified industrial giant operating on terms of production capacity and gross national product. The Soviet society is production-oriented, while the Soviet people commonly despise trade for both ideological and personal or household reasons. Nevertheless, the Soviet economy with its traditionally strong emphasis on industrial production suddenly turns to trade. After the Soviet Union collapse, Russia faces numerous challenges, including the need for organizational and institutional reforms. The rapidly rising inflation brings to the fore a need for budget austerity, wellplanned monetary policy, and establishing and proper functioning of the Central Bank. These issues, addressed by mercantilists are well applicable to Russia of the 1990s and modern Russia as well. There are numerous analogies that may be drawn between economic policy in Russia, especially in earlier stages of its economic transition, and ideas and suggestions of mercantilists. Earlier mercantilism places emphasis on money made of precious metals, giving a strong preference to golden coins. For Russia, this process finds its expression in the rapid dollarization of the national economy. In distinction of the early mercantilism, the later mercantilism values commodities over money. The later mercantilism advises to accumulate commodities as material assets within the country. Similarly, Russia’s galloping and hyperinflation of the 1990s pushes the population toward accumulating material assets. As Russian households are too poor and cash strapped to buy real estate, they decide to place their money in more affordable durable goods. Households start buying numerous TV sets, tape recorders, refrigerators, gas stoves, vacuum cleaners, and other consumer goods that can be used both in present and in the future. The notorious Soviet deficit or shortage in consumer goods rapidly transforms the situation in the Russian economy when one household owns several TV sets, tape recorders, refrigerators, and vacuum cleaners, stocked in the apartment. Mercantilism in its application to post-Soviet economic realities in Russia is not limited to monetary issues and trade. Emphasis on low wages is yet another interesting aspect of mercantilism. Mercantilists suggest low

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or minimal acceptable wages in order to maintain a continuous increase in the total volume of produced goods. The newly minted Russian capitalists adopt similar pay-scale strategies. Even after three decades of post-Soviet economic transformation, relatively low wages of both public and private employees remain one of Russia’s largest economic and social problems. Being distinct with its relatively skilled workforce, Russia is also distinct with its relatively low wages. These low wages appear to be inadequately low under the conditions of steady economic growth. Mercantilists justify low wages by the need to achieve constant increases in productivity and rapid accumulation of wealth. Small wages of Russian employees can hardly contribute to high labor productivity and rapid accumulation of wealth. A lack of incentives, underpaid workforce, and significant and long-term arrears in salaries can hardly have economic justification. Under such conditions, low wages can lead to a rapid accumulation of wealth of businesspeople, but not the wealth of nation. In addition, wage arrears also contribute to the liquidity crisis, slowing down increases in consumer demand due to the insufficiently large monetary mass in circulation. These patterns of economic behavior may be found especially surprising for the country with a large industrial sector, dominated by machine building, defense industry, and extraction industry, and in need of high-skilled labor. While dollarization that characterizes the Russian economy is commonplace in large cities and industrial centers, in rural areas money circulation is replaced with the natural exchange. Households in Russian countryside often trade goods in exchange for other goods. In addition, private households from the countryside trade in produce on farmers’ markets in large cities and small towns. This situation leads to the understanding of the much-needed comprehensive agricultural reform, including the land reform, in the post-Soviet space. The idea of agricultural development, along with the need for a comprehensive land reform, finds its base in the post-Soviet Russia. During the Soviet era, agricultural production was vast, but also vastly inefficient. Significant losses of the harvest due to poorly performing logistical chains, including in storage facilities, transportation, and retail, were considered a norm. Food imports were significant and the postSoviet period witnesses even higher volumes of food imports. In Moscow at some point in the mid-1990s, over 75% of food supply was done thanks to food imports. Since the early 1990s and until present, Russia attempts to realize import substitution programs in the country’s food sector. The idea

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moves some aspects of economic transition closer to the ideas voiced by Physiocrats. The major principles of Physiocrats were statements about the leading role of agriculture, surplus product, and a unified system of monetary and commodity circulation. The idea of the national economy as a unified system is more akin to the Soviet economic planning. The economic chaos of the 1990s and the need for new forms of economic regulation necessitates the ideas similar to that of a unified system of monetary and commodity circulation. According to Physiocrats, the real product in the national economy was produced only in agriculture. Other branches of the national economy could only change the form of that product. In Russia, with its rich soils and vast agricultural fields and territories, the idea of import substitution, self-sufficiency, and sustainability in terms of food products and other agricultural products gains strength. In fact, some Russian economists claim that by the end of 2010s, Russia’s export of agricultural products brings more revenues than do oil and gas exports (see, for instance, Ivanter, 2019). It is true that Russia holds around 20 percent of the world grain market. Not less significant is that a substantial portion of wealth that the country obtains from land, comes in the form of raw materials. Oil, gas, timber, metals, and minerals constitute a significant part of Russian exports. Physiocrats proclaim a principle of “natural law.” They consider economic life as a natural process that goes according to its own natural laws. Accordingly, Physiocrats oppose interference of the state in economic processes. This position reminds the situation in the postSoviet Russia, where political stability only underlines the instability in the national economy. During the early stages of the economic and political transition in Russia, many turn to liberal ideas of free market economy, laissez faire capitalism, and limitation of the state power and authority over the economy. Physiocrats also accept the idea about the existence of surplus as a part of the product that was not used in consumption or in production. This surplus product, accumulated in the economy, increases the national wealth. The idea of capital accumulation and investment becomes a number one economic priority in Russia. The national economy needs a massive renovation of principal capital, including production capacities, buildings, machinery, and equipment. This massive renovation can only be realized through the continuing accumulation of capital. The system of economic reproduction and distribution of national product on the

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national scale, first offered by the Physiocrats, remains popular, as it is still being taught to economics majors in Russian colleges and universities. Issues raised by Mercantilists and Physiocrats find their place and continuation in classical economic thought. The minimum wage issue, so relevant for contemporary Russian economy, continues in the works of Adam Smith. In distinction from Smith, David Ricardo suggests the existence of a natural market wage. Ricardo writes that the introduction of new technologies in the production process leads to a decline in the demand for labor, assuming a particular form of technological change. More fundamentally, the famous invisible hand, suggested by Smith, serves as one of the major justifications for the market transition in the post-Communist Russia. The economic transition is launched in an expectation of higher efficiency and effectiveness of the new market-based economic system, frequently disregarding other important determinants, including social aspects of such transition. In line with the Communist ideology, the Soviet economy is built to serve the needs of the egalitarian society with the highest values placed on income equality and equity. It is a challenging task to turn the supposedly egalitarian society toward the new system where efforts of particular individuals are rewarded based on the market principles. In such a system, governmental regulation designed for the planned economy is being replaced with the invisible hand of the market. It is assumed under the invisible hand approach that having each particular individual or economic agent acting in his\her self-interest eventually makes everyone economically better off. In reality, this principle works well in creating incentives and favorable conditions for particular economic agents enriching themselves, but less so in benefiting the entire society. Such is the case of post-Soviet Russia. Hume regards international trade as a moving force of economic development. Classics of economic growth, such as Hume, Smith, and Ricardo, point to an increase in international trade and national export as the engine of economic growth. Similarly, such is the position of the state reformers of the Russian economy in the 1990s. Unlike in the early period of post-Soviet economic transition, much distinct with reliance on international trade and international aid, economic liberalism is no longer as popular in Russia as it once was. Neither Russian economists nor the population in general see the root of economic prosperity in the weak state and the invisible hand of the market.

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Thomas Malthus considers the link between population increase and growth in agricultural production. The issue of population decline remains of concern in Russia, although the demographic problem is not as acute now as it was in the 1990s and 2000s. The country manages to reverse the trend of a steady decline in population that takes place in the 1990s. Nevertheless, the long-term demographic situation necessitates a new state-supported concept of economic growth. There is no steady and significant decline in population any more, but the aging trends remain, and they are not favorable for the Russian economy. The new concept should combine the slow reduction in the total labor force with the steady economic growth and growth of per capita GDP in particular. Malthus emphasizes the importance of proportions in economic development. In his view, these are needed in order to avoid over-saving, idle production capacity, and unemployment. Proportional increases in population, capital, and savings rates should in turn lead to full capacity utilization and full employment. This Malthusian suggestion would be an optimal scenario for Russia. The transitional socio-economic crisis of the 1990s is marked with a fear of highly possible and even unavoidable mass unemployment. John Stuart Mill supports the general idea that output in the national economy is a function of labor, capital, and land. Mill suggests that an increase in output depends on an increase in inputs or their productivity. He makes a distinction between the quality and quantity of inputs and between extensive and intensive types of economic growth. In this sense, Russia continues to suffer from the legacies of the Soviet economic system. The transition from extensive to intensive economic growth remains at the stage of largely unsuccessful attempts. Progressive ideas expressed by Mill are logically explained by the fact that he wrote during the industrial revolution in England. Similarly, the industrialized society in Russia requires major renovation of production capacities that would allow for the implementation of technological advancements and sustainable economic growth. Unlike other economists of his era, Schumpeter makes a distinction between innovations and inventions. R&D laboratories that existed in the Soviet planned economy, attached to large plants, transform into independent research institutes. Their destiny is not clear. Some are successful in adapting to new market realities, while others are just surviving financially. Some R&D institutes and laboratories remain closed or disappear. The

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process of institution building is yet another parallel that can be drawn between Schumpeter’s works and Russia’s economic realities.

Concluding Remarks The review of major developments in economic thought as related to economic growth, presented in this chapter, helps better understand economic processes that take place in modern Russia. This review considers both pre-classical and classical economic thought, trying to locate main processes that take place in the Russian economy within the framework elements designed in the early economic thought. These include early mercantilism, late mercantilism, Physiocrats, and quite a few major representatives of classical political economy. Inferences drawn for modern Russia include commercialization, unemployment, dollarization, entrepreneurialism, and the new role of the state. Russia lives through the 1990s with an unclear, unspecified role of the state. On the one hand, economic liberalization and demonstrative political de-Sovietization anticipates a significantly diminished role of the state in the economy and society and a dramatic reduction of the state itself. This reminds of Physiocrats’ famous principle of “natural law.” On the other hand, implementation of economic reforms requires a significant state effort. In addition, the multiplicity of newly emerged independent economic agents requires some form of regulation and control that would usually come from the state. The state has yet to restructure and reorganize many of its regulatory and supervisory institutions. In many instances, the state bureaucracy with its significant levels of corruption appears to be detrimental to the normal development of the national economy. After the decades of zero unemployment in the planned Soviet economy, any increase in unemployment rate increases economic and social worries of households. Just a few organizational forms of employment are implemented, including public works. However, these forms are not particularly effective, nor are they efficient. The national economy now faces the need to utilize the already existing production capacities, renovate principal capital, and convert the neutral demographic trend into a positive one. Malthus’s suggestion to use tax revenue to fund capital accumulation and investment is fully applicable to modern Russia, as more investment in production is needed.

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At the initial stages of economic transition, Russian state authorities are appealing to the entrepreneurial spirit of the population. The state authorities often confuse the class of small entrepreneurs with the middle class in an industrialized society. This appeal brings to the discussion Schumpeter’s emphasis on entrepreneurship and the role of economic innovator. Entrepreneurial skills remain in high demand, as Russia passes the benchmark of three decades of market reforms. Surprisingly, the ever popular idea of the emerging middle class as consisting of small entrepreneurs is still being actively promoted in Russia, as if Russia is not an industrialized society.

References Barber, W. (1993). Neomercantilism in American Official Thinking in the 1920s and Early 1930s. In L. Magnusson (Ed.), Mercantilist Economics (pp. 221– 234). Springer. Boisguilbert, P. (1695). Le détail de la France. Reprinted in Pierre de Boisguilbert, II. Paris: I.N.E.D., 1966, pp. 581–662. Boisguilbert, P. (1705). Letter to the Contrôleur-Général, November 26, 1705. Reprinted in Pierre de Boisguilbert, I. Paris: I.N.E.D., 1966, pp. 414–415. Boisguilbert, P. (1707a). Factum de la France. Reprinted in Pierre de Boisguilbert, II. Paris: I.N.E.D., 1966, pp. 879–956. Boisguilbert, P. (1707a). Traité de la nature, culture, commerce et intérêt des grains. Reprinted in Pierre de Boisguilbert, II. Paris: I.N.E.D., 1966, pp. 827– 878. Boisguilbert, P. (1707c). Dissertation de la nature des richesses, de l’argent et des tributs. Reprinted in Pierre de Boisguilbert, II. Paris: I.N.E.D., 1966, pp. 973–1012. Cantillon, R. (1931). Essai sur la nature du commerce en général. In H. Higgs (Ed.). Macmillan. Dinopoulos, E., & Waldo, D. (2005). Gradual Product Replacement, IntangibleAsset Prices and Schumpeterian Growth. Journal of Economic Growth, 10(2), 135–158. Grampp, W. (1993). An Appreciation of Mercantilism. In L. Magnusson (Ed.), Mercantilist Economics (pp. 59–85). Springer. Eltis, W. (2000). The Classical Theory of Economic Growth. Palgrave Macmillan. Hébert, R. (1981). Richard Cantillon’s Early Contributions to Spatial Economics. Economica, 48(1), 71–77. Hébert, R. (1987). In Search of Economic Order: French Predecessors of Adam Smith. In S. Lowry (Ed.), Pre-Classical Economic Thought: From the Greeks to the Scottish Enlightenment (pp. 185–210). Springer.

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Higgs, H. (1892). Cantillon’s Place in Economics. Quarterly Journal of Economics, 6(1), 436–456. Higgs, H. (1897). The Physiocrats: Six Lectures on the French Economy of the Eighteenth Century. Augustus M. Kelley, 1968. Horn, I. (1867). L’Économie politique avant les physiocrats. Guillaumin. Ivanter, V. (2019). Vozmozhnosti uskoreniya tempov ekonomicheskogo rosta v Rossii [On the Opportunities for the Acceleration of Economic Growth in Russia]. Obshchestvo i ekonomika, 7 , 5–11. https://ras.jes.su/oie/s02073676 0005829-0-1-en Koot, G. (1993). Historical Economics and the Revival of Mercantilism Thought in Britain, 1870–1920. In L. Magnusson (Ed.), Mercantilist Economics (pp. 187–220). Springer. Kregel, J. (1973). The Reconstruction of Political Economy: An Introduction to Post-Keynesian Economics. Macmillan. Lowry, S. (1987). Introduction. In S. Lowry (Ed.), Pre-classical Economic Thought: From the Greeks to the Scottish Enlightenment (pp. 1–6). Springer. Magnusson, L. (1987). The Language of Mercantilism. In S. Lowry (Ed.), PreClassical Economic Thought: From the Greeks to the Scottish Enlightenment (pp. 174–184). Springer. Magnusson, L. (1993). Introduction. In L. Magnusson (Ed.), Mercantilist Economics (pp. 1–13). Springer. McDermott, J. (1999). Mercantilism and Modern Growth. Journal of Economic Growth, 4(1), 55–80. Nelson, R. (1956). A Theory of the Low-level Equilibrium Trap in Undeveloped Economies. American Economic Review, 46(5), 894–908. Nelson, R. (1996). The Sources of Economic Growth. Harvard University Press. Perrotta, C. (1993). Early Spanish Mercantilism: The First Analysis of Underdevelopment. In L. Magnusson (Ed.), Mercantilist Economics (pp. 17–58). Springer. O’Rourke, K., & Williamson, J. (2005). From Malthus to Ohlin: Trade, Industrialization and Distribution Since 1500. Journal of Economic Growth, 10(1), 5–34. Quesnay, F. (1758). Letter from Quesnay to Mirabeau. Translated and reprinted in Meek, op. cit., p. 108. Quesnay, F. (1766). Dialogue on the Work of Artisans. Translated and reprinted in Meek, op. cit., pp. 203–230. Reid, G. (1989). Classical Economic Growth: An Analysis in the Tradition of Adam Smith. Basic Blackwell Ltd. Rostow, W. (1959). The Stages of Economic Growth. The Economic History Review, 12(1), 1–16.

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Rostow, W. (1990). Theorists of Economic Growth from David Hume to the Present; with a Perspective on the Next Century Including a Mathematical Appendix by Michael Kennedy and Walt W. Rostow. Oxford University Press. Schumpeter, J. (1911). Theory of Economic Development. Harper & Brothers. Schumpeter, J. (1934). The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle. Harvard University Press. Schumpeter, J. (1939). Business Cycles: A Theoretical, Historical, and Statistical Analysis of the Capitalist Process. McGraw Hill. Schumpeter, J. (1947). Capitalism, Socialism, and Democracy. Harper & Brothers. Smith, A. (1776). An Inquiry into the Nature and Causes of the Wealth of Nations. Ed. by E. Cannan (1937). Modern Library. Turgot, A. (1766). Reflections on the Formation and the Distribution of Wealth. Translated and reprinted in P.D. Groenewegen (1977). The Economics of A.R.J. Turgot. Martinus Nijhoff. Vauban, S. (1707). Projet d’une dîme royale. Reprinted in Daire, op. cit., pp. 31– 153. Wiles, R. (1987). The Development of Mercantilist Economic Thought. In S. Lowry (Ed.), Pre-Classical Economic Thought: From the Greeks to the Scottish Enlightenment (pp. 147–173). Springer.

CHAPTER 3

Endogenous Economic Growth and Human Capital

Endogeneity of Human Capital Technical progress is in the fundament of sustainable economic growth. Classics of economic growth, including Cobb-Douglas production function, Harrod-Domar growth model, are reflected in works of Arrow et al. (1961), Domar (1970), Harrod (1948, 1970), Kuznets (1966), Lucas (1987), Nerlove (1965), Robinson (1955, 1956), Samuelson (1991), Solow (1960), Uzawa and Watanabe (1960), to name but a few. Economists came to recognize the need for technology adoption in initiating and sustaining economic growth. Exogenous improvements in technology generate an increase in productivity. In the long run, the rate of economic growth is independent of the rate of investment. Robert Solow (1957) gives consideration to technical change and models economic growth using a standard neoclassical production function with decreasing returns to capital. While considering the aggregate production function, Solow (1957, p. 12) notes that, “The new wrinkle I want to describe is an elementary way of segregating variations in output per head due to technical change from those due to changes in the availability of capital per head.” Taking the rates of saving and population growth as exogenous, Solow (1957) shows that these two variables determine the steady-state level of income per capita in the national economy. Gregory Mankiw et al. (1992, p. 1) note that the Solow model of economic growth offers simple © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 A. L. Osipian, Sustainable Economic Growth in Russia, https://doi.org/10.1007/978-3-031-38874-3_3

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testable predictions about how these variables influence the steady-state level of income. Solow (1957, p. 314) in his study of the aggregate production function includes land and mineral deposits in capital: The capital time series is the one that will really drive a purist mad. For present purposes, “capital” includes land, mineral deposits, etc. Naturally I have used Goldsmith’s estimates (with government, agricultural, and consumer durables eliminated). Ideally what one would like to measure is the annual flow of capital services. Instead one must be content with a less utopian estimate of the stock of capital goods in existence. All sorts of conceptual problems arise on this account. As a single example, if the capital stock consisted of a million identical machines and if each one as it wore out was replaced by a more durable machine of the same annual capacity, the stock of capital as measured would surely increase. But the maximal flow of capital services would be constant. There is nothing to be done about this, but something must be done about the fact of idle capacity. What belongs in a production function is capital in use, not capital in place.

Kaldor and Mirrlees (1969) present a model that introduces technical progress in the specific form of the rate of improvement of the design and technique of newly produced capital equipment as the main engine of economic growth. This model determines not only the rate of growth in productivity, but, together with other parameters, many other macroeconomic indicators. These macroeconomic indicators include the rate of obsolescence, the average lifetime of equipment, the share of investment of income, and the share of profits. This model also determines the relationship between investment and potential output. In fact, this model shows future expected capital-output ratio on new capital. Kaldor and Mirrlees (1969) suggest that the model of economic growth is Keynesian in its mode of operation and considers entrepreneurial expenditure decisions as primary and incomes and profits as secondary. Also the model is non-neoclassical in that technological factors, marginal productivities or marginal substitution ratios, play no role in the determination of wages and profits. A production function in the sense of a single-valued relationship between some measure of capital, K t , the labor force Nt , and of output Yt (all at the time t ) that clearly does not exist. Everything depends on past history, on how the collection of equipment goods, which comprises K t (as measured by historical cost) if a greater part of the existing capital stock is of more recent creation; this

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would be the case, for example, if the rate of growth of population has been accelerating. The authors raise the question of to what extent the technical progress function imposes some restraint on the nature of technological change. Every change in the rate of investment per worker implies a change in the extent to which innovations are actually utilized. Since the capital saving innovations, which increase the output-capital ratio and outputlabor ratio, are much more profitable to the entrepreneur than the labor saving ones that give the same rate of increase in labor productivity, and the balance of technological change will appear with higher capital consumption, the greater the rate of increase in investment per worker. Drawing implications from their tests for endogenous economic growth, Philippe Aghion and Peter Howitt (1998a) suggest that the long-run rate of growth should be positively correlated with the flow of patents, the flow of entry of new firms, and the flow of new product introduction. Aghion and Howitt model, also labeled as a model of growth through creative destruction, is developed in which vertical innovations generated by a competitive research sector constitute the underlying source of economic growth (Aghion & Howitt, 1992, p. 323). The authors say that the central role in Schumpeterian economic growth theory belongs to creative destruction. This centrality of creative destruction can be tested by looking at the correlation between economic growth and two other variables, namely the flow of exit of firms and the rate of obsolescence of principal capital. According to Aghion and Howitt (1998a), the flow of exit of firms from the market is identical to the flow of entry of new firms under the conditions of a steady-state market equilibrium. At the same time, the rate of obsolescence of principal capital is the rate of arrival of new innovations in the national economy, which is equal to the rate of economic growth. Aghion and Howitt (1998a, p. 429) conclude that the long-run rate of economic growth should be positively correlated with the flow of exit of firms and with the rate of obsolescence of principal capital. According to Kaldor and Mirrlees (1969, p. 188), machines used in the process of production earn quasi-rents. The older the machines, the smaller are these quasi-rents. The oldest machine does not earn any quasirents. At the same time, it would be incorrect to suggest that the position of the marginal machine determines the share of quasi-rent in the income earned. The authors formulate this idea as the following:

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Whilst “machines” earn quasi-rents which are all the smaller the older they are (so that, for the oldest surviving machine, the quasi-rents are zero) it would be wrong to say that the position of the marginal “machine” determines the share of quasi-rent (or gross profits) in total income.

The authors further suggest that the total profit is determined quite independently of the structure of these quasi-rents, earned by the machines. The total profit is determined instead by the factors determining the share of investment in output and the proportion of profits saved by the producer. Therefore, the position of the marginal machine is itself fully determined by the other equations of the system. Kaldor and Mirrlees (1969, p. 188) conclude that, “It is the macro-economic condition, and not the age-and-productivity structure of machinery, which will determine what the (aggregate) share of quasi-rents will be.” According to this approach, the technical progress function is very consistent with a technological investment function, that is, a shifting in time functional relationship between investment per worker and output per worker. However, it would not be correct to say that the marginal product of investment in the creation of new capital plays a role in determining the amount per man. Since the profitability of operating the machines and equipment is expected to diminish in time, the marginal addition to the stream of profits, which Kaldor and Mirrlees (1969) call the marginal value productivity, will be something quite different from the marginal product in the technological sense. Furthermore, this marginal addition to the stream of profits will not be a derivative from a technological function only, but will depend on the entire system of the relationships. Paul Romer, in his 1990 paper entitled “Endogenous Technological Change” includes technological changes into the model of economic growth. He considers technology as the method used in a production process that transforms the inputs into output and specifies research and development as sources for technological changes. The author emphasizes ideas that drive progress as specific types of goods. Romer (1990) considers ideas as non-rival goods in contrast to other goods. According to the author, non-rivalry nature of ideas also implies increasing returns to scale in production. The implications of Romer’s (1990) economic growth model are reminiscent of the neoclassical ideas. His model of economic growth can

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be viewed as a semi-endogenous, because this model predicts sustainable economic growth only in the case of endogenous technological progress and exogenous population growth. According to this model of economic growth, labor force participates in the production process making capital productive. The qualified and educated labor force also produces ideas that push forward technological progress and, therefore, economic growth. This model of economic growth encourages investments in human capital. Such investments are necessary, because they lead to an increase in the productivity of capital and labor. Romer (1990) considers education as the main source of knowledge and ideas. He also considers education as a guide for the implementation of this knowledge in the production process. According to Pomfret (2000), development of health care is another way to increase productivity of the labor force. Of more recent works, Osiobe (2019) offers a comprehensive literature review examining the relationship between human capital and economic growth. The author summarizes scholarly works on human capital in terms of the theoretical framework of economic growth theory, the neoclassical growth model, the Solow growth production-function, the new endogenous theory, and empirical evidence on the relationship and causal link between human capital and economic growth. Mankiw et al. (1992) develop an Augmented-Solow type model. They suggest that international differences in income per capita are best understood using an augmented Solow growth model. Mankiw et al. (1992, p. 432) state that in this model, “output is produced from physical capital, human capital, and labor, and is used for investment in physical capital, investment in human capital, and consumption.” The production function that is consistent with the empirical results is as follows: 1

1

1

Y = K 3 H 3 L3.

(3.1)

where K denotes capital, H denotes human capital, L denotes labor. The model, presented above, has several implications. The elasticity of income with respect to physical capital does not differ significantly from share in income caused by capital input. This conclusion indicates that capital receives approximately its social return. The process of accumulation of physical capital does not cause any significant externalities.

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According to this model, the accumulation of physical capital has a larger impact on income per capita than the Solow model would suggest. A higher saving rate leads to higher income under the steady state market conditions. This higher income leads in turn to a higher level of human capital accumulation. According to this model, population growth also has a larger impact on income per capita than the Solow model indicates. In the augmented model, human capital must be spread more thinly over the population of workers as well as capital. This is because the higher population growth lowers measured total factor productivity. Finally, the model has implications for the dynamics of the national economy when the economy is not in the steady state. In contrast to endogenous growth models, the model by Mankiw et al. (1992) predicts that countries with similar technologies and rates of accumulation and population growth should converge in income per capita. The results obtained by the authors indicate that the Solow model is consistent with the international evidence if one acknowledges the importance of human as well as physical capital. Mankiw et al. (1992, p. 433) conclude that, “The augmented Solow model says that differences in saving, education, and population growth should explain cross-country differences in income per capita. Our examination of the data indicates that these three variables do explain most of the international variation.” There is a research on low-development traps within the endogenous economic growth theories as well. Aghion and Howitt (1998b) consider the model, based on Acemoglu (1994, 1997) and developed by Redding (1996). The economic growth model concludes that there is a complementarity between the decisions that workers make regarding receiving additional education and the decisions that private businesses make regarding investing in R&D. Surprisingly, this complementarity will not open the possibility for multiple paths in steady-state economic growth, including a low-development trap. This means that the more workers invest in education, the more will entrepreneurs invest in R&D. This model suggestion can be formalized in the following equation: μ∗ = 1, if α < ρ(λ − 1)(1 + γ υ θ )(1 − β), 0 otherwise.

(3.2)

Thus, the more workers invest in education, that is, the higher the value of υ, the more will entrepreneurs invest in R&D. Such a trap will 1 involve μ = 0 and therefore υ ∗ = υ = (βρθ γ ) 1−θ . For it to exist we

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simply need 1

α > δ(1 − β)(λ − 1)(1 + γ (βρθ γ ) 1−θ ).

(3.3)

Conversely, in order to a high growth steady state path to exist, we need 1

α < δ(1 − β)(λ − 1)(1 + γ (βρθ γ ) 1−θ ).

(3.4)

The corresponding growth rates will be g = g = ln λ in the highgrowth equilibrium and g = g = 0 in the low-development trap (Aghion & Howitt, 1998b, p. 342). The authors point out that due to the strategic complementarity between R&D and education, they did not have to introduce threshold externalities in the accumulation of human capital in order to generate multiple equilibria and low-development traps. Aghion and Howitt (1998b, p. 342) conclude that targeted education policies and subsidies for R&D appear as “substitutable instruments for moving the economy away from a low-development trap. In practice, however, education subsidies may be easier to monitor than R&D subsidies to industries (the scope for diversion and manipulation being presumably larger in the latter case).” The role of R&D in the economic growth process is also investigated in Howitt and Aghion (1996) and continued with Olsson’s (2005) consideration of technological opportunity and economic growth. To summarize, the integrative scholarly synthesis of the economic growth literature indicates that historically, economic growth is considered indivisibly from industrial capital. However, empirical evidence indicates that the primary accumulation of capital is not confined to the industrial sector. Technological changes before the industrial revolution are exogenous to the production process.

Endogenous Economic Growth Models With achieving technological maturity, noted in Rostow (1990), industry becomes the engine of societal production. The accumulation of capital occurs within manufacturing and is followed by reinvestment in economic production. The theory of exogenous economic growth continues its dominance until the 1970s. Technological change is still considered to be exogenous to production in economic growth models. However, starting in the 1980s, economists begin to conceptualize technological changes

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from within production. In particular, they start placing emphasis on R&D. The main suggestion that Kaldor and Mirrlees (1969) offer for economic policy regarding economic growth is that any scheme that leads to the accelerated retirement of old machinery and equipment, such as taxes on use of morally and/or physically old equipment, technologies and plants, and environmental pollution, and lower or no taxes on investment funds is bound to accelerate for a short period the rate of increase in output per head y/y since it will increase the number of workers available for the new machines n, and hence investment I , and will involve a reduction in p/y. The problem of the capital accumulation is being transferred into the problem of investment and the balance between saving and consumption. Accordingly, labor is considered as an economic input that could be developed by investing in human capital. At the same time, economic growth is stimulated by improvements in the quality of labor, including education, qualifications, and skills used in economic production. The quality of skilled labor is considered as accumulated human capital. Businesses have to find a new balance in choosing between making investments in the physical capital and human capital. For instance, Chmelarova and Papageorgiou (2005) investigate nonlinearities in complementarity of capital and human skills engaged in economic production and its impact on economic growth. Since the 1980s, the endogenous theory of economic growth firmly dominates the research agenda on economic growth in both developed and developing countries. Benigno Valdes (1999, pp. 168–169) points out the following regarding the choice of the physical capital investment and human capital investment: Ever since the new wave of research on growth theory began in the late 1980s, proponents of the two theories have been (on and off) arguing over which of the two approaches is better. One (possibly the first) round of the dispute was fought in the empirical arena. To meet the empirical finding that λ = -0. 022, ( α) the parameter in the aggregate production function Yt = K tα (At L t )1−α has to be approximately to 0.7 (consequently, 1- α = 0.3). In the Solow-Swan (S&S) model factor inputs are paid their marginal products, thus in this model α is the share of K (and 1- α is the share of L) in national income. So the model predicted (this was the interpretation at the time) that K must receive about 70 percent of the national income and L about 30 percent of it. However, the national income accounts were

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indicating the opposite: a 30 percent share for K and a 70 percent for L. The proponents of the new theory took it for certain that it was the S&S model which failed. Specifically, it assumed that K and L were paid their marginal products but in reality K is paid less and L more than that. Why? Because each new bit of K generates an externality for which it is not compensated.

According to Valdes (1999), the important point is that this new theory of economic growth can explain the observed discrepancy between each factor’s marginal product and their actual redistributions with the help of the externality effect. Then, as it usually occurs in intellectual discussions, “the old theory had its turn on the issue and the human capital augmented Solow-Swan model came to its rescue. Another round in the debate between the two theories seems to have been constructed over their (as-of-today-known) implications for economic policy” (Valdes, 1999, pp. 168–169). Jacob Mincer, Theodore Schultz, and Gary Becker introduced the concept of human capital as early as in the 1950s. They demonstrated how individuals invest in their human capital similar to businesses investing in physical capital. As firms decide to invest in new machinery and equipment in order to increase production, individuals can invest in their own education to increase their personal income. Accordingly, human capital can be seen as a means of production: investment in human capital increases output. Mincer (1958) considers investment in human capital as resulting in an increase in personal income and thus impacting personal income distribution. Becker (1962, p. 9) points out that, People differ substantially in their economic well-being, both among countries and among families in a given country. For a while economists were relating differences primarily to differences in the amount of physical capital since richer people had more physical capital than others. It has become increasingly evident, however, from studies of income growth, that factors other than physical resources play a larger role than formerly believed, thus focusing attention on less tangible resources, like the knowledge possessed. A concern with investment in human capital, therefore, ties in closely with the new emphasis on intangible resources and may be useful in attempts to understand the inequality in income among people.

Schultz (1961) expanded on the meaning of investment in an individual’s human capital with activities that improved an individual’s

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working skills and productivity. These are individual investments made through health expenditures, on-the-job training, formal education, study programs for adults such as agricultural extensions, and labor migration. He also considered direct costs and opportunity costs of obtaining human capital, such as foregone earnings, and lost leisure time. While Schultz (1961) and Becker (1962) consider human capital on the individual level, in microeconomic perspective, other scholars transferred these views into macroeconomic perspective. Furthermore, human capital becomes endogenous for economic production. The endogenous economic growth model placed human capital as the central determinant of economic growth. According to Lucas (1993, p. 252): The main engine of growth is the accumulation of human capital-of knowledge-and the main source of differences in living standards among nations is differences in human capital. Physical capital accumulation plays an essential but decidedly subsidiary role. Human capital accumulation takes place in schools, in research organizations, and in the course of producing goods and engaging in trade.

Measurement of human capital and issues of allocation for economic growth are presented by Barro and Sala-i-Martin (1999), Mincer (1996), Mulligan and Sala-i-Martin (2000), and Ruth (1998). Emphasis on the measurement of human capital and its impact on economic growth with the emphasis on the measurement of human capital are made by Kalaitzidakis et al. (2001). Human capital itself is a composite variable, closely linked to economic development and economic growth. Chakraborty and Das (2005) investigate the links between the levels of mortality, accumulated human capital, and persistent income inequality and their impact on economic growth. These are clearly developmental issues. Bleakley (2010) suggests that human health not only represents human capital, but can also be considered as a certain input in producing other forms of human capital. A healthy worker is more capable of being economically productive, while an unhealthy one has a decreased ability to work productively. Investing in worker’s health equates to investing in human capital. The author concludes that poor health leads to lower personal income. Education is considered a single major component of human capital in economic growth models. Not surprisingly, education as a factor influencing economic growth rates is considered more frequently than health. Glomm and Ravikumar (1992) focus on investment in human capital

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through formal schooling, delineating public and private education. They develop an overlapping generations model with heterogeneous economic agents living for two periods. An overlapping generations model is a type of economic model in which agents live for at least two periods, that is, long enough to enter into the next period and thus the next generation. Overlapping generations models are actively used in modeling economic growth. This is done through the role of human capital in endogenous economic growth. Such models assume that human capital accumulation by the present generation depends on the amount of human capital accumulated by the previous generation. Similar to Glomm and Ravikumar (1992), Growiec (2010) suggests that people of different economic generations are carriers of human capital. He considers the average human capital in production as increasing due to schooling and on-the-job training. The author also considers aggregate human capital in individual human capital accumulation. Knowledge sharing and exchange, education presented as public spending, and production technology are considered as inputs that can potentially generate a steady increase in production. Growiec (2010) finds a combination of factors under which human capital accumulation generates aggregate economic growth. Cross-country economic growth regressions against different measures of human capital are presented in studies by Barro (1997), Barro and Sala-i-Martin (1999), Benhabib and Spiegel (2000), Krueger and Lindahl (2000), Mankiw et al. (1992), and Pritchett (1996). The authors argue that a semiparametric, partially linear regression model specification of the cross-country growth regression function is a particularly useful way of studying the contribution of human capital to economic growth. The semiparametric partially linear regression model is written as: Yit = xitT γ + q(Z it ) + Uit ,

(3.5)

where xit denotes a variable of dimension q, γ denotes q × 1 vector of unknown parameters, Z it denotes a continuous variable of dimension p. In this model, Z it refers to various measures of human capital. Human capital is measured by the level of education and gender. They conclude that the effect of human capital accumulation on economic growth is nonlinear and that there are threshold levels of human capital and economic growth for each country.

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Human Capital Models and Implications Kalaitzidakis et al. (2001) in their study of endogenous economic growth analyze the role and impact of human capital on per capita economic growth in a set of countries. They analyze the factors that are associated with the human capital in terms of education levels in order to measure this impact. Their approach is to estimate the significance of educational levels of population for initiating substantial economic growth. The model tests empirically the hypothesis that human capital has a positive impact on per capita economic growth in a variety of different national economies. The endogenous economic growth model is used as it appears as most appropriate for evaluation. This model is developed for cross-sectional analysis and shows the influence and importance of human capital for economic growth relative to other key inputs and to differences across countries. A variety of measures of human capital frequently used in applied growth studies is employed by Kalaitzidakis et al. (2001). The results of the estimated model equation are not entirely clear or unequivocal. While intuition and theories of endogenous growth would point toward a positive effect of human capital on economic growth, empirical evidence on this issue is mixed. Kalaitzidakis et al. (2001) note that while both intuition and several theories of endogenous economic growth point toward a positive effect of human capital on economic growth, empirical evidence on this issue has been mixed. The purpose of their study is to provide a systematic investigation of the human capital-economic growth nexus. The impact of human capital on economic growth is incorporated according to the Mankiw et al. (1992) framework. Mankiw et al. (1992) assume a production function of the form presented in the following equation: β

Y = K tα − Ht (At L t )1−α−β ,

(3.6)

where Y denotes total output, K denotes physical capital stock, H denotes human capital stock, L denotes labor, A denotes a technological parameter. Technology in this model is assumed to grow exponentially at the rate φ.

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The model of endogenous economic growth presented by Kalaitzidakis et al. (2001) is in some sense a continuation of the Durlauf and Johnson (1995) model of economic growth. However, Kalaitzidakis et al. (2001) extend their model in one significant direction. While Durlauf and Johnson (1995) focus on identifying homogenous subgroups of countries, Kalaitzidakis et al. (2001) assume differences across countries in different time periods. Durlauf and Johnson (1995) make an assumption that the contribution of human capital to economic growth is the same for all countries within each economic subgroup. Kalaitzidakis et al. (2001) allow the effect of human capital on economic growth to differ both across countries and also across time in their regression analysis. Kalaitzidakis et al. (2001) employ a variety of measures of human capital frequently applied in endogenous economic growth studies. The authors estimate the unrestricted economic growth model presented as follows: yit = a0 + a1 Dt + a2 D j + a3 ln Sitk + a4 ln(n it + α + δ + γ ) + a5 ln X it + a6 ln h it + εit ,

(3.7)

where yit denotes the growth rate of income per capita during each period, S k denotes the share of output devoted to physical capital accumulation, n it denotes the rate of growth of the labor force, α denotes the rate of technical exogenous progress that is constant for all countries in all periods, δ denotes the depreciation rate of human capital, γ denotes the depreciation rate of physical capital, X it denotes per capita income at the beginning of each period, h it denotes human capital measured either as a stock or as a flow, Dt denotes dummy variable for each period of time, D j denotes dummy variable for each country included in the crosscountry regression analysis. The economic growth model by Kalaitzidakis et al. (2001) considers a wide variety of measures of education capital. At the same time, health, and other forms of human capital are not measured. The first measure of human capital expressed in education presented by the authors is mean years of schooling for the whole population. This measure is used most frequently in the modern literature on endogenous economic growth.

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The authors also examine the educational attainment of separately males and females at the primary, secondary, and postsecondary or tertiary levels. Kalaitzidakis et al. (2001, p. 234) list major reasons why they include educational achievement at the secondary and tertiary level in their model of endogenous economic growth as follows: (i) a number of countries have very low or zero values for educational achievement at the tertiary level; (ii) to limit the number of measures of human capital; and (iii) the theoretical mechanisms that link human capital of different educational levels to economic growth draw a distinction between basic education (primary) and education that enables the diffusion of ideas (post primary). Finally, for the purposes of comparison with the early literature on human capital, we consider enrollment rates both at the primary and secondary level and by gender.

Human capital in the Kalaitzidakis et al. (2001) endogenous economic growth model is expressed in terms of education only. The rate of depreciation of human capital can be interpreted as a function of healthcare expenditures. It is not an objective of the model to suggest whether the rate of human capital depreciation is linearly related to healthcare expenditures. Nevertheless, the authors make an assumption for their model that higher per capita healthcare expenditures lead to lower rates of human capital depreciation. Benos and Zotou (2014) conduct a meta-regression analysis in order to investigate the nexus of education and economic growth by surveying the scholarly literature on the issue. Specifically, they apply meta-regression analysis to 57 studies with 989 estimates, with education considered a proxy for human capital. The authors find that there is substantial publication selection bias toward a positive impact of education on economic growth. Benos and Zotou (2014) conclude that the genuine effect of education on economic growth is not homogeneous across studies, but varies according to several factors. The authors attribute the impact of education on economic growth to differences in education measurement and study characteristics, mainly model specification, and type of data used. Economists also consider human capital as linked to public capital. Shioji (2001) incorporates human capital into his concept of public capital and estimates dynamic effects of public capital on output per capita. In

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addition to human capital, components of public capital include infrastructure, conservation of national land, and agriculture and fishery. Based on an open economy economic growth model, the author derives an income convergence equation augmented with public capital. The relationship between steady-state output per unit (Y ) of labor and public capital (PUP) is presented by the following equation: Yit∗ =

J 

φ j × PUP jit−τ + Yi ,

(3.8)

j=1

where φi = Ci /(1 − a), φi denotes the long-run elasticity of output with respect to public capital per capita, C denotes a short-run elasticity. Shioji (2001) reports that each component of PUP has a positive effect on the steady-state output per unit of labor Y . At the same time, economic infrastructure is more important to economic growth than education and has a more significant positive effect on economic productivity than education. These results can be interpreted as supporting the endogenous economic growth approach. Discrepancies and contradictions between the predictions of exogenous and endogenous economic growth models make some economists focus on a unified theoretical framework for explaining economic growth. Such frictions combined with the process of development over most of human history induced growth theorists to advance an alternative theory that would capture the contemporary era of sustained economic growth. Galor (2005, p. 171) offers a unified growth theory and suggests that the transition from socio-economic stagnation to growth is an inevitable outcome of the process of development. The author places an emphasis on the importance of human capital accumulation and points out the following: The inherent Malthusian interaction between the level of technology and the size and the composition of the population accelerated the pace of technological progress, and ultimately raised the importance of human capital in the production process. The rise in the demand for human capital in the second phase of industrialization, and its impact on the formation of human capital as well as on the onset of the demographic

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transition, brought about significant technological advancements along with a reduction in fertility rates and population growth, enabling economies to convert a larger share of the fruits of factor accumulation and technological progress into growth of income per capita, and paving the way for the emergence of sustained economic growth.

The focus on human capital and its role in economic growth has practical implications. These practical implications apply equally to both developing and developed countries, although this applicability varies depending on the structure of the national economy and level of human capital accumulation. Stiglitz (2016, p. 44) notes regarding the muchneeded structural transformation of the national economy in the United States: the United States has been moving from a manufacturing to a service sector economy. Global manufacturing employment is in the decline, and with globalization, the United States will be seizing a declining share of that employment, specializing in skill- and capital-intensive niches. For a while, construction masked what was going on; but the real estate bubble was but a short-term palliative. Among the service sectors that should be taking up the slack are education and health. In both, government rightly plays an important role, and austerity has constrained the ability of the government to play the role which it should.

Further human capital accumulation is needed to develop such service sectors as education and health. The proclaimed specialization in skilland capital-intensive niches may be prescribed not only to the developed countries, such as the United States, but also to industrialized nations in economic distress, transition, or resource-dependent ones. National economies heavily dependent on natural resources, including their extraction and trade, need to develop skill- and capital-intensive industries, if they need to seize the opportunity to initiate sustainable economic growth. Such industries should include both manufacturing and services. Instead of trading in raw materials, manufacturing of final products may bring more stability to a national economy in a resource-rich country. This shift will lead to changes in the structure of the national economy. For this transition to happen, a larger stock of human capital would be required.

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Concluding Remarks In modern economic growth theory, the issue of the capital accumulation is being transferred into the problem of investment and optimization of the saving-to-consumption rate. Labor is considered as an input that could be developed by investing in human capital. Human capital accumulation through investment may result in higher labor quality. Economic growth is stimulated by improvements in the quality of labor, including education and professional qualifications applied in production. In addition to optimizing the relation between levels of savings and consumption, there is now choice between investing in the physical capital and human capital. Since the 1980s, the endogenous theory of economic growth dominates the research agenda in both developed and developing countries. Investment in human capital and endogenous character of human capital in economic growth is supplemented with new institutionalism and organizational improvements. Endogenous economic growth is stimulated by improvements in the quality of labor, achieved through increasing levels of education and professional qualifications applied in production. In addition to optimizing the relation between levels of savings and consumption, there is now the issue of optimizing correlation between the physical capital and human capital. Although very useful, these endogenous economic growth models do not offer a comprehensive description of Russia’s economic transition experiences and possible moves to sustainable economic growth. A more comprehensive description of Russia’s economic perspective requires an economic approach based on data.

References Acemoglu, D. (1994). Search in the Labor Market, Incomplete Contracts, and Growth (CEPR Discussion Paper no. 1026). Acemoglu, D. (1997). Training and Innovation in an Imperfect Labor Market. Review of Economic Studies, 64(3), 445–464. Aghion, P., & Howitt, P. (1992). A Model of Growth Through Creative Destruction. Econometrica, 60(2), 323–351. Aghion, P., & Howitt, P. (1998a). Capital Accumulation and Innovation as Complimentary Factors in Long-Run Growth. Journal of Economic Theory, 3(2), 34–60. Aghion, P., & Howitt, P. (1998b). Endogenous Growth Theory. The MIT Press.

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Krueger, A., & Lindahl, M. (2000). Education for Growth: Why and for Whom? (NBER Working Paper 7591). Kuznets, S. (1966). Modern Economic Growth: Rate, Structure, and Spread. Yale University Press. Lucas, R. (1987). On the Mechanics of Economic Development. In D. Jacobs, E. Kalai, & M. Kamien (Eds.). (1998). Frontiers of Research in Economic Theory (pp. 82–102). Cambridge University Press. Lucas, R. (1993). Making a Miracle. Econometrica, 61(2), 251–272. Mankiw, G., Romer, D., & Weil, D. (1992). A Contribution to the Empirics of Economic Growth. The Quarterly Journal of Economics, 107 (2), 407–437. Mincer, J. (1958). Investment in Human Capital and Personal Income Distribution. Journal of Political Economy, 66(4), 281–302. Mincer, J. (1996). Economic Development, Growth of Human Capital, and the Dynamics of the Wage Structure. Journal of Economic Growth, 1(1), 29–48. Mulligan, C., & Sala-i-Martin, X. (2000). Measuring Aggregate Human Capital. Journal of Economic Growth, 5(3), 215–252. Nerlove, M. (1965). Estimation and Identification of Cobb-Douglas Production Function. Rand McNally&Co. Nickell, S., & Layard, R. (1999). Labor Market Institutions and Economic Performance. In O. Ashenfelter & D. Card (Eds.), Handbook of Labor Economics (Vol. 3, pp. 3029–3084). Elsevier. Olsson, O. (2005). Technological Opportunity and Growth. Journal of Economic Growth, 10(1), 35–58. Osiobe, E. (2019). A Literature Review of Human Capital and Economic Growth. Business & Economic Review, 9(4), 179–196. Pomfret, R. (2000). Development Economics. Prentice Hall. Pritchett, L. (1996). Where Has All the Education Gone? World Bank, Working Paper 1581. Redding, S. (1996). Low-skill, Low-quality Trap: Strategic Complementarities Between Human Capital and R&D. Economic Journal, 106(435/1), 458– 470. Robinson, J. (1955–1956). The Classification of Inventions. Review of Economic Studies, 5(1), 139–142. Robinson, J. (1956). The Accumulation of Capital. Richard D. Irwin. Romer, P. (1990). Endogenous Technological Change. Journal of Political Economy, 98(5/2), 71–102. Rostow, W. (1990). Theorists of Economic Growth from David Hume to the Present; with a Perspective on the Next Century Including a Mathematical Appendix by Michael Kennedy and Walt W. Rostow. Oxford University Press. Ruth, J. (1998). Economic Growth and Investment in Education: How Allocation Matters. Journal of Economic Growth, 3(4), 337–359.

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Samuelson, P. (1991). A Theory of Induced Innovation along KennedyWeisacker Lines. In R. Becker & E. Burmeister (Eds.), Growth Theory. Volume I. Descriptive Growth Theories (pp. 34–63). Edward Elgar Publishing. Schultz, T. (1961). Investment in Human Capital. American Economic Review, 51(1), 1–17. Shioji, E. (2001). Public Capital and Economic Growth: A Convergence Approach. Journal of Economic Growth, 6(3), 205–228. https://doi.org/10. 1023/A:1011395732433 Solow, R. (1957). Technical Change and the Aggregate Production Function. The Review of Economics and Statistics, 39(3), 312–320. Solow, R. (1960). Investment and Technical Progress. In K. J. Arrow, S. Karlin, & P. Suppes (Eds.), Mathematical Methods in Social Sciences (pp. 89– 104). Stanford University Press. Stiglitz, J. (2016). How to Restore Equitable and Sustainable Economic Growth in the United States. American Economic Review: Papers & Proceedings 2016, 106(5), 43–47. https://doi.org/10.1257/aer.p20161006 Uzawa, H., & Watanabe, T. (1960). A Note on the Classification of Technical Inventions (Technical Report 85). Stanford University Press, Stanford. Valdes, B. (1999). Economic Growth: Theory, Empirics, and Policy. Edward Elgar Publishing.

CHAPTER 4

Sustainable Economic Growth and Development

Economic Growth and Development Sustainable development has become one of the most popular topics in public discussions and debate, a major focal point for scholars, and one of top priorities for international organizations in setting the agenda for twenty-first century. The United Nations laid out 17 sustainable development goals, addressing, poverty, energy, and climate concerns globally. According to this framework, the research on sustainable development is called to “understand and navigate relationships among social, environmental and economic development objectives.” The UN World Commission on Environment and Development points out that, “sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs” (United Nations, 2023). The concept of sustainable development and sustainability as applied to world global problems found its way not only in the agenda of international organizations, but also in the agenda of a variety of other organizations and institutions, including universities. In the charter for the UCLA Sustainability Committee, sustainability is defined as the following:

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The integration of environmental health, social equity and economic vitality in order to create thriving, healthy, diverse and resilient communities for this generation and generations to come. The practice of sustainability recognizes how these issues are interconnected and requires a systems approach and an acknowledgement of complexity. (UCLA, 2016)

Within economic theory, the topic of economic growth and its sustainability is directly linked to the issues of general equilibrium and economic cycles. In addition, the topic of economic growth is also linked to the issue of economic development. In fact, economic growth and economic development and—more recently, sustainable economic growth and sustainable economic development—are a usual part of modern political rhetoric. Moreover, these two terms—economic growth and economic development—are frequently confused or used interchangeably. The confusion between the two terms—economic growth and economic development—frequently found in political discourse and discussion, is also reflected on by economists. For instance, Bruce Morris (1961, p. 7) points out that, “The terms ‘economic growth’ and ‘economic development’ seem to be used interchangeably and refer to a rise in the per capita national output.” The author considers a country as experiencing economic growth if it “undergoes a persistent increase in its national output of goods and services per capita over a period of years” (Morris, 1961, p. 7). This persistence in the output increase may be interpreted as a ground for sustainable economic growth. On the contrary, Shearer (1961) points to a distinction in terms of economic growth and economic development. According to the author, the term economic growth denotes an increase in the output of goods and services, while economic development implies a more general development, including personal and social values. Thus, says Shearer (1961, p. 499), “a country might be growing economically but failing to develop (or even may be retrogressing) because other values were being lost.” This distinction refers more to sustainable development goals, laid out for twenty-first century. Joseph Stiglitz and Hirofumi Uzawa (1969) point to the meaning of economic growth theory as distinct from that of Gerald Meier (1964), as related to understanding of Development Economics. Specifically, Stiglitz and Uzawa (1969, pp. 3–4) formulate the way John Hicks (1965) highlights the methodological distinctions between the two meanings of economic growth theory in the following way:

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The appearance of a branch of theory called Growth Theory, at a time when the economics of underdevelopment has been a major concern of economists, has made it look as though there must be a real connection. I much doubt if there is. Underdevelopment economics is a practical subject which must expect to call upon any branch of theory (including non-economic theory) which has any relevance to it. Growth Theory has no particular bearing on underdevelopment economics, nor has the underdevelopment interest played any special part in its development.

Economic growth does not necessarily lead to higher levels of human development and well-being for all the socio-economic strata of population. Empirical evidence shows that in some developing nations, economic growth combined with the growing inequality in income distribution leads to a decline in per capita income in the lower strata of population (see, for instance, Foster & Székely, 2000; Page, 2006). As a result, poverty is not being eradicated or even reduced based solely on achieved economic growth. These imaginary scissors that appear between the positive rate of economic growth and declining personal well-being of the poorest relate to distributional deficiencies, a clear lack of good governance, and bring to the fore much-needed anti-corruption policies. At times, practical matters of economic policy implementation become more important than theoretical views on economic growth. According to Graeme Snooks (1999, p. 4), the pioneering development economists and international development agencies equated economic development with an increase in real gross domestic product (GDP) per capita. More recently, these same scholars and agencies see economic development in terms of poverty reduction, equity, basic needs, and human development. This change once again returns us to the problem of positive economic growth not necessarily resulting in higher levels of human development, social cohesion, and personal well-being. Snooks (1999) points out that such a change in understanding of economic development and economic growth has important policy implications. The author refers to Paul Streeten (1995) in an assertion that, “the evolution from economic growth, via employment, jobs and justice, redistribution with growth to basic needs and human development, represents a genuine evolution of thinking and is not a comedy of errors, a lurching from one slogan to the next” (Snooks, 1999, pp. 17–18). The author offers a new theory of economic development based on the concept of the global strategic transition.

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Morris (1961) points to the difficulty in measuring different aspects of economic development and gives preference to economic growth as it is defined classically. According to the author, it is possible to define economic growth in terms of any measure, such as population, accumulated wealth, productive capital, material goods, technological information, or quality of the people. However, many of these are impossible to measure, and the main concern seems to be goods and services available for consumers (Morris, 1961, p. 7). Measurement, once again, becomes an issue. In the sense of measurement issues, economic growth and its reliance on GDP per capita as a major macroeconomic indicator appears to be most applicable, especially taken as a measure of economic performance in a given national economy. Nevertheless, problems emerge when international comparisons come into play, giving way to real macroeconomic indicators instead of the nominal ones. However, even adjusted for purchasing power parity (PPP), macroeconomic indicators of per capita GDP often do not reflect the reality as accurately as one would expect or require for proper macroeconomic analysis. Other macroeconomic indicators, including those that come from the realm of economic development, become of a high value, including in quantitative analysis.

Sustainability, Inequality, and Human Development One of the key points in the discussion on the differences between economic development and economic growth is that economic development is traditionally applied to developing countries, also commonly referred to as underdeveloped nations. This approach binds the discussion about economic development primarily to poor and highly populated countries of Sub-Saharan Africa and South-East Asia, and broader, to Africa, Asia, and Latin America. Another aspect of this duality is in the attribution of social problems and issues to economic development rather than economic growth. For instance, access to clean water, secondary and tertiary education, health services, food security, and even national and personal security are included in economic development. Human development—being itself composed of several indicators—is traditionally considered as one of the key components of economic development. While economic development analysis is applied to the developing countries, the tools of economic analysis come from economics.

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This economic theory is developed in the developed countries. Furthermore, Macroeconomics as a distinct economic discipline is traditionally based on principles of economic growth rather than economic development. Economic growth is more specific and more concentrated as an expression of the purely economic situation in a given country, while economic development is more inclusive and equally so more flexible in terms of definitions and measurements. It may appear that economic development naturally includes economic growth. At the same time, economic growth measured in terms of GDP per capita growth can coincide with digressions in human development. This may happen, among other reasons, due to the growing inequality in income distribution, so characteristic of the post-Soviet Russia. GDP per capita is an aggregated average macroeconomic indicator, while higher level of income inequality may lead to a decrease in the aggregated average level of human development, observed during the transitional economic crisis of the 1990s. Robert Barro (2000) examines economic data from a broad panel of countries and reports little overall relation between income inequality and rates of economic growth and investment. At the same time, the author finds a negative relationship between rates of economic growth and investment and level of income inequality in low-income countries. It appears that there is an indication that income inequality retards economic growth in poor countries, but encourages economic growth in wealthy countries. Barro (2000) observes that economic growth tends to fall with greater inequality when per capita GDP is below around US$2,000 and to rise with inequality when per capita GDP is above US$2,000. In his cross-country analysis, US$2,000 emerges as a threshold. Somewhat contradictory to Barro’s (2000) findings, Sokoloff and Engerman (2000) find that countries with greater income inequality had lower economic growth, but countries with lower initial inequality grew faster over time. The authors apply a broader historical perspective and start from the nineteenth century, with the scope being worldwide. Based on their findings, Argentina, for instance, is one of those countries with greater levels of income inequality that historically demonstrates lower rates of economic growth. On the contrary, the example of Soviet Russia would point to low levels of income inequality, at least officially proclaimed during the socialist era. It would be possible to speculate that economic development is more of a process, while economic growth is more of a result. While the former

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is usually expressed in the set of complex economic and non-economic indicators, the latter is demonstrated with the help of a clearly defined macroeconomic indicator, that is, per capita GDP. At the same time, an equally valid may be the discussion that considers economic development as a result, accounting for achievements in human development, social environment, standard of living, and such. Such a discussion would also regard economic growth as nothing but a continuing process of annual changes in per capita GDP. Both of these approaches are equally credible and may serve a purpose of improving the understanding of economic development and economic growth, including in the post-Soviet Russia. The solution to this imaginary dichotomy lies not in the realm of these two determinants—economic development or economic growth—but in the process of analysis itself. For instance, economic growth, and more specifically, achieved level of real GDP per capita, may be considered as a basis and necessary ground for further economic development. Very frequently, advancements in the nation’s development, including access to education, health services, and even level of democracy, are explained by economic growth. This usual or routine explanation may be considered as a well-grounded orthodox approach, when growing economic well-being supports broader betterment of the society. In search for causes of economic growth, social and economic indicators are used as contributing factors. For instance, number of physicians per certain number of population, access to medical services, literacy rate, enrollment in higher education institutions, and other indicators of human development may play a crucial role in initiating and maintaining sustainable economic growth. Some of these factors, and primarily access to education and health care, facilitate the formation of human capital utilized in production. In the post-Soviet Russia, quality of health care and education remains an issue. A good example of human capital use would be the role of unemployment in economic growth. Unemployment is considered as a social problem, as an obstacle for economic growth, and as a number of people who are not currently in the workforce and thus do not contribute to societal production. Similarly, education may be considered as an indicator of human capital accumulation or an indication of human development. To sum up, it appears that the concept of economic development anticipates production for humans, while economic growth considers humans as a resource to be used in production.

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Access to health care and education, along with other indicators of literacy and involvement in social life are recognized as indicators of the level of development, including both human development and economic development. For instance, measures of welfare progress, offered by Morris (1961), include such indicators as the number of physicians per 100,000 population, number of college students per 100,000 population, and newspaper circulation per 100,000 population. Morris (1961, p. 15) asserts that these indicators “reflect, roughly, the health standards, educational effort, and general literacy at a level sufficient to read newspaper (and afford one).” The scholarly literature on economic growth has examined other issues that are important to the understanding of the growth fundaments and processes. It may be useful to highlight at least some of this research and scholarship. First, within the broad discussion of exogenous versus endogenous economic growth, the reader can find the following research to be of high interest: Bachmann and Moscarini (2011), Barro (1997), Barro and Sala-i-Martin (1999), Bernanke and Gürkaynak (2001), Grafts (1995), Johansen (1959), Kelly and Hageman (1999), Kendrick (1976), Vanek (1968), and Von Neumann (1946), who reconsiders the British industrial revolution in a historical perspective while standing on positions of both exogenous and endogenous theories of economic growth. There is also a particularly noteworthy research on the effects of inequality on economic growth (Barro, 2000; Easterly, 2001; Gould et al., 2001; Sokoloff & Engerman, 2000); institutional structure and economic growth (Barro, 1997; Benhabib & Spiegel, 2000; Bleaney & Nishiyama, 2002; Durham, 1999; Ghost, 1999; Lal, 2000; Lensink & Kuper, 2000); human capital and economic growth (Acemoglu, 1996; Aghion & Howitt, 1998a, b; Berthelemy et al., 2000; Black, 1962; Galor & Tsiddon, 1997; Kalaitzidakis et al., 2001; McDermott, 1999; Mincer, 1996; Romer, 1986, 1989a, b, 1990a, b, 1994; Ruth, 1998; Schultz, 1963, 1970, 1981, 1990, 1993; Scott, 1989; Zagler, 1999); health, mortality and economic growth (Acemoglu & Johnson, 2007; Aghion et al., 2010; Bhargavaa et al., 2001; Chakraborty, 2004; Kalemli-Ozcan, 2002; Weil, 2007), and economic growth in the post-Soviet Eurasia (Havrylyshyn, 1999, 2007). There is no shortage of scholarly literature on the nexus of human capital and economic growth, with the most research produced over the last four decades. While the positive role of well-functioning institutions and human capital in economic well-being and economic growth

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worldwide is undeniable, the issue is left mostly unattended by scholars in Russia and other former Soviet republics. There are a few studies in the West that address this issue. For instance, Pasquale Tridico (2007) investigates the question of whether human development was concurrent with economic growth during the transition toward the market economy in Central and Eastern Europe and the former Soviet Union. His main hypothesis is that economic growth is not always concurrent with human development. Tridico (2007) uses simple Ordinary Least Squares (OLS) regression analysis, searching for a possible correlation between human development variables and GDP per capita. The author suggests that in transition economies human development is a sufficient but not a necessary condition required to initiate economic growth. According to the author, Granger causality test used in the regression analysis confirms this finding. Tridico (2007, p. 592) concludes that, “investing in human development is crucial for obtaining GDP growth. However, since human development is strictly correlated with institutions, appropriate institutional policies are crucial to a development process.” This conclusion once again highlights the importance of institutionalism as a framework and institutions as a supporting structure for initiating sustainable economic growth in the industrialized Russian economy.

Sustainable Economic Growth At present, there is a broad spectrum of approaches employed by scholars in addressing the issue of sustainable economic growth These approaches are conceptual, technical, quantitative, historical, and evolutionary. Galor and Omer (2002) develop an evolutionary growth theory that captures the interplay between the evolution of mankind and economic growth. The authors suggest that, “the struggle for survival that had characterized most of human existence generated an evolutionary advantage to human traits that were complementary to the growth process, triggering the takeoff from an epoch of stagnation to sustained economic growth” (Galor & Omer, 2002, p. 1). From huge and resource-consuming economies, such as that of China, to small and resource-exporting economies, such as that of Mongolia, sustainable economic growth becomes more of a target than just a wish. The major focus in the concepts of sustainable economic growth is usually on the environment, natural resource depletion, resource dependency,

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and economic footprint on the ecology and climate. Other focuses are on such determinants as economic instability, economic and financial crises, unemployment, inflation, price volatility, poverty, and negative rates of economic growth. There are also combinations of any of these determinants. These combinations include, for instance, clean energy investment and financial development (Zahoor et al., 2022), and transitioning from natural resource boom to sustainable economic growth (Li et al., 2017). These areas and combinations point to economic stability and sustainability and—either directly or through poverty alleviation—relate to sustainable development and correspond to sustainable development goals. Sustainable development usually allies to both developed and developing countries. Not all industrialized nations are environmentally friendly, and many contribute significantly to climate change. In discussions of sustainable economic growth, the focus is usually on developing or underdeveloped countries. Poverty alleviation topic within sustainable development and growth is a good example of this focus. Sustainable economic growth is not as broad of a term as sustainable development. Thus, it is important not to confuse sustainable development with sustainable economic growth. There is some confusion around the use of terms sustained economic growth versus sustainable economic growth. Specifically, sustainable would generally mean economic growth capable of being sustained. In general, however, these two terms may be used in the scholarly economic literature interchangeably. Logically, sustained economic growth would mean economic growth maintained at a certain rate at the length of a certain period of time without any significant interruption. Sustainable economic growth would imply that the national economy has achieved economic growth which is capable of being sustained. In this way, sustained economic growth indicates the country’s efforts to maintain positive rates of economic growth. At the same time, the country that has achieved sustainable economic growth would have to continue its efforts in transforming it into sustained economic growth. Sustainable economic growth is a goal of each and every developing or underdeveloped economy. For instance, Galor (2005, p. 171) points out regarding the sustained economic growth the following: The hurdles faced by less developed economies in reaching a state of sustained economic growth would remain obscured unless the origin of the transition of the currently developed economies into a state of sustained

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economic growth would be identified, and its implications would be modified to account for the additional economic forces faced by less developed economies in an interdependent world.

Sustainable may be defined as something not harmful and continuous. Sustainable means able to be maintained at a certain rate or level for a continuous period of time. In this sense, sustainable economic growth may be interpreted as continuous or stable economic growth that is not harmful to humans or the environment. Sustainable does not mean selfsufficient, and thus sustainable economy does not mean self-sufficient economy that eliminates the need for international trade and capital flow, nor does sustainable economic growth mean self-sufficiency in terms of resource input. As compared to broad definitions of sustainable development and economic development, sustainable economic growth may be narrowed down to a stable low-volatility national economy offering a favorable business environment in the long run. At the same time, annual rates of this sustainable economic growth may be low both in the short run and in the long run, especially when adjusted for inflation. In this sense, economic stability may be a result or a manifestation of economic sustainability. Studies of sustainable economic growth are oftentimes country related or region specific. The countries to which it is related in scholarly works are usually developing countries. At the same time, it should be noticed that the concept of initiating or maintaining sustainable economic growth does not concern exclusively developing countries. Developed countries also need a pathway to either achieve or restore sustainable economic growth. Stiglitz (2016) has outlined an agenda that would enable the US economy to restore robust equitable and sustainable growth. This agenda includes such strategic items as climate change, infrastructure and technology, ending austerity, fighting inequality, reforming the financial sector, structural transformation, and reforming global financial architecture. It is hard to deny the broadness of the scope of the targeted areas and suggested changes in this strife for sustainable economic growth. Uncertainty is the antipode of sustainable economic growth. Economic volatility, instability, and uncertainty confront stability and sustainability in the national economy. The role of uncertainty in a national economy and its possible impact on the rates of economic growth, cyclic development, and economic crises attracts attention of the economists and policymakers. Starting with Bernanke’s (1983) work on economic uncertainty and

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cyclical investment, the issue of economic uncertainty in macroeconomics gains momentum. Scholars addressed such aspects and issues of economic uncertainty as uncertainty and business activity in macroeconomic analysis (Bachmann et al., 2013), possible negative impact of uncertainty on rates of economic growth (Baker & Bloom, 2013), econometric analysis of the negative impact of uncertainty shocks on the national economy (Bloom, 2009), and economic fluctuations in uncertainty (Bloom, 2014). Nakamura et al. (2017) apply macroeconomic cross-country analysis in their study of economic growth rate and uncertainty shocks in consumption. Scholars also address measuring issues in economic uncertainty (Jurado et al., 2015) and in economic policy uncertainty (Baker et al., 2016). Historical data is also used for studying economic uncertainty and its negative effect on the rates of economic growth. For instance, Ng and Wright (2013) use lessons drawn from the Great Recession for forecasting and macroeconomic modeling. A significant block of scholarly works and empirical studies focuses on the negative impact of resource orientation or resource-driven trade on developing countries. Such exclusive specialization in primary goods, also called resource curse, characterizes developing or underdeveloped economies. Sachs and Warner (1997), Auty (2000, 2001), and Collier and Dehn (2001) investigate how extraction and trade in natural resources affect economic growth and development, based on Prebisch’s (1959) thesis of a “decline in the terms of trade between industrialized and non-industrialized countries, volatile export earnings and low productivity” (Mania & Rieber, 2019, p. 140). Other studies, such as those by Agosin (2007), Agosin et al. (2012), Lederman and Maloney (2006, 2012), and Naudé and Rossouw (2011), directly test the relationship between export diversification and economic growth. The results of these studies use different clusters of countries and demonstrate that export diversification contributes to positive rates of economic growth in developing countries. Similar results are reported by the International Monetary Fund (IMF, 2014a, b, 2015, 2017). Mania and Rieber (2019) offer a theoretical framework that makes it possible to identify the required conditions for export diversification for long-run sustainable growth. They use the lessons from the model to analyze, for the period of 1995 to 2015, the impact of export diversification on the sustainable economic growth in three regional clusters

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of developing countries. These are countries from Latin America, SubSaharan Africa, and Developing Asia. The authors note that these three regions experience very contrasting levels and changes in their export composition. The results of econometric analysis allow Mania and Rieber (2019) to assess, for each of the three groups of countries, the nature of these evolutions for the long-run economic growth. The authors conclude that global value chains integration enables countries to broaden their export composition and rapidly industrialize their economies. At the same time, this global value chains integration does not necessarily lead to transformation of the economic structure favorable to sustainable economic growth in the long run.

Concluding Remarks The topic of economic growth is usually linked to the issue of economic development. For scholars, economic growth is more specific and more concentrated an expression of the situation in a given national economy, while economic development is more inclusive. Economic development comes in terms of poverty reduction, equity, equality, and human development. Positive economic growth not necessarily results in higher levels of human development, social cohesion, and personal well-being. The positive role of well-functioning institutions and human capital accumulation in economic growth and development worldwide traditionally receives a fair share of scholarly attention. At the same time, this issue is left mostly unattended by Russian scholars. The transition from economic stagnation to growth and further to sustainable economic growth is characteristic of developing countries transformed into industrialized economies. As a result of massive industrialization, a technologically driven demand for high skilled labor, and thus human capital, emerged in developed countries. Along with this demand emerged the need for extensive human capital formation. Human capital, while being endogenous to the system of production, does not depend on the degree of exploitation or depletion of natural resources. Accumulated human capital may be used in production for decades as embedded in an educated and skilled worker and thus makes the national economy move on the path of sustainable economic growth.

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CHAPTER 5

Economic Crises and Sustainable Growth in Russia

Economic and Financial Crises Both national and global economic and financial crises are regarded as arch-nemesis of economic development, because they have negative social, political, and economic consequences and certainly slow down— and sometimes reverse—economic development and socio-economic progress in general. Global economic and financial crises are capable of converting positive trends in a given national economy into the negative ones. Furthermore, economic and financial crises serve as natural obstacles for sustainable economic growth. Thus, the consideration of the negative consequences caused by global economic and financial crises for the Russian economy may be important. During the studied period of the post-Soviet development, the Russian economy suffers of three major economic and financial crises. These include the world financial and economic crisis of 1997–1998, global economic and financial crisis of 2008, and economic and financial crisis of 2014. The negative consequences of these three crises for the Russian economy prevent a rapid post-transitional shift to initiating sustainable economic growth in the country. Not less important is the recovery of the Russian economy from the negative consequences of the world economic and financial crises. Gavrilenkov (2002, p. 13) points out that:

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As shown by the most recently published data of the Russian Central Committee on Statistics (Goskomstat), the country’s GDP increased by 14.1% and industrial output increased by more than 24% over the period of 1999 and 2000. In 2000, GDP grew 8.3%. Thus, at the end of 2000 the seasonally adjusted GDP slightly exceeded the level in early 1994. Industrial output grew over 10% in 2000, and fixed investments grew over 17%. The rapid growth of investment was one of the most impressive results of the fast recovery. Consumption also grew steadily in 2000; thus retail sales expanded 8.9%, well behind the growth of real disposable income, which increased 9.1% in 2000 over 1999.

The author suggests that the major factors contributing to the high rates of economic growth after the August 1998 economic and financial crisis in Russia include national currency devaluation resulting in import substitution, low domestic energy prices that are not allowed to grow as fast as inflation, and high world market oil prices that contribute to substantial foreign currency inflows into the country. The 1998 devaluation contributes to a substantial decrease of household incomes, while increasing corporate incomes, which in turn results in high investment growth rates. Gavrilenkov (2002, p. 14) stresses that Russia’s newly emerged corporate sector does not fully use favorable conditions for business right after the 1998 world economic and financial crisis as an opportunity to invest in the country. Nevertheless, the Russian economy achieves high growth rates even against the background of continuous capital outflows that roughly accounted for nearly one-tenth of the country’s GDP in both 1999 and 2000. The author suggests that this may be used as a proof that the rapid recovery from economic and financial crisis in 1999–2000 occurred mostly due to natural reasons, such as the national currency devaluation against the US$ and/or the world market oil prices hike, but not as a result of any strategy of the Russian government. Gilman (2010) studies the 1998 financial default in Russia as the chain of interconnected economic and political events. The author argues that the August 1998 default of the Russian government on its domestic financial obligations, also known as GKOs, and the economic collapse that followed the default, could have been avoided. A series of missteps eventually made the financial crisis unavoidable, but its aftermath helped the Russian economy to adjust and become better prepared for the global financial crisis of 2008. In his analysis, Gilman (2010) follows through the 2000s and refers to the economic and political events

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of 2010. Åslund et al. (2010) point out that Russia has to demonstrate a special effort in order to overcome the consequence of the 2008 economic and financial crisis. This world economic crisis caused poor performance of the national economy. Myant and Drahokoupil (2011) delineate four stages of the 2008 financial and economic crisis. These four stages include the credit crunch, the demand slump, further downward pressures, and the financial and solvency crisis. The authors assert that, “Predicting the future would be hazardous, particularly after neither the form taken by the ending of the state Socialism nor the nature and effects of the crisis of 2008 were widely predicted” (Myant & Drahokoupil, 2011, p. 332). It is hard to disagree with such an assertion given the less-than-predictable character of changes that have taken place in the Eurasian region over the last century as well as in the present century. Not a single scholar of Russian studies was able to predict the Soviet Union collapse, scrambling instead to write on how it collapsed post factum. With the post-Soviet region becoming more heterogeneous and most certainly more volatile, any predictions regarding its economy and politics would become even less reliable, while their validity—more arguable. Viktorov and Abramov (2020, p. 506) conclude that, The implementation of the reform agenda within the Washington Consensus framework, as promoted by IFIs in the early 1990s, made most of the economy’s productive sectors uncompetitive. Hydrocarbon export revenue remains the primary source of international liquidity that potentially can be transformed into domestic investments and government spending. Yet this potential has not been fully utilised. During the early years of transition, the Russian banking sector underwent the process of financialisation; the relational banking that otherwise could provide credits to NFCs has been destroyed. Under this financialised structure, the state’s supply of large and ongoing liquidity flows became an additional destabilising force on the currency value.

Vavilov (2010) offers a good and thorough account of the financial metamorphoses of the post-Soviet Russia placed in the broader context of radical economic changes. The author resorts to a standard Western approach: a doomsday scenario for the Soviet system. Based on this initial premise, he tries to convince a reader that everything that happens after the Soviet Union disintegration should be regarded as positive by default.

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In his view, if the reforms had not occurred, this agony would eventually turn into a complete economic and political collapse. Vavilov (2010, p. 14) starts from justifying the reforms: The centralized planned system could have collapsed as early as the end of the 1970s, if the new stock of energy resources in West Siberia had not been discovered and utilized. This ‘manna from heaven’ gifted 15 years of life to the socialist system, while the generous external debt financing of the 1980s helped to continue its agony for several more years.

Vavilov (2010, p. 55) points to the problem of non-payments, barter transactions, and wage arrears, so typical for the Russian economy of the 1990s: “The problem was that banks benefited from high inflation and had strong incentives to delay payments for weeks or even months.” One should add that not only banks benefited from delaying payments. Socalled red directors that come from the Soviet era benefited as well. Wage arrears meant extra cash for turnover on the bank accounts of enterprises. Besides, these same newly established commercial banks were nothing else but a creation of large Soviet enterprises. They were created by the directors in order to syphon off cash from the enterprises. Simply put, they acted parasitically. Vavilov (2010, p. 91) admits the failure of the state to fight wage arrears. Gilman (2010) presents some interesting observations and reminders, which Western scholars and politicians generally avoid. For instance, Gilman (2010, p. 37) offers a passage on the Western financial aid to Russia that reminds one of a long uncovered economic cost-benefit analysis: The total amount of loans and grants distributed to Russia as a sovereign borrower (other than short-term trade credits) from 1992 to the end of 2002 only amounted to US$20 billion, or about US$2 billion a year on average… Yet the so-called peace dividend to Western nations stemming from the end of the cold war was a significant multiple of this amount. Aslund calculates that the accumulated peace dividend for the United States alone in the 1990s amounted to US$1.4 trillion.

Gilman (2010, p. 178) argues with Soros and post factum confronts his plan on handing Russia fifteen billion US dollars by the G-7 in order to help the Russian government defend its currency:

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Soros, in my view, started the stampede for the exit: there was no way back, even though his proposed solution was totally unrealistic. A currency board in Russia’s circumstances was nonsense since there was neither the political will nor the administrative capacity to implement the policies that would be required.

The role of the state in mitigating the negative impact of the crisis on the national economy in Russia remains arguable. According to Gavrilenkov (2002), the Russian government does not play any significant role in overcoming the negative consequences of the 1998 world economic and financial crisis. The Russian government has no effective anti-crisis economic strategy. The author suggests that positive changes in the national economy do not occur as a result of a government strategy, “Even despite the announcement of such a strategy by the government during the middle of 2000. In fact, it looks as if the strategy’s implementation lagged well behind its publication” (Gavrilenkov, 2002, p. 14). Another interesting and indeed very useful reminder, given by Gilman (2010, p. 264), is that Russia is the world’s prime destination for immigrants, next only to the United States. This reminder would be of particular value to those numerous Western politicians and scholars, who truly believe that Russians try to escape to the West, and that no one wants to come, reside, live, and work in Russia because of the economic hardship, authoritarian regime, and systemic corruption. Such perceptions are misleading and detrimental to Russia’s image on the world scene. The region’s labor market is what really partially compensates for the disintegration of the USSR and unites the CIS countries. All these unfortunate events and phenomena that take place in Russia have a set of economic explanations and terminology. Unemployment and low capacity utilization are supplemented with the oil-based resource curse. Shinichiro Tabata (2009) investigates the impact of the 2008 global financial and economic crisis on the mechanism of economic growth in Russia. The author concludes that the sharp drop in national production in 2008 and the first quarter of 2009 should be attributed mostly to liquidity problems and declines in the price of oil on the world market.

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Fossil Fuel Dependency and Revenue The connection between the abundant stock of natural resources and economic growth as related to Russia is also addressed by Gylfason (2002). The data on end-period proven petroleum reserves in Russia also appears very promising. End-period proven petroleum reserves in Russia exceeds 63 billion barrels in 1998, reaching 69 billion barrels in 2000. In 2003, end-period proven petroleum reserves are marked at 79 billion barrels. The rise in end-period proven petroleum reserves in Russia continues and stays around 85 billion barrels from 2006 to 2012 (Economist Intelligence Unit, 2021; RosStat, 2021). It follows from the data that the volume of proven petroleum reserves in Russia is abundant and continues to grow despite the large-scale annual extraction and export. The dynamic of the oil production in Russia during the studied period points to an extremely sharp decline during the transitional socioeconomic crisis of the 1990s. Simply put, the “oil pit” on the graph coincides with the period when the Russian economy finds itself stalled in the poverty trap. The dynamic of crude oil production in Russia, taken as average of thousand barrels per day, during the period from 1980 to 2022, is depicted in Fig. 5.1. A significant and continuous flow of revenues in hard currency, received from the export of natural resources, appears to be the main guarantor of economic growth and anti-crisis strategy for the present Russia. Hass (2012) reconsiders Russia’s moral economy of security, formulated as the “dictatorship of law,” while considering the economic and financial crisis of 2008 as a test for the new moral economy. The author points out the state grasp over the country’s exceptionally rich natural resources, suggesting that, “Gazprom, Rosneft, and Rostekhnologiia were important means through which the state could reorganize support, and increase political control over key sectors (hydrocarbons and the military-industrial complex)” (Hass, 2012, p. 214). In Russia, state bureaucrats regularly switch chairs with the corporate management. Top politicians and their offspring occupy places on corporate boards of directors. Russia’s largest state-owned corporation, Gazprom, declared the highest profit among the world’s largest companies in the post-crisis year of 2011. Gilman (2010) says that an economy oriented on export of oil may not be sustainable, especially in the long run, and suggests cutting budgetary

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14000 12000 10000 8000 6000 4000 2000 0

Petroleum production (b/d) RUPETP

Fig. 5.1 Crude oil production in Russia, average thousand barrels per day, 1980–2022

spending in order to avoid a possible new debt crisis. The choice of a development model may be crucial for Russia when it comes to sustaining a steady and relatively high rate of growth. So far, the extraction of natural resources remains a very capital-intensive sector of the Russian economy. The author concludes that investment should be channeled to sectors of the national economy with higher productivity and higher value-added output. Gel’man and Marganiya (2010) study the impact of oil and gas abundance on political, economic, and social developments of Russia and other post-Soviet states, including Kazakhstan and Azerbaijan. The study systematically examines various effects of resource curse in different arenas such as state building, regime changes, rule of law, property rights, policymaking, interest representation, and international relations in theoretical, historical, and comparative perspectives. The authors analyze the role of oil and gas dependency in the course of the evolution and subsequent collapse of the Soviet Union. According to Gel’man and Marganiya (2010), the majority of scholars agree that the influence of the oil and gas abundance on the economic, political, and social processes in the most countries is primarily negative, pointing to the resource curse concept.

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Of more recent studies of the Russian economy, Dobler and Hagemann (2015) combine institutions, natural resources, and economic growth in studying transition processes, while using the case of Russia. However, most studies of the Russian economy address the fossil fuel dependency and revenues or the country’s political economy, or the political economy of the fossil fuel dependency and revenues. At the same time, there is a clear lack of theoretical and quantitative studies of economic growth in Russia, including its causes, grounds, resources, main directions, potential, and opportunities. A true response to economic and financial crises in the long run would be initiation of sustainable economic growth. This may be true for the Russian economy as well. Sustainable economic growth and development may also be a solution for the oil-dependent economy. Economic dependency on fossil fuel generated revenues also known as a resource curse is considered as an antipode of sustainable economic growth. This in turn makes the economy dependent on prices volatility, international markets, and vulnerable to economic crises. Gilman (2010) addresses the economic crises in Russia, linked with finance and foreign currency exchanges, prices on oil and gas, and the Russia’s politics and politicians. Russia’s resource curse has become a textbook maxim, retaining the status of a most common characteristic of the national economy. Revenue imperatives and resource dependency is also addressed in Easter (2013) and Robinson (2013). As Gel’man and Marganiya (2010) point out regarding the resource curse, by the end of the 2000s, the term itself becomes so widespread that it becomes an immanent part of the scholarly language of the social sciences, when it comes to the post-Soviet transition. The term resource curse finds its firm ground in political and media discourse, effectively replacing such terms as modernization in the early 1960s and transition in the early 1990s. According to Gel’man and Marganiya (2010), the aggravation of many problems in the global economy and politics, against the background of the growing oil prices in 2004–2008, became the environment for academic and public debates about the role of natural resources in general, and oil and gas in particular, in economic development of different countries.

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Transition to Sustainable Growth Transitioning post-Communist societies in general and Russia in particular inherited a planned economy from the disintegrated Soviet Union. The national economies that emerged from the socialist economy were not at the level of developing or underdeveloped countries, but at a much higher level economically. The Soviet economy had relatively strong macroeconomic indicators even decades prior to the stage of economic transition of the 1990s. According to the data presented in RosensteinRodan (1961), per capita income of the USSR in 1961 was equal to US$986, as compared to US$2790 in the United States. At the same time, the Soviet economy was able to produce per capita income on par with the developed nations, such as Switzerland with US$1010, Sweden with US$950, and Belgium with US$800. Countries in Eastern Europe had an average income per capita of US$850. Developing or underdeveloped countries with large population had drastically smaller per capita income than did the USSR. For instance, per capita income in India in 1961 was equal to only US$140 and in China US$167. The data by Rosenstein-Rodan (1961) is presented with the per capita income translated into an estimate of the equivalent purchasing power of US dollars in the United States. Snooks (1999) suggests that the deficiency of the Soviet system was in that it was nonstrategic and thus, what it needs is not an institutional transition per se, but the strategic transition. Snooks (1999, p. 83) points out that, Transition involves a dismantlement of the institutional apparatus of centralized government planning, control, and production in favor of freely operating commodity and factor markets and the primacy of individual enterprise. Essentially, transition is conventionally interpreted as a complete change in a society’s economic and political institutions.

The ideas of public spending and foreign investment as major engines of economic growth, especially in developing nations, are now replaced with the ideas about the importance of reinvestment of profits and development of domestic market. The theories of economic growth based on the fundamental assumption that a significant influx of the external resources is necessary to initiate sustainable economic growth do not

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hold. They might work to a certain degree in the developing or underdeveloped countries, but appear to be insufficient to explain economic growth in Russia. There is never a shortage in scholars who are dissatisfied with the government’s economic policies, especially when it comes to overcoming economic crises. Neither state policies toward the business in helping it to overcome the negative consequences of the 1998 world economic and financial crisis, nor the business climate observed after the crisis satisfy Gavrilenkov (2002, p. 14). The author stresses that, Most likely the high investment growth rate was not a result of an improved business climate, but it arose out of high corporate profits generated mostly in export-oriented sectors. As a matter of fact, many other indicators show that the business climate in Russia was far from perfect. Thus in 2000, foreign direct investments in Russia (USD 2.7 bn) decreased relative to the already low level of 1999. In contrast Russian legal direct investments abroad (USD 3.1 bn) grew substantially in 2000 and for the first time exceeded foreign direct investment inflows into Russia. In fact, Russia became a net exporter of legal direct investments. Official statistics also show that in 2000 the number of small and medium size businesses decreased in Russia (by roughly 1.3% relative to 1999). The output share produced by small and medium size businesses correspondingly decreased as a percentage of GDP.

Clearly, economic growth that took place in Russia in the aftermath of the painful 1998 world economic and financial crisis as a recovery for the national economy can by no means be characterized as a form of sustainable economic growth. It appears that this growth was nothing more than a recovery, when the Russian economy bounced back with private businesses regaining their positions. This follows from Gavrilenkov’s (2002, p. 14) estimates of the post-crisis economic recovery: Furthermore, growth rates slowed during the second half of 2000, first in industry, and then in the overall GDP as well (see Graph 1.1 and 1.2). Some indications of industrial output contraction could already be seen starting in September 2000. Although - according to official statistics - the output contraction stopped in early 2001, there are no clear indications yet that the economy had started growing again as rapidly as before. According to preliminary estimates by the Ministry of Economic Development and

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Trade, GDP increased roughly 4.2% (year-on-year basis) during the first quarter of 2001, mostly as a result of a much lower base in 2000.

In 2008, Russia’s Ministry of Economic Development presents a program of economic strategic development, according to which the Russian economy will no longer be reliant on oil and gas revenues starting in 2020 (Zykova, 2008). In 2020, Russian president declares that Russia is slowly getting off the oil needle, that is, addiction to revenues from oil and gas exploration (Moskovsky komsomolets, 2020a). According to the statement, revenues from the fossil fuel constitute only around 30 percent of the state budget (Moskovsky komsomolets, 2020b). One can only speculate that this smaller share of fossil fuel generated revenues in the state budget may be due to the dramatic fall in the world oil prices rather than any improvements in the structure of the national economy. Quite a few authors paint Russia as a country with a dark economic reality and grim future prospects, but Sutela (2012) is clearly not among them. He recreates the political economy of post-Soviet Russia while applying basic economic concepts and models to Russian realities. Despite some outright criticisms of the regime and the present economic system, Sutela (2012, p. 191) in general is positive toward Russia, continuously naming it a high middle-income country and also saying that, “There is a good chance that within a few years Russia might become on PPPs the single biggest European economy, bypassing Germany.” It is true that the majority of population in Russia enjoys a relatively high standard of living, higher than normally perceived in the West. Whether the country’s productivity will grow past the stage of immediate recovery from economic downturns remains an open issue, however. Brück and Lehmann (2012) conduct a quantitative study of economic and social consequences of restructuring in Russia and present extensive data analysis and regression results. The authors research the human component of economic restructuring. The volume also reflects on social implications of structural reforms in the economy, while looking into production rather than applying a purely social security paradigm. One of the most painful problems of the post-Soviet space is unemployment. The authors consider unemployment both in relation to worker quits and to displacement, juxtaposing the former with the latter. These changes with broad social implications are being considered in the context of a major economic restructuring, which add to its industrial flavor.

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Russian economy is also considered in the context of global economic processes, unions, and organizations. Åslund et al. (2010) start the discussion of Russia’s belonging to the BRIC (Brazil, Russia, India, and China). The authors express concern regarding Russia’s place in this organization due to its relatively weak economic performance. Russia, an industrialized nation for many decades, is being compared with those that still undergo the fundamental process of industrialization. Russia belongs to this pool of newly emerged economic giants and shares with them the losses of the economic plunge caused by the 2008 economic and financial crisis. Of more recent studies of Russian economy, Dobler and Hagemann (2015) combine institutions, natural resources, and economic growth in studying transition processes, while using the case of Russia. The concepts and theories of sustainable economic growth have certain implications for the Russian economy. Most of what is considered as sustainable, as applies to Russia, relates directly to sustainable economic development and has a relation to sustainable economic growth as well. Given the richness of natural resources and equally so the orientation of the national economy on natural resource exploitation, extraction, and export, Russia is expected to be environmentally friendly, not harmful to ecology, and not contributing to a rapid and harmful climate change. Sustainable economic growth in Russia does not anticipate economic growth without crises. First, a cycling economic development, typical for developed market economies, presupposes more-or-less periodical economic crises, recessions, declines in production, or economic downturns. Second—not less importantly—global economic and financial crises affect all national economies, even the most stable and sustainable ones. The Russian economy, being integrated into the world economy through international trade, investment, capital flow, and—to a much lesser extent—labor migration, unavoidably suffuses of negative consequences caused by global economic and financial crises. This negative and significant external impact affects the Russian economy as a globally integrated national economy, no matter how sustainable it may be at present or in the future. It would be incorrect—naïve, indeed—to regard sustainable economic growth in Russia as economic growth not dependent on natural resources. Being referred to as a resource curse, Russia’s dependency on natural resources is perhaps as unavoidable as its suffering of negative consequences caused by global economic and financial crises. The Russian economy benefits significantly from foreign trade, exporting raw materials

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in huge quantities for many decades. This trade may negatively impact the structure of the Russian economy, but at the same time, it guarantees a significant and continuous flow of revenue. This revenue flows come both to private businesses and to the state budget. Even if the Russian economy would be free from a significant price volatility on raw materials on the international market, this independency alone would hardly be sufficient to consider it as an economy enjoying sustainable economic growth. Nor would sustainable economic growth make the Russian economy entirely free from such a price volatility. At present, the Russian economy is tilting more to the side of raw materials dependency in terms of both production capacity and revenue streams. However, this dependency is not new, as it was characteristic of the Soviet economy as well. This dependency is unlikely to change drastically even in the long run. In order to become more sustainable, the Russian economy needs to increase the volume in production and trade in intermediary products, such as metals, instead of raw materials, such as ore. This would help to adjust the structure of the national economy even if the country does not have necessary technology and human capital to focus predominantly on the production of intermediary products, and final products or consumer products. The Russian economy would certainly benefit from changing its role in the global economy, and its main focus in the global division of functions. After the Soviet Union collapse, Russia still does not have a completely formed, well-shaped, and stable economic structure. Historically, every industrialized nation responds to the need of increasing the level of human capital in production with expediting the process of massification of higher education. This process is driven by two fundamentals: development of production and social development (see, for instance, Lindeen & Willis, 1975; Volkwein & Malik, 1997). Private businesses present demand for the skilled labor, produced in the higher education sector (Marshall & Tucker, 1992). Massification of higher education with preserving its quality brings the element of technical dynamism to the economy. Kaldor and Mirrlees (1969, p. 190) conclude that a more permanent solution requires stimulating of the technical dynamism in the national economy. This stimulation of the technical dynamism implies raising the technical progress function, which is not only—or perhaps even mainly—a matter of more scientific education and more expenditure on research, but of higher quality business management. This scientific high

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quality business management should be more alert in searching for technical improvements and less resistant to their introduction in economic production. The Soviet economy was distinct with a high savings rate. There was a high rate of capital accumulation. Also, Soviet Russia had a relatively high level of human capital involved in production. However, the problem was in its proper application in production. A lack of incentives combined with poor organizational structures led to underutilization of human capital. Moreover, a substantial amount of human capital was involved in the overdeveloped Soviet defense industry, thus bringing no return to the consumer market. The Soviet economy was distinct with low production efficiency and effectiveness. As a result, the Soviet economy may not serve as a good example of endogenous and sustainable economic growth, relying instead on the extensive use of natural resources in economic production. The use of human capital in the Russian economy remains to a significant degree attached to the defense industry with no immediate economic returns. The rearmament program, launched by the Russian government, anticipates a significant modernization of the armed forces. The allocated budget of $670 billion, which is well over one trillion US$ in terms of purchasing power parity, is appropriated by 2020. This use of human capital appears to be not essential in initiating sustainable economic growth.

Concluding Remarks The post-Soviet Russian economy faces many challenges and obstacles even 35 years after the start of the socio-economic transition from plan to market. These include obstacles for developing private farming in the agricultural sector, dependency on oil and gas revenues, and the political dysfunctions of new Russian capitalism. At the same time, the strong dependency on oil, gas, and other natural resources defines the significant role of the state in the national economy and the strong influence that the state has on economic agents. Economic and financial crises work against economic development, as they have negative social and economic consequences. Such crises slow down economic growth and can even reverse major economic development trends. Economic and financial crises serve as natural obstacles for sustainable economic growth. During the studied period of the

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post-Communist transition, the Russian economy suffers of three major economic and financial crises. These crises take place in 1997–1998, 2008, and 2014. The negative consequences of these three crises for the Russian economy prevent a rapid post-transitional shift to initiating sustainable economic growth in the country. The relatively rapid economic growth that takes place in Russia after the 1997–1998 world economic and financial crisis as a recovery for the national economy can by no means be characterized as a form of sustainable economic growth. This growth was a recovery, when the Russian economy started recovering from both the negative consequences of the 1998 economic and financial crisis and the overall transitional crisis of the 1990s. Economic dependency on fossil fuel generated revenues also known as a resource curse is considered as an antipode of sustainable economic growth. This in turn makes the economy dependent on prices volatility, international markets, and vulnerable to global economic and financial crises. At present, the Russian economy, oriented on export of oil, gas, and other natural resources may not be sustainable, especially in the long run. Simply cutting state budgetary spending in order to avoid a possible new debt crisis does not appear as a sufficient and credible solution. The choice of development model may be crucial for Russia when it comes to sustaining a steady and relatively high rate of economic growth. Instead of focusing predominantly on the extraction of natural resources, the Russian economy should be focused on sectors of the national economy with higher productivity and higher value-added output. The significant and continuous flow of revenues from the export of natural resources appears to be the main guarantor of economic growth and anti-crisis strategy. At the same time, a true response to economic and financial crises in the long run for Russia would be the initiation of sustainable economic growth. Sustainable economic growth and development may also be a solution for the oil-dependent Russian economy. Simply put, instead of exporting massive amounts of natural resources, the Russian economy should invest more in industries that use these natural resources to produce consumer products. For that to happen Russia would have to invest in human capital and technologies. The ideas of public spending and foreign investment as major engines of economic growth, especially in developing nations, are now replaced with the ideas about the importance of reinvestment of profits and development of domestic market. The theories of economic growth based

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on the fundamental assumption that a significant influx of the external resources is necessary to initiate sustainable economic growth do not hold. They might work to a certain degree in the developing or underdeveloped countries, but appear to be insufficient to explain economic growth in Russia.

References Åslund, A., Guriev, S., & Kuchins, A. (Eds.). (2010). Russia after the Global Economic Crisis. Peterson Institute for International Economics. Brück, T., & Lehmann, H. (Eds.). (2012). In the Grip of Transition: Economic and Social Consequences of Restructuring in Russia and Ukraine. Palgrave Macmillan. Dobler, C., & Hagemann, H. (2015). Institutions, Resources and Economic Growth in Transition Processes: The case of Russia. In M. Baranzini, C. Rotondi, & R. Scazzieri (Eds.), Resources, Production and Structural Dynamics (pp. 232–258). Cambridge University Press. Easter, G. (2013). Revenue Imperatives: State over Market in Postcommunist Russia. In N. Robinson. (Ed.). (2013). The Political Economy of Russia (pp. 60–85). Rowman & Littlefield. Economist Intelligence Unit. (2021). Economist Intelligence Unit Database. Bureau van Dijk Electronic Publishing. Gavrilenkov, E. (2002). Achievements or Missed Opportunities: Factors of Economic Growth in Russia. What Lessons are Relevant to Ukraine. In S. Cramon-Taubaden, & I. Akimova (Eds.). Fostering Sustainable Growth in Ukraine (pp. 13–27). Physica-Verlag. Gel’man, V., & Marganiya,O. (Ed.). (2010). Resource Curse and Post-Soviet Eurasia: Oil, Gas, and Modernization. Lexington Books. Gilman, M. (2010). No Precedent, No Plan: Inside Russia’s 1998 Default. MIT Press. Gylfason, T. (2002). Natural Resources and Economic Growth: What is the Connection? In S. Cramon-Taubaden, & I. Akimova (Eds.), Fostering Sustainable Growth in Ukraine. Physica-Verlag. Hass, J. (2012). Rethinking the Post-Soviet Experience: Markets, Moral Economies and Cultural Contradictions of Post Socialist Russia. Palgrave Macmillan. Kaldor, N., & Mirrlees, J. (1969). A New Model of Economic Growth. In J. E. Stiglitz & H. Uzawa (Eds.), Readings in the Modern Theory of Economic Growth (pp. 384–402). MIT Press. Lindeen, J., & Willis, G. (1975). Political, Socio-economic, and Demographic Patterns of Support for Public Higher Education. Western Political Quarterly, 28(4), 528–541.

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Marshall, R., & Tucker, M. (1992). Thinking for a Living: Education and the Wealth of Nations. Basic Books. Moskovsky komsomolets. (2020a). Putin zayavil, chto Rossiya slezla s neftyanoy igly [Putin said that Russia Got Off the Oil Needle]. Moskovsky komsomolets, December 17, 2020. Retrieved October 12, 2021, from https://www.mk. ru/economics/2020/12/17/putin-zayavil-chto-rossiya-slezla-s-neftyanoyigly.html Moskovsky komsomolets. (2020b). Press-konferentsiya Putina 2020: onlayntranslyatsiya [Putin’s Press Conference 2020: Online Broadcast]. Moskovsky komsomolets, December 17, 2020. Retrieved October 12, 2021, from https:/ /www.mk.ru/politics/2020/12/17/bolshaya-presskonferenciya-putina2020-onlayntranslyaciya.html Myant, M., & Drahokoupil, J. (2011). Transition Economies: Political Economy in Russia, Eastern Europe, and Central Asia. Wiley. Robinson, N. (Ed.). (2013). The Political Economy of Russia. Rowman & Littlefield. Rosenstein-Rodan, P. (1961). International Aid for Underdeveloped Nations. Review of Economics and Statistics, May, pp. 22-38. RosStat. (2021). The State Committee of Statistics of the Russian Federation. Moscow: RosStat. https://rosstat.gov.ru/ Snooks, G. (1999). Global Transition: A General Theory of Economic Development. Macmillan Press. Sutela, P. (2012). The Political Economy of Putin’s Russia. Routledge. Tabata, S. (2009). The Impact of Global Financial Crisis on the Mechanism of Economic Growth in Russia. Eurasian Geography and Economics, 50(6), 682–698. Vavilov, A. (2010). The Russian Public Debt and Financial Meltdowns. Palgrave Macmillan. Viktorov, I., & Abramov, A. (2020). The 2014–15 Financial Crisis in Russia and the Foundations of Weak Monetary Power Autonomy in the International Political Economy. New Political Economy, 25(4), 487–510. Retrieved October 12, 2021, from https://www.tandfonline.com/doi/full/10.1080/ 13563467.2019.1613349?src=recsys Volkwein, J., & Malik, S. (1997). State Regulation and Administrative Flexibility at Public Universities. Research in Higher Education, 38(1), 17–43. Zykova, T. (2008). Dozhit’ do 2020: Cherez 12 let Rossiya soydet s “neftyanoy” igly [To Live to 2020: In 12 years Russia Will Get Off the “oil” Needle]. Rossiyskaya gazeta—Stolichnyy vypusk, (4614). Retrieved October 12, 2021, from https://rg.ru/2008/03/18/prognoz.html

CHAPTER 6

Economic Growth in Russia in the 1990s and 2000s

Economic Growth in Russia in the 1990s Economic growth in Russia may be conditionally split into three distinct stages. These three distinct stages are the 1990s, 2000s, and 2010s. The three stages of economic growth in Russia reflect the difference in economic growth trends during these three decades. Needless to say, the criteria for delineating these three stages that characterize the Russian economy are not only chronological. The main criteria include values and trends in such economic indicators as real GDP growth, private consumption, government consumption, gross fixed investment, stock-building, exports and imports of goods and services, and domestic demand, predicted or observed dynamic in these macroeconomic indicators, and estimates and values of overall economic performance. Main characteristics of these three stages in the development of the Russian economy during the post-Communist era are reflected in the data description and analysis presented below. Economic crises serve as markers for these three distinct stages. Each of the three stages ends with economic crisis and post-crisis recovery years of 1998–1999, 2008– 2009, and 2014. The crisis of 2020 and 2021, related to health issues, carries an idiosyncratic nature rather than a purely economic one. The economic data for the analysis is split accordingly to these three stages. The data reflects changes in the structure of GDP growth by expenditures in Russia. This data is presented in Tables 6.1 and 6.2. © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 A. L. Osipian, Sustainable Economic Growth in Russia, https://doi.org/10.1007/978-3-031-38874-3_6

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– −5.000 −14.500 −8.700 −12.700 −4.000 −3.550 1.279 −5.140 6.039

– – – – – – −4.763 4.682 −3.167 −2.985

– – – – – – 3.140 −2.349 1.031 3.070

Government consumption (% real change pa)

– – – – – −15.300 −19.911 −6.709 −11.720 3.683

Gross fixed investment (% real change pa)

– – – – – – −0.800 −0.300 −11.100 −4.200

Stock-building (% real change pa)

– 27.800 −20.000 −2.100 4.900 4.900 3.710 −0.629 2.055 11.406

Exports of G&S (% real change pa)

– 33.000 −35.800 −9.600 9.200 10.500 2.949 0.283 −15.484 −18.663

Imports of G&S (% real change pa)

Sources Economist Intelligence Unit (2021), the State Committee of Statistics of the Russian Federation, RosStat (2021)

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Private consumption (real % change pa)

Expenditure on GDP in Russia, real percentage change per annum, 1990–1999

Real GDP (% change pa)

Table 6.1

– 17.700 −24.700 −19.800 −20.100 −10.900 −5.300 −0.300 −13.800 −4.400

Domestic demand (% real change pa)

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10.080 5.072 4.741 7.378 7.159 6.339 8.123 8.544 5.487 −7.931

7.137 9.287 8.307 9.537 12.026 11.751 12.012 14.220 10.649 −4.996

1.986 −0.826 2.550 3.061 2.112 1.450 2.356 2.711 3.352 −0.581

Government consumption (% real change pa) 18.043 9.777 2.789 14.543 13.240 9.947 17.274 20.509 13.422 −14.957

Gross fixed investment (% real change pa) 9.700 3.000 −1.100 −0.400 1.000 0.800 1.700 2.800 1.100 −11.800

Stock-building (% real change pa) 9.570 4.105 10.126 11.122 11.689 6.360 7.205 6.222 0.757 −4.863

Exports of G&S (% real change pa)

31.644 18.784 14.682 17.418 23.160 16.512 21.107 26.043 15.042 −30.616

Imports of G&S (% real change pa)

Sources Economist Intelligence Unit (2021), the State Committee of Statistics of the Russian Federation, RosStat (2021)

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Private consumption (real % change pa)

Expenditure on GDP in Russia, real percentage change per annum, 2000–2009

Real GDP (% change pa)

Table 6.2

18.700 8.600 3.500 6.900 9.400 8.400 11.100 14.200 9.500 −16.800

Domestic demand (% real change pa)

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The macroeconomic data that characterizes the Russian economy includes real GDP growth, private consumption, government consumption, gross fixed investment, and stock-building. Real GDP, % change per annum, denotes the total percentage change in real GDP, taken over previous year. Private consumption, real % change per annum, represents the total percentage change in real private consumption, taken over previous year. Government consumption, % real change per annum, indicates the total percentage change in real government consumption, taken over previous year. Gross fixed investment, % real change per annum, marks the total percentage change in real gross fixed investment, taken over previous year. Stock-building, % real change per annum, denotes the total percentage change in real stock-building in Russia, taken over previous year. The macroeconomic data that characterizes the Russian economy also includes such variables as exports of goods and services, imports of goods and services, and domestic demand. Exports of G&S, % real change per annum, represent the total percentage change in real exports of goods and services, taken over previous year. Imports of G&S, % real change per annum, indicate the total percentage change in real imports of goods and services, taken over previous year. Domestic demand, % real change per annum, marks the total percentage change in real total domestic expenditure, including stock-building, taken over previous year, for the Russian economy. The data on the measures and components of GDP by expenditures in the Russian economy that includes real GDP growth, private consumption, government consumption, gross fixed investment, stock-building, exports and imports of goods and services, and domestic demand, is presented in Table 6.1. The first stage of economic growth in Russia clearly indicates the dominance of negative trends in economic growth. This predominant negativity is indicated by the data on the expenditure on GDP in Russia, taken in percentage points, during the period of 1990 to 1999. The data is presented in Table 6.1. The total percentage change in real GDP, taken over previous year, as a major macroeconomic indicator of economic growth, indicates that real GDP in Russia suffers significantly. As compared to 1990, real GDP in Russia falls by 5 percent in 1991. This very significant fall is followed by a truly dramatic fall of 14.5 percent in 1992. This dramatic fall in real GDP continues in 1993 with the drop

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of 8.7 percent, followed by a fall of 12.7 percent in 1994, 4 percent in 1995, and 3.6 percent in 1996. The steady trend of negative economic growth in Russia, observed throughout the transitional 1990s, is interrupted only in 1997, the precrisis year, with a real GDP growth rate of only 1.3 percent. In 1998, the year of financial and economic crisis, real GDP falls again, this time by over 5 percent. Finally, the post-crisis year, 1999, brings to the Russian economy a real GDP growth with the growth rate of slightly over 6 percent. The overall picture for the 1990s clearly points to explicitly negative economic trends reflected in the mostly negative rates of growth for real GDP. The sharp and continuous fall in real GDP in 1991–1996 lays a shaky fundament for potential economic growth, continued instead with the world economic and financial crisis of 1998, shared by Russia. Private consumption usually plays a major role in real GDP growth. As follows from the data on the expenditure on GDP in Russia, presented in Table 6.1, the total percentage change in real private consumption, taken over previous year, falls by almost 5 percent in 1996. During this period, the national economy is suffering of a significant downfall. This macroeconomic indicator then rises sharply to reach almost 5 percent in 1997. During the 1998 economic and financial crisis year, experienced by the Russian economy, private consumption as real percentage change per annum, falls by 3.2 percent. In the following year, the value of this macroeconomic indicator in Russia continues to decline, falling by another 3 percent, apparently as a result of the 1998 financial and economic crisis. In addition to private consumption, government consumption usually plays a major role in initiating and sustaining real GDP growth. In Russia, the macroeconomic indicator of the total percentage changes in real government consumption, taken over previous year, rises by over 3 percent in 1996. This rise is observed despite the national economy is suffering of a significant downfall. This seems to be the right strategy for Russia. Increasing government spending in order to increase the total consumption and support the national economy during the transitional economic crisis should be welcomed. Unexpectedly, the change in the value of government consumption indicator in the Russian economy then drops significantly by almost 2.4 percent in 1997. Perhaps, the Russian government does not have enough resources at its disposal to continue increasing government consumption. During the 1998 economic and financial crisis year, government

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consumption in the Russian economy, taken as real percentage change per annum, increases by 1 percent. In the following year, the value of this macroeconomic indicator continues to rise, increasing by another 3 percent. Apparently, this is done in an attempt to neutralize the negative consequences of the 1998 financial and economic crisis. Real gross fixed investment is absolutely necessary to initiate and sustain real GDP growth. As follows from the data on the Russian economy, presented in Table 6.1, the total percentage change in real gross fixed investment, taken over previous year, falls by well over 15 percent in 1995, as compared to 1994. This dramatic fall is explained by the national economy experiencing a significant downfall in the crisis 1990s. The value of real gross fixed investment in the Russian economy then falls even more dramatically, reaching the negative of 20 percent in 1996. Gross fixed investment in Russia falls by the cumulative of 35 percent in just two years, 1995 and 1996. This fall continues in 1997, reaching a nearly 7 percent decline in the value of gross fixed investment in Russia. During the 1998 financial and economic crisis year, suffered by the Russian economy, gross fixed investment as real percentage change per annum, falls by nearly 12 percent. Overall, four years of the transitional economic crisis, from 1995 to 1998, are marked with the cumulative negative change of almost 54 percent. This rate of decline in gross fixed investment, recorded in the Russian economy, is much more significant than declines in real private consumption and in real government consumption during the same period of time. In 1999, following the economic and financial crisis, gross fixed investment as real percentage change per annum indicates an increase of almost 4 percent. This is the first year of increase in the value of this macroeconomic indicator in the Russian economy. Real stock-building in the national economy also supports real GDP growth. As follows from the data on the Russian economy, presented in Table 6.1, the total percentage change in real stock-building falls far less than 1 percent in 1996, as compared to 1995. This insignificant fall continues in 1997 with -0.3 percent decline. During the 1998 economic and financial crisis year, suffered by the Russian economy, real stockbuilding falls by over 11 percent. Year 1999 is marked with the continuing fall in the value of real stock-building, registering a decline by another 4.2 percent. Overall, four years of the transitional economic crisis in Russia, from 1996 to 1999, are marked with the cumulative decline of well over 16 percent. The rate of decline in real stock-building during the 1998

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economic and financial crisis is similar to the rate of decline in the value of real gross fixed investment in Russia. The total value of real exports of goods and services is used as a major macroeconomic indicator of foreign trade and macroeconomic activity. As follows from the data on the expenditure on GDP in Russia, presented in Table 6.1, the total percentage change in real exports of goods and services, taken over previous year, rises almost 28 percent in 1991, as compared to 1990. This extremely high increase in the total volume of real exports of goods and services comes at a time when real GDP in Russia falls by 5 percent and the national economy suffers a significant downfall. This macroeconomic indicator then falls sharply to −20 percent in 1992. This dramatic fall in the value of real exports of goods and services comes in 1992, when real GDP falls by a staggering 14.5 percent. In 1993, the total volume of real exports of goods and services in the Russian economy falls by another 2 percent. This insignificant decline takes place when real GDP falls by nearly 9 percent. Year 1994 is marked with the nearly 5 percent increase in the volume of real exports of goods and services. In 1995, the Russian economy repeats these results. During these two years, real GDP in Russia falls by almost 13 percent and 4 percent, respectively. The positive trend in the value of real exports of goods and services in the Russian economy continues in 1996, with the rate of increase of 3.7 percent. At that year, real GDP continues its fall, reaching the rate of decline of 3.6 percent. During the pre-crisis year of 1997, the total volume of real exports of goods and services in Russia falls by 0.6 percent. At the same time, real GDP in Russia increases by 1.3 percent. During the 1998 economic and financial crisis year, the value of real exports of goods and services increases by 2 percent. This is given the fall of over 5 percent in real GDP, over 3 percent in real private consumption, almost 18 percent in real gross fixed investment, and over 11 percent in real stock-building, recorded in the Russian economy. Apparently, the crisis in Russia has no impact on real exports of goods and services. In the following year, the value of this macroeconomic indicator raises by another 11.4 percent, clearly not reacting to the 1998 economic and financial crisis. Real imports of goods and services is another major macroeconomic indicator of foreign trade that characterizes the Russian economy. As follows from the data on the expenditure on GDP in Russia, presented in Table 6.1, the total percentage change in real imports of goods and services, taken over previous year, rises by 33 percent in 1991, as

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compared to 1990. This extremely high increase in the total volume of real imports of goods and services comes at a time when real GDP in Russia falls by 5 percent and the national economy suffers a significant downfall. This macroeconomic indicator then falls sharply to almost -36 percent in 1992. This dramatic fall in real exports of goods and services comes in 1992, when real GDP in Russia falls by a staggering 14.5 percent. In 1993, the total volume of real imports of goods and services in Russia falls by another percent. This significant decline takes place when real GDP falls by nearly 9 percent. Year 1994 in Russia is marked with the 9.2 percent increase in the volume of real imports of goods and services. In 1995, the Russian economy repeats these results. During these two years, real GDP falls by almost 13 percent and 4 percent, respectively. The positive trend in the value of real imports of goods and services, observed in the Russian economy, continues in 1996, with the rate of increase of 3 percent. At that year, real GDP in Russia continues its fall, reaching the rate of decline of 3.6 percent. During the pre-crisis year of 1997, the total volume of real imports of goods and services in Russia increases by only 0.3 percent. At the same time, real GDP increases 1.3 percent. During the 1998 economic and financial crisis year, the value of real imports of goods and services in Russia decreases significantly by 15.5 percent. This is given the fall of over 5 percent in real GDP, over 3 percent in real private consumption, almost 18 percent in real gross fixed investment, and over 11 percent in real stock-building that characterizes the Russian economy. Apparently, the crisis has a serious impact on real imports of goods and services. In the following year, this macroeconomic indicator falls even more dramatically, by another 18.7 percent, strongly reacting on the 1998 financial and economic crisis. The first stage, characterized above, clearly indicates the dominance of negative trends in economic growth in Russia. This almost exclusive negativity is indicated by the data on the total percentage change in real total domestic expenditure, including stock-building, taken over previous year. This data, recorded in the Russian economy during the period of 1990 to 1999, is presented in Table 6.1. Domestic demand, as a major macroeconomic indicator, suffers significantly during this period. As compared to 1990, domestic demand in the Russian economy in 1991 increases an impressive 17.7 percent. In this year, real GDP in Russia falls by 5 percent. This very significant rise of almost 18 percent is followed by an

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even more dramatic fall of 24.7 percent in 1992. This fall corresponds to a significant fall of 14.5 percent in real GDP, recorded in the Russian economy. This dramatic fall in the total percentage change in the value of real total domestic expenditure, including stock-building, continues in the Russian economy during the period of 1993 to 1996. Specifically, the fall continues in 1993 with the drop in this value by 19.8 percent, 1994 with the drop by 20.1 percent, 1995 with the drop by 10.9 percent, and 1996 with the drop by 5.3 percent. This dramatic fall corresponds to a significant fall in real GDP of 8.7 percent in 1993, 12.7 percent in 1994, 4 percent in 1995, and 3.6 percent in 1996. In 1997, domestic demand in the Russian economy falls at the rate of only 0.03 percent. This year interrupts the steady trend of negative economic growth in Russia. Year 1997, the pre-crisis year, is marked with a positive real GDP growth rate of only 1.3 percent. In 1998, the value of real total domestic expenditure in Russia, including stock-building, falls by almost 14 percent. In this year of financial and economic crisis, real GDP in Russia falls again, this time by over 5 percent. Finally, the post-crisis year in the Russian economy is marked with a decline in domestic demand of 4.4 percent. Year 1999 brings a real GDP growth rate of slightly over 6 percent. The overall picture for the 1990s, recorded in the Russian economy, clearly points to explicitly negative and steady economic trends reflected in the negative rates of change in domestic demand. This negativity corresponds with the steady and significant decline in real GDP.

Economic Growth in Russia in the 2000s The 2000s in Russia are perceived as the decade of exceptionally strong economic recovery from the negative consequences of the 1998 world economic and financial crisis. This decade is also considered as a decade of the most rapid expansion of the national economy. By analogy with the US economy of the 1920s, called the roaring twenties, the 2000s decade may be called in the Russian economy as the roaring twentyhundreds. A distinct feature of this decade was a rapid increase of oil prices, recorded on the world market. This increase was especially beneficial for the Russian economy, as the country continued to trade in oil and gas since the Soviet era. The major indicators through which these high rates of economic growth in Russia are visible include real GDP, private

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consumption, government consumption, gross fixed investment, stockbuilding, exports of goods and services, imports of goods and services, and domestic demand. Table 6.2 offers the data on dynamics and major trends in these main macroeconomic indicators for the period of 2000 to 2009. The second stage of economic growth in Russia clearly indicates the dominance of positive values for rates of economic growth. This predominant positivity is indicated by the data on the expenditure on GDP in Russia, in percentage points, during the period of 2000 to 2009. The data is presented in Table 6.2. The total percentage change in real GDP, taken over previous year, as a major macroeconomic indicator of economic growth, continues to increase from 1999. This macroeconomic indicator in Russia reaches a staggering 10 percent in 2000. This dramatic recovery from the negative economic consequences of the world financial and economic crisis of 1998, observed in the Russian economy, continues in 2001 and 2002, although with lesser rates of growth. Both years are marked with the rates of real GDP growth in Russia of about 5 percent each year. The two consecutive years that follow bring real GDP growth with the annual growth rate of well over 7 percent. Year 2005 in the Russian economy is marked with real GDP growth rate of well over 6 percent. The two consecutive years that follow—2006 and 2007—bring real GDP growth in Russia with the annual growth rate of well over 8 percent. In fact, in 2007 this macroeconomic indicator reaches close to 9 percent, which is the second highest value of this macroeconomic indicator reached since 1991. During the economic and financial crisis year of 2008, real GDP growth, recorded in the Russian economy, demonstrates the annual growth rate of 5.5 percent. However, this steady trend on positive and significant economic growth in Russia is reversed briefly by the world economic and financial crisis of 2008, with the aftermath of a very significant fall of almost 8 percent recorded in 2009. As the data shows, the national economy continues to experience a significant increase in business activities and positive real GDP growth rates throughout the 2000s. This growth may be considered as a steady economic growth in Russia, achieved in the post-crisis period. In fact, the term post-crisis used in this case has two distinct economic meanings. First, this term means the period after the transitional economic crisis of the 1990s in Russia. Second, this term denotes the period after the world

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financial and economic crisis of 1998 that demonstrates a clear negative impact on the Russian economy. The steady trend of positive economic growth in Russia is interrupted only at the end of the period, in 2009. This is the after-crisis year, in which real GDP growth rate falls very significantly, by almost 9 percent. The overall picture for the 2000s clearly points to explicitly positive economic trends reflected in the mostly positive rates of growth for real GDP in Russia. The sharp and continuous rise in real GDP in 2000–2009 lays a firm fundament for potentially possible further sustainable economic growth. However, this steady economic growth is instead jeopardized by the world economic and financial crisis of 2008, negative consequences of which are shared by Russia. As follows from the data on the expenditure on GDP in Russia, presented in Table 6.2, the total percentage change in real private consumption, taken over previous year, continues to increase. This increase that starts from 1999 reaches over 7 percent in 2000. The national economy continues to experience a significant increase in business activities and positive real GDP growth rates. The total value of private consumption in Russia further increases by almost 10 percent in 2003 and reaches a staggering 12 percent in 2004. This remarkably high rate of annual increase in real GDP growth in Russia, achieved in 2004, continues in 2005 and 2006, with 12 percent per annum. The value of the private consumption indicator in the Russian economy that represents the total percentage change in real private consumption, taken over previous year, reaches a staggering 14.2 percent in just one year, 2007. This is a pre-crisis year that precedes the 2008 world economic and financial crisis. Year 2008 itself is marked with a high increase of almost 11 percent in private consumption. Finally, the steady trend of an increase in private consumption recorded in the Russian economy is interrupted only at the end of the observed period, in 2009. This is the after-crisis year, in which the volume of real private consumption in Russia falls by almost 5 percent as compared to the previous year. The overall picture for the 2000s clearly points to explicitly positive economic trends in Russia. These positive trends are reflected in the mostly positive rates of growth in private consumption. The sharp and continuous rise in real private consumption, observed in the Russian economy in 2000–2008, lays a firm fundament for further steady economic growth. However, this steady increase is negatively impacted by

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the world economic and financial crisis of 2008. As a consequence, total volume of the real private consumption in Russia in 2009 declines. This change has a negative impact on the national economy. Real government consumption indicates mostly positive trends. As follows from the data on the expenditure on GDP in Russia, presented in Table 6.2, the total percentage change in real government consumption, taken over previous year, continues to increase from 1999 and reaches 2 percent in 2000. The national economy continues to experience a significant increase in business activities and positive real GDP growth rates. This macroeconomic indicator acquires a negative value of almost 0.9 percent in 2001, reflecting the fall in the real government consumption in Russia. The total percentage change in real government consumption in Russia reaches 2.6 percent in 2002. The total value of government consumption in Russia continues on the rising trajectory, increasing further by over 3 percent in 2003, and over 2 percent in 2004. This rate of annual increase in government consumption that fluctuates between 1.5 and 2.7 percent continues in 2005, 2006, and 2007. The economic and financial crisis year of 2008 is marked with a high increase of well over 3 percent. This implies that the rate of annual increase in real government consumption in Russia reaches its highest point of almost 3.4 percent during the world economic crisis. The postcrisis year is marked with a decline of 0.6 percent in the value of total real government consumption. As follows from the data on the expenditure on GDP in Russia, presented in Table 6.2, the total percentage change in real gross fixed investment, taken over previous year, continues to increase starting from 1999 and reaches a staggering 18 percent in 2000. The national economy continues to experience a significant increase in business activities and positive real GDP growth rates. The rate of growth in real gross fixed investment in Russia further increases by almost 10 percent in 2001 and reaches almost 3 percent increase in 2002. A remarkably high rate of annual increase in this indicator continues in 2003 and 2004, with 14.5 and over 13.2 percent per annum, respectively. Clearly, a dramatic decline in the value of real gross fixed investment in Russia in the 1990s is being counterbalanced by an equally dramatic increase in the 2000s. In 2005, this macroeconomic indicator in Russia continues its increase and reaches 10 percent. The total percentage change in real gross fixed investment, taken over previous year, reaches 17.3 percent in 2006 and a staggering 20.5 percent in 2007. This is the

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highest recorded value of this macroeconomic indicator in Russia during the entire period of study, from 1990 to 2019. This high mark in the total increase is reached in real gross fixed investment during the pre-crisis year that precedes the 2008 world economic and financial crisis. 2008 is marked with a high increase in real gross fixed investment of slightly over 13.4 percent. Finally, the steady trend of an increase in real gross fixed investment in Russia is interrupted only at the end of the period, in 2009. This is the after-crisis year, in which real gross fixed investment falls by almost 15 percent as compared to the previous year. Apparently, investors are scared by the world economic and financial crisis and economic risks and uncertainties that such crises usually bring. Not surprisingly, investors become less decisive in terms of making new investments in the Russian economy. The overall picture for the 2000s clearly points to explicitly positive economic trends reflected in the mostly positive rates of growth in real gross fixed investment in Russia. The sharp and continuous rise in real gross fixed investment during the period of 2000 to 2008 lays a firm ground for further steady economic growth. Although this steady increase is negatively impacted by the world economic and financial crisis of 2008, this one year may not be able to break the positive trend. The decline of 2009 is significant, marked by a drop of 15 percent. Nevertheless, the recovery follows quickly, returning growth rates in real gross fixed investment in Russia to positive and high values. Real stock-building in Russia demonstrates positive trends through most of the 2000s. The data on real stock-building in the national economy is presented in Table 6.2. As follows from this data, the total percentage change in real stock-building, taken over previous year, starts to increase after the sharp downfall of 1998–1999. This macroeconomic indicator reaches an impressive 9.7 percent in 2000. This is the first year of increase in the value of this macroeconomic indicator following the transitional economic crisis of the 1990s in Russia. During this period, the national economy experiences a significant increase in business activities and positive real GDP growth rates. The rate of growth in real stockbuilding further increases by 3 percent in 2001, but starts yet another downfall immediately thereafter. The value of real stock-building decreases in 2002 and 2003, with 1.1 and over 0.4 percent decline, respectively. After these two years of negative values in real stock-building in Russia comes another rise. This is a

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continuous rise that lasts for 5 years, from 2004 to 2008. 2004 indicates an increase of 1 percent in the value of real stock-building, while 2005 indicates below 1 percent, 0.8 only. Then comes the rise in rates of increase in real stock-building in 2006 and 2007, with 1.7 and 2.8 percent, respectively. 2.8 percent is the highest rate of real stock-building increase achieved during this five-year period. In Russia, 2008 is marked with an increase in real stock-building of slightly over 1 percent. The 2008 world economic and financial crisis leaves its print on Russia’s stock-building only in 2009, with a sharp decline of almost 12 percent. This is the sharpest decline in the value of this macroeconomic indicator considered over the entire period of 1996 to 2019. The overall picture for the 2000s does not point to any steadily positive economic trend. There are mostly positive rates of growth in real stock-building observed in the Russian economy, but the increments are small. The only significant rise is that of 2000, while the most significant fall of 2009 is even more dramatic. Real exports of goods and services contribute significantly to external revenues for the Russian economy. The steady trend of positive change in real exports of goods and services in Russia continues for over a decade, from 1998 to 2008. This steady trend is interrupted only at the end of the period, in 2009. This is the after-crisis year, in which real GDP growth rate in Russia falls very significantly. The overall picture for the 2000s clearly points to explicitly positive economic trends. These trends are reflected in the positive rates of growth for real exports of goods and services. The sharp and continuous rise in the total volume of real exports of goods and services in Russia is certainly a positive economic trend. This rise during the period of 1998 to 2008 lays a firm fundament for potentially possible further sustainable economic growth in Russia. However, this steady increase is compromised by the world economic and financial crisis of 2008, negative consequences of which are suffered by the national economy. The recovery from the crisis is an indication of the strength of the national economy. As follows from the data on the expenditure on GDP in Russia, presented in Table 6.2, the total percentage change in the volume of real exports of goods and services, taken over previous year, continues to increase from 11.4 percent in 1999 and reaches close to 10 percent in 2000. This high increase is of no surprise, as the national economy continues to experience a significant increase in business activities and

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positive real GDP growth rates. In that same year, the value of real GDP in Russia increases 10 percent, real private consumption increases well over 7 percent, real gross fixed investment increases 18 percent, and real stock-building increases almost 10 percent. 2001 is characterized by a 4.1 percent increase in real exports of goods and services in Russia. Then follow three years of high rates of increase in the value of this macroeconomic indicator. 2002, 2003, and 2004 are marked with the rise in real exports of goods and services of 10.1 percent, 11.1 percent, and 11.7 percent, respectively. Although with less impressive rates of increase, this positive trend continues in the next three years. In Russia, 2005, 2006, and 2007 are marked with the rise in real exports of goods and services of 6.4 percent, 7.2 percent, and 6.2 percent, respectively. This period from 2002 to 2007 is also characterized with high rates of increase in other main macroeconomic indicators, including real GDP, real private consumption, real gross fixed investment, and real stock-building. The 2008 world economic and financial crisis puts an end to these remarkably high rates of increase in real exports of goods and services, enjoyed by the Russian economy. 2008 itself is marked with an increase of less than 1 percent. Finally, the steady trend of an increase in real exports of goods and services in Russia is interrupted only at the end of the period, in 2009. This year is marked with the decline of almost 5 percent. This is the after-crisis year, in which real GDP falls by almost 8 percent, real private consumption falls by 5 percent, real gross fixed investment falls 15 percent, and real stock-building falls by 12 percent, as compared to 2008. The overall picture for the 2000s clearly points to explicitly positive economic trends reflected in positive and high rates of increase in real exports of goods and services. The Russian economy observes strongly positive trends in the volume of imports of goods and services in the country. The steady trend of positive change in real imports of goods and services in Russia starts from 2000 and continues until 2008. This steady trend is interrupted only at the end of the period, in 2009. This is the after-crisis year, in which real GDP growth rate falls very significantly. The overall picture for the 2000s clearly points to explicitly positive economic trends reflected in the positive rates of growth for real imports of goods and services received in Russia. As follows from the data on the expenditure on GDP in Russia, presented in Table 6.2, the total percentage change in the volume of

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real imports of goods and services, taken over previous year, increases by an impressive 31.6 percent. This high increase is of no surprise, as the national economy continues to experience a significant increase in business activities and positive real GDP growth rates. In that same year, real GDP increases by 10 percent, real private consumption increases by well over 7 percent, real gross fixed investment increases by 18 percent, and real stock-building increases by almost 10 percent. 2001 is characterized by a 19 percent increase in real imports of goods and services in Russia. These high rates of increase in the value of this macroeconomic indicator continue in 2002 with 15 percent and 2003 with 17.4 percent. 2004 is marked with another significant rise in real imports of goods and services, constituting well over 23 percent. Although with less impressive rates of increase, this positive trend continues in the next two years. 2005 and 2006 are marked with the rise in real imports of goods and services of 16.5 percent and 21.1 percent, respectively. 2004 is marked with yet another significant rise in real imports of goods and services, constituting over 26 percent. The 2008 world economic and financial crisis puts an end to these remarkably high rates of increase in real imports of goods and services in Russia. 2008 is marked with an increase of 15 percent. However, the steady trend of an increase in real imports of goods and services in Russia is interrupted at the end of the period, in 2009. This year is marked with the decline of over 30.6 percent. This is the after-crisis year, in which real GDP falls by almost 8 percent, real private consumption falls by 5 percent, real gross fixed investment falls by 15 percent, and real stock-building falls by 12 percent, as compared to 2008. The overall picture for the 2000s clearly points to explicitly positive economic trends that find their reflection in positive and high rates of increase in real imports of goods and services that come in Russia. This period from 2000 to 2008 is also characterized with high rates of increase in the values of other main macroeconomic indicators, including real GDP, real private consumption, real gross fixed investment, and real stock-building, recorded in the Russian economy. Positive changes in values of all of these macroeconomic indicators positively characterize the national economy. The second stage clearly indicates the dominance of positive trends in domestic demand in Russia. This dominant positivity is indicated by the data on the total percentage change in real total domestic expenditure, including stock-building, during the period of 2000 to 2009, presented in

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Table 6.2. After the negative macroeconomic indicators of the 1990s, the total percentage change in domestic demand, as a major macroeconomic indicator, starts to increase in 2000 with impressive 18.7 percent. This is while real GDP in Russia continues to increase from 6 percent in 1999 to a staggering 10.1 percent in 2000. This dramatic recovery from the negative economic consequences of the world financial and economic crisis of 1998 continues to characterize the Russian economy in 2001 and 2002. During these two years, the total percentage change in real total domestic expenditure, including stockbuilding, reaches 8.6 and 3.5 percent, respectively. Both years are marked with the rates of real GDP growth, recorded in the Russian economy, of about 5 percent each. The two consecutive years that follow bring domestic demand in Russia with the annual growth rate of 6.9 and 9.4 percent. These two years mark real GDP growth in Russia with the annual rate of well over 7 percent. Year 2005 in the Russian economy is marked with the growth rate in domestic demand constituting 8.4 percent. This year is also marked in the national economy with recorded real GDP growth rate of well over 6 percent. The two consecutive years that follow—2006 and 2007— bring domestic demand with the annual growth rate of 11.1 and 14.2 percent, respectively. In Russia, 14.2 percent increase in domestic demand, achieved in 2007, marks the second highest value of this macroeconomic indicator reached in the national economy since 1991. Years 2006 and 2007 also bring positive real GDP growth, recorded in the Russian economy, with the annual growth rate of well over 8 percent. In 2007, this macroeconomic indicator reaches close to 9 percent, which is the second highest value of this macroeconomic indicator reached since 1991. This trend in real GDP growth corresponds with increases in domestic demand observed in the Russian economy. During the crisis year of 2008, the total percentage change in real total domestic expenditure, including stock-building, demonstrates the annual growth rate of 9.5 percent. Similarly, in 2008, real GDP growth in Russia demonstrates the annual growth rate of 5.5 percent. However, this steady trend of positive and significant growth in domestic demand in Russia is reversed briefly. This reversal is caused by the aftermath of the world economic and financial crisis of 2008. In 2009, a dramatic fall of 16.8 percent in domestic demand is recorded in the national economy. In that same year, real GDP growth in Russia suffers a very significant fall of almost 8 percent.

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Concluding Remarks The first stage of economic growth in Russia, from 1990 to 1999, is characterized by the dominance of negative trends. This predominant negativity is indicated in the steady and significant decline in real GDP. Private consumption usually plays a major role in real GDP growth, but in Russia of the 1990s it falls continuously. Government consumption rises despite the national economy is suffering of a significant downfall. This seems to be the right strategy for Russia. However, the general picture for the 1990s, recorded in the Russian economy, clearly points to explicitly negative and steady economic trends reflected in the negative rates of change in domestic demand. The second stage of economic growth differs drastically from the first stage. The Russian economy continues to experience a significant increase in business activities and demonstrates positive real GDP growth rates throughout the 2000s. This growth may be considered as a steady economic growth in Russia, achieved in the post-crisis period. First, this growth denotes the increase in production after the transitional economic crisis of the 1990s, suffered by Russia. Second, this growth signifies the recovery of the Russian economy from the negative impact of the world financial and economic crisis of 1998. The overall picture for the 2000s clearly points to explicitly positive economic trends in Russia, reflected in the mostly positive rates of growth in private consumption. This steady increase is negatively impacted by the world economic and financial crisis of 2008. This decade is also characterized with mostly positive rates of growth in real gross fixed investment. The sharp and continuous rise in real gross fixed investment during the period of 2000 to 2008 lays a firm ground for further steady economic growth. Although this steady increase is negatively impacted by the world economic crisis of 2008, with the significant decline in 2009. The quick recovery brings growth rates in real gross fixed investment in the Russian economy to positive and high values. At the same time, the 2000s do not point to any steadily positive trend in real stock-building. There are mostly positive rates of growth in real stock-building, but the increments are small, and the declines are sharp. Real exports of goods and services contribute significantly to the Russian economy. The sharp and continuous rise in the total volume of real exports of goods and services in Russia is certainly a positive economic trend. This rise during the period of 1998 to 2008 lays a firm

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fundament for potentially possible further sustainable economic growth in Russia. However, this steady increase is compromised by the world economic crisis of 2008. The overall picture for the 2000s clearly points to explicitly positive economic trends reflected in positive and high rates of increase in real imports of goods and services in Russia. As the data shows, the national economy continues to experience a significant increase in business activities and positive growth rates in domestic demand throughout the 2000s. This growth may be considered as reflecting a steady economic growth in Russia in the post-crisis period. The steady trend of positive total percentage change in real total domestic expenditure, including stock-building, is interrupted only at the end of the period, in 2009. The overall picture for the 2000s clearly points to explicitly positive economic trends observed in Russia. The sharp and continuous rise in domestic demand in 2000–2008 lays a firm fundament for sustainable economic growth.

References Economist Intelligence Unit. (2021). Economist Intelligence Unit Database. Bureau van Dijk Electronic Publishing. RosStat. (2021). The State Committee of Statistics of the Russian Federation. Moscow: RosStat. https://rosstat.gov.ru/

CHAPTER 7

Economic Growth in Russia in the 2010s and 2020s

Economic Growth in Russia in the 2010s The 2010s in Russia are perceived as the decade of strong economic recovery from the negative consequences of the 2008 world economic and financial crisis. Table 7.1 offers the data on dynamics and major trends in main macroeconomic indicators. The third stage of economic growth in Russia clearly indicates the dominance of positive trends in rates of economic growth. Nevertheless, this dominance is nowhere near the dominance of positive economic growth demonstrated by the national economy in the 2000s. This predominant positivity is indicated by the data on the expenditure on GDP in Russia, taken in percentage points, during the period of 2010 to 2019, presented in Table 7.1. After the sharp fall of nearly 8% in 2009, the total percentage change in real GDP in Russia, taken over previous year, as a major macroeconomic indicator of economic growth, starts to increase from 2010 with a rate of 4.5%. This increase is followed with the real GDP growth in Russia of slightly over 4% in 2011. This dramatic recovery from the negative economic consequences of the world financial and economic crisis of 2008 continues in 2012, 2013, and 2014. These years are marked with the rates of real GDP growth in Russia of 3.7%, 1.8%, and 0.8%, respectively. 2014 is a crisis year for the Russian economy, and thus the low rate of real GDP growth of only 0.8% is of no surprise. The two consecutive years that follow the 2014 © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 A. L. Osipian, Sustainable Economic Growth in Russia, https://doi.org/10.1007/978-3-031-38874-3_7

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4.516 4.043 3.720 1.764 0.777 −2.777 −0.082 1.514 1.700 1.800

5.427 4.701 7.845 5.234 1.981 −9.664 −2.271 3.281 4.100 3.000

−1.451 −0.649 2.578 0.844 −2.094 −3.026 0.912 0.344 0.900 −0.500

Government consumption (% real change pa) 4.714 18.166 6.063 1.842 −1.579 −9.229 −0.457 4.571 3.200 1.500

Gross fixed investment (% real change pa) 4.800 1.100 0.000 −2.000 −1.600 −1.600 0.400 0.700 0.000 0.000

Stock-building (% real change pa) 7.258 4.129 1.348 4.533 0.618 3.602 3.640 5.091 3.100 4.200

Exports of G&S (% real change pa)

25.316 15.025 9.495 3.556 −7.164 −25.885 −3.314 17.305 7.000 7.000

Imports of G&S (% real change pa)

Sources Economist Intelligence Unit (2021), the State Committee of Statistics of the Russian Federation, RosStat (2021)

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Private consumption (real % change pa)

Expenditure on GDP in Russia, real percentage change per annum, 2010–2019

Real GDP (% change pa)

Table 7.1

8.700 7.200 6.000 1.400 −1.200 −9.700 −0.800 3.700 3.200 1.900

Domestic demand (% real change pa)

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economic and financial crisis bring negative real GDP growth with the fall of almost 3% in 2015 and virtually zero annual growth rate in 2016. Year 2017 in the Russian economy is marked with real GDP growth rate of well over 1.5%. The two consecutive years that follow—2018 and 2019—bring real GDP growth in Russia with the annual growth rate of close to 2%. Some reports claim the real GDP growth in 2018 of as high as 2.5%. This does not change the general picture, observed in the Russian economy. One should admit that in 2007 this macroeconomic indicator reaches close to 9%, which is the second highest value of this macroeconomic indicator reached since 1991. During the crisis year of 2008, real GDP growth demonstrates the annual growth rate of 5.5%. However, this steady trend on positive and significant economic growth in Russia is reversed briefly by the world economic crisis of 2008, with the aftermath of a very significant fall of almost 8% recorded in 2009. As the data shows, the national economy continues to experience a significant increase in business activities and positive real GDP growth rates throughout most of the 2010s. This growth may be considered as a steady economic growth in Russia in the post-crisis period, meaning the period after the world economic crisis of 2008. The steady trend of positive economic growth in Russia is interrupted only for one year in the aftermath of the 2014 crisis. Even in this after-crisis year, the real GDP growth rate falls very insignificantly, by less than 3% in 2015. However, rates of real GDP growth in the 2010s, recorded in the Russian economy, are not nearly as impressive, as they were during the 2000s. The overall picture for the 2010s points to positive economic trends reflected in the predominantly positive rates of growth for real GDP, enjoyed by the Russian economy. The continuous rise in real GDP in 2010–2019 continues to form a firm fundament for potentially possible further sustainable economic growth in Russia. It is important to note that this steady economic growth at reasonably high-to-moderate rates is not jeopardized by the economic and financial crisis of 2014. The negative consequences of this crisis for the Russian economy are insignificant. Real GDP growth in the 2000s is much more significant than during the 2010s. This may be explained by the effects of economic recovery, experienced by the Russian economy. In the 2000s, Russian economy is recovering from the downfall of the 1990s and is thus capable of growing at significant rates. The third stage of economic growth in Russia indicates the dominance of positive trends in private consumption, taken as real percentage change

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per annum. However, this dominance is nowhere near the dominance of rates of increase in real private consumption indicated in the national economy in the 2000s. This predominant positivity is indicated by the data on private consumption growth, observed in the Russian economy, measured in percentage points, during the studied period from 2010 to 2019, as presented in Table 7.1. After the sharp fall of 5% in 2009, the total percentage change in real private consumption in Russia, taken over previous year, starts to increase. The value of this macroeconomic indicator, recorded in the Russian economy, increases with a rate of 5.5% in 2010, followed with another increase of close to 5% in 2011. This fast and strong recovery from the negative economic consequences of the world financial and economic crisis of 2008 continues in Russia in 2012, 2013, and 2014, although the rate of this economic recovery continues to decrease year after year. These years are marked with the rates of growth in real private consumption at 7.9%, 5.2%, and 2%, respectively. 2014 is a crisis year for the Russian economy, and thus the relatively low rate of increase in real private consumption of only 2% is of no surprise. The two consecutive years that follow the 2014 economic and financial crisis attach negative signs to the rate of change in real private consumption, recorded in the Russian economy. 2015 demonstrates a dramatic fall by nearly 10% in the value of this macroeconomic indicator, while 2016 indicates the fall by almost 2.3%. Levels of private consumption in Russia start the recovery after the 2014 economic crisis no later than in 2017. This year is marked with real private consumption growth rate of slightly less than 3.3%. The two consecutive years that follow bring real private consumption increases, recorded in the Russian economy, at the annual rate of over 4% and 3%, respectively. As the data shows, the national economy continues to experience a significant increase in business activities and positive growth in real private consumption rates throughout most of the 2010s. This positive trend in the rate of growth in the total volume of private consumption in Russia experiences a serious interruption for two years in the aftermath of the 2014 economic crisis. Obviously, annual rates of real private consumption increase demonstrated in the 2010s are not nearly as impressive, as those demonstrated during the 2000s. The transitional economic crisis of the 1990s has the most negative consequences for economic and social well-being of Russian households. The level of real private consumption decreases significantly during this period. The period of 2000s is characterized by

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economic recovery. The rate of recovery is quite high, as the Russian economy is trying to pull itself from the poverty trap. This explains the high rates of an increase in real private consumption. The period of 2010 is characterized by a clear slowdown in the national economy’s rate of growth, and relatively low or moderate rate of increase in real private consumption. The third stage indicates the dominance of positive trends in government consumption, taken as real percentage change per annum, as observed in the Russian economy. Furthermore, the situation appears much bleaker than the rates of increase in real government consumption indicated in the national economy during the 2000s. Government consumption has its ups and downs during the studied period and the trends recorded in the Russian economy are clearly non-linear. This mixture of positivity and negativity is indicated by the data on private consumption growth in Russia, measured in percentage points, during the studied period of 2010 to 2019, presented in Table 7.1. The world economic and financial crisis year of 2008, marked with its highest 3.4% value of increase in the real government consumption in Russia, is followed by the three consecutive years of negative growth in the value of this macroeconomic indicator. Years 2009, 2010, and 2011 are marked with the annual decrease in the real government consumption of 0.6%, 1.5%, and 0.7%, respectively. After the fall in government consumption of 2009, 2010, and 2011, the total percentage change in real private consumption in the Russian economy, taken over previous year, starts to increase only in 2012. The relatively high rate of increase of 2.6% in 2012 is followed with a much more modest increase of only 0.8% in 2013. The impression of a fast and strong recovery in Russia from the negative economic consequences of the world financial and economic crisis of 2008, produced by the 2.6% increase in 2012, vanishes in 2013. Another decrease in real government consumption of over 2% comes in 2014. 2014 is a crisis year for the Russian economy, and thus this decrease is of no surprise, at least economic wise. The year that follows the 2014 economic crisis surprises with even more significant fall by over 3%. This is surprising, given the usually active role of the national government in promoting increases in government spending during and after the economic crises. One would expect the government to increase the rates of real government consumption in order to stabilize the national economy.

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Surprisingly, the Russian government is not on the forefront of the recovery efforts, leaving the national economy to its own devices. This inactivity attaches negative signs to the rate of change in real government consumption, recorded in the Russian economy. Levels of government consumption in Russia start the recovery after the 2014 crisis only in 2016. This year is marked with real government consumption growth rate of slightly less than 1%. The two consecutive years that follow bring real government consumption increases in the Russian economy at the annual rate of only 0.3 and 0.9%, respectively. While the Russian economy continues to experience a significant increase in business activities and positive growth in real private consumption rates throughout most of the 2010s, the dynamic of real government consumption is much more modest. From 2000 to 2019, the volume of real government consumption increases only during five years, and decreases during four years. The rate of increase in the value of this vital macroeconomic indicator for the Russian economy remains below 1%, except for one year, 2012, when this indicator rises to 2.6%. At the same time, 2015 in Russia brings the decline in real government consumption of slightly over 3%. This positive trend in the rate of growth in the total volume of government consumption in Russia experiences a serious interruption for three years in the aftermath of the 2008 economic crisis and another serious interruption for two years during and after the 2014 economic crisis. As the data shows, a significant fall of 2.4% in real government consumption in 1997 can be explained only by the transitional economic crisis of the 1990s and its negative consequences, given that the crisis came to Russia in 1998. Obviously, annual rates of real government consumption increase demonstrated in the 2010s are not nearly as impressive, as those demonstrated during the 2000s. The total volume of the real gross fixed investment in the Russian economy in 2009 declines as a consequence of the 2008 world economic and financial crisis. This negative change has an impact on the national economy, as the decline is significant at negative 15%. A similar decline of negative 15% took place in 1996, during the transitional economic crisis. However, in distinction of the 1995 fall, suffered by the Russian economy, the decline of 2009 lasts for only one year. The value of gross fixed investment starts demonstrating an increase of close to 5% immediately in 2010. This fast recovery, observed in Russia, is a sign of a strong economy.

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Similar to trends in private consumption and government consumption, the third stage indicates the dominance of positive trends in real gross fixed investment, taken as real percentage change per annum, in Russia. Nevertheless, this dominance is nowhere near the dominance of rates of increase in real gross fixed investment indicated in the national economy in the 2000s. This predominant positivity is indicated by the data on real gross fixed investment growth in Russia, in percentage points, during the period of 2010 to 2019, presented in Table 7.1. After the sharp fall of 15% in 2009, the total percentage change in real gross fixed investment, taken over previous year, starts to increase from 2010 with a rate of 5% to an impressive 18.2% in 2011. This fast and strong recovery from the negative economic consequences of the world financial and economic crisis of 2008 continues in 2012. This strong recovery continues with the rate of 6%, as recorded in the Russian economy. Nevertheless, 2013 brings an increase of only less than 2% to the value of real gross fixed investment. Obviously, the rate of this recovery continues to decrease year after year. Years 2014, 2015, and 2016 do not add much optimism about the main investment trends in the Russian economy. These years are marked with the rates of decline in real gross fixed investment at 1.6%, 9.2%, and 0.5%, respectively. Real gross fixed investment present in the Russian economy started the after-the-crisis recovery in 2017. This year is marked with real gross fixed investment growth rate of 4.6%. The two consecutive years that follow bring real gross fixed investment increases at the annual rate of over 3% and 1.5%, respectively, as recorded in the Russian economy. As the data shows, the national economy continues to experience a significant increase in business activities and positive growth in real gross fixed investment rates throughout most of the 2010s. This positive trend in the rate of growth in the total volume of real gross fixed investment in Russia experiences a serious interruption for two years in the aftermath of the 2014 economic and financial crisis. Annual rates of increase in real gross fixed investment demonstrated in the 2010s are not nearly as impressive, as those demonstrated by the Russian economy during the 2000s. The transitional economic crisis of the 1990s has most negative consequences for the national economy, while the resources for investment are scarce. Business skills of investors operating in the still volatile Russian economy are scarce as well. The period of 2000s is characterized by economic recovery from the crisis of the 1990s. The rate of increase in real gross fixed investment is quite

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high, as the Russian economy is on its way to recovery. The period of 2010 is characterized by a clear slowdown in the national economy’s rate of growth, and relatively low or moderate rate of increase in real private consumption. Overall, the third stage indicates the dominance of positive trends in real gross fixed investment in Russia. The situation with the rates of increase in real gross fixed investment appears much better than the situation with the rates of increase in real government consumption, indicated in the national economy during the 2010s. Real gross fixed investment has its rises and declines during the studied period and the trends in the value of this indicator, observed in the Russian economy, are obviously non-linear. Year 2014 is a crisis year for the Russian economy, and thus the high rate of decrease in real gross fixed investment in the year that follows is not surprising. The two consecutive years that follow the 2014 economic crisis attach negative signs to the rate of change in real gross fixed investment. Year 2015 demonstrates a serious fall of well over 9% in the value of this macroeconomic indicator that characterizes the Russian economy, while 2016 indicates the fall of less than half-a-percent. Despite its significant rate, almost negative 12%, the decline of the post-crisis 2009 in real stock-building in Russia lasts for only one year. Year 2010 indicates a significant rise of almost 5% in the value of real stock-building in the Russian economy. This rise is followed with an increase of only 1.1% in 2011. 2012 brings no change to the value of real stock-building. 2013 starts the three-year period of negative change in the rate of real stock-building in Russia. During this year, stock-building in the Russian economy falls insignificantly, by only 1%. Years 2014 and 2013 are marked with the decline in real stock-building of 1.6% each year. Apparently, the world economic and financial crisis of 2008 that leaves its mark on the Russian economy is preceded and followed by year of decline in real stock-building. After the 2014 crisis, the dynamic of real stock-building in Russia slows down. Years 2016 and 2017 are marked with the small rise of 0.4 and 0.7%, respectively. 2016 and 2017 indicate no change in the value of real stock-building. The steady trend of positive change in real exports of goods and services that characterizes the Russian economy continues from 2010 to 2019 without interruptions. The overall picture for the 2010s clearly points to explicitly positive economic trends reflected in the positive rates of growth for real exports of goods and services. The sharp and

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continuous rise in the total volume of real exports of goods and services, recorded in the Russian economy from 2010 to 2019, lays a firm fundament for potentially possible further sustainable economic growth in the country. Importantly, this steady increase is not compromised even by the economic and financial crisis of 2014, negative consequences of which found their reflection in the dynamic of the Russian economy. As follows from the data on the expenditure on GDP in Russia, presented in Table 7.1, the total percentage change in the volume of real exports of goods and services, taken over previous year, continues to increase from 7.3% in 2010 and reaches well over 4% in 2011. This high increase is of no surprise, as the national economy in Russia continues to experience a significant increase in business activities and positive real GDP growth rates. In that same year, real GDP in Russia increases by 4%, real private consumption increases by 4.7%, real gross fixed investment increases by impressive 18.2%, and real stock-building increases by 1.1%. 2013 is characterized by a 4.5% increase in real exports of goods and services in Russia. The crisis year of 2014, suffered by the Russian economy, results in an increase in real exports of goods and services of only 0.6%. Then follow five years of reasonably high rates of increase in the value of this macroeconomic indicator. 2015 demonstrates the rise in real exports of goods and services of 3.6%. This is despite the crisis of 2014. Changes in other main macroeconomic indicators in the Russian economy demonstrate negative signs in 2015. Specifically, real GDP in Russia decreases by 2.8%, real private consumption decreases by 9.7%, real gross fixed investment decreases by 9.2%, and real stock-building decreases by 1.6%. Similarly to 2015, year 2016 brings further positive changes in the Russian economy and demonstrates the rise in real exports of goods and services of slightly over 3.6%, while changes in real GDP, real private consumption, and real gross fixed investment remain negative. 2017 brings a further increase in the rate of growth of the total volume of real exports of goods and services. The value of this macroeconomic indicator in the Russian economy reaches 5.1%. This year is also characterized with much more modest rates of increase in other main macroeconomic indicators, including real GDP, real private consumption, real gross fixed investment, and real stock-building. Year 2018 in the Russian economy is marked with an increase of 3.1% in the value of real exports of goods and services. Finally, the steady trend

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of an increase in real exports of goods and services in Russia continues through 2019 with the rate of 4.2%. The overall picture for the 2010s clearly points to explicitly positive economic trends reflected in positive and high rates of increase in real exports of goods and services. Although the rates of annual increase in real exports of goods and services in the Russian economy during the 2010s are not nearly as impressive as those of the 2000s, they point to the possibility of achieving sustainable economic growth. The total value of real imports of goods and services in Russia recorded in 2009 declines, apparently due to the world economic and financial crisis of 2008. This negative change has an impact on the national economy, as the decline is significant at negative 30.6%. A similar decline of negative 35% takes place in 1992, at the beginning of the transitional socioeconomic crisis. However, in distinction of the 1992 dramatic fall, the decline of 2009, observed in the Russian economy, lasts for only one year. The total value of real imports of goods and services in the Russian economy starts demonstrating a very significant increase of 25.3% immediately in 2010. This fast recovery from the negative consequences of the 2008 crisis may be interpreted as a sign of a strong economy. The third stage indicates the dominance of positive trends in real imports of goods and services, taken as real percentage change per annum, in Russia. Nevertheless, this dominance is nowhere near the dominance of rates of increase in real imports of goods and services indicated in the national economy in the 2000s. This predominant positivity is indicated by the data on real imports of goods and services growth in Russia, in percentage points, during the period of 2010 to 2019, presented in Table 7.1. After the sharp fall of 30.6% in 2009, the total percentage change in real imports of goods and services increases. However, the rate of this annual increase declines year after year. The increase in real imports of goods and services of 2010 with an impressive rate of 25.3% ends with an increase of only 3.6% in 2013. This recovery from the negative economic consequences of the world financial and economic crisis of 2008, suffered by the Russian economy, continues in 2011, with the rate of 15% and 2012 with the rate of 9.5%. The 2014 has a negative impact on the total value of real imports of goods and services, recorded in Russia. Years 2014, 2015, and 2016 do not add much optimism about the main import trends observed in the Russian economy. These years are marked with the rates of decline in the volume of real imports of goods and services at 7.2%, 26%, and 3.3%, respectively.

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Real imports of goods and services in the Russian economy start the after-the-crisis recovery in 2017. This year is marked with real imports of goods and services growth rate of 17.3%. The two consecutive years that follow, bring real imports of goods and services increases in the Russian economy at the annual rate of 7% each. As the macroeconomic data shows, the national economy continues to experience a significant increase in business activities and positive growth in real imports of goods and services rates throughout most of the 2010s. This positive trend in the rate of growth in the total volume of real imports of goods and services in Russia experiences a serious interruption for three years in the aftermath of the 2014 economic crisis. Annual rates of increase in real imports of goods and services demonstrated by the Russian economy in the 2010s are not nearly as impressive, as those demonstrated during the 2000s. The transitional economic crisis of the 1990s in Russia has most negative consequences for the economy, while the base for imports of goods and services shrinks. The period of 2000s is characterized by the economic recovery from the transitional crisis of the 1990s. The rate of increase in real imports of goods and services is quite high, as the Russian economy is on its way to recovery. The period of 2010 is characterized by a clear slowdown in the national economy’s rate of growth, and relatively low or moderate rate of increase in the value of real imports of goods and services. Overall, the third stage indicates the dominance of positive trends in the value of real imports of goods and services in Russia. The situation with the rates of increase in real imports of goods and services appears much less stable than the situation with the rates of increase in real exports of goods and services, indicated in the national economy during the 2010s. Real imports of goods and services have raises and declines during the studied period and the trends are obviously non-linear. 2014 is a crisis year for the Russian economy, and thus the decline in real imports of goods and services is not surprising. The two consecutive years that follow the 2014 economic and financial crisis also indicate negative change in the value of real imports of goods and services in the Russian economy. The third stage clearly indicates the dominance of positive trends in domestic demand in Russia. Although this positivity is nowhere near the dominance of positive trends in domestic demand, observed in the national economy in the 2000s. This predominant positivity is indicated

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by the data on the total percentage change in real total domestic expenditure, including stock-building, taken over previous year, in the Russian economy during the period of 2010 to 2019, presented in Table 7.1. After the sharp fall of nearly 16.8% in 2009, domestic demand increases by 8.7% in 2010. This major macroeconomic indicator increases another 7.2% in 2011. The positive trends in domestic demand are similar to those in real GDP, observed in the Russian economy. During that same period, the total percentage change in real GDP, over previous year, starts to increase from 2010 with a rate of 4.5%, followed with the real GDP growth of slightly over 4% in 2011. The recovery in domestic demand from the negative economic consequences of the world financial and economic crisis of 2008 continues in 2012 and 2013, but the rates of this recovery in the Russian economy are becoming less and less significant. These years are marked with the rates of increase in domestic demand of 6 and 1.4%, respectively. During these two years, the value of real GDP grows at the rate of 3.7% and 1.8%, respectively. 2014 is a crisis year for the Russian economy, and thus it is of no surprise that the total percentage change in real total domestic expenditure, including stock-building, falls as compared to the previous year. However, this fall is insignificant, only 1.2%. Similarly, the low rate of real GDP growth of only 0.8%, recorded in the Russian economy in 2014, is of no surprise. The two consecutive years that follow the 2014 economic and financial crisis bring negative rate of growth in domestic demand of almost 9.7% in 2015 and 0.8% in 2016. These years bring negative real GDP growth with the fall of almost 3% in 2015 and 0 annual growth rate in 2016. Year 2017 in the Russian economy is marked with domestic demand growth rate of 3.7%. The two consecutive years that follow—2018 and 2019—bring the total percentage change in real total domestic expenditure, including stock-building, with the annual growth rate of 3.2% and 1.9%, respectively. Some reports claim the real GDP growth in 2018 of as high as 2.5%. During this period, domestic demand in the Russian economy repeats the trends of real GDP growth. Year 2017 is marked with real GDP growth rate of well over 1.5%, while 2018 and 2019 bring real GDP growth with the annual growth rate of close to 2% each. Figure 7.1 compares the cumulative dynamic of annual growth rates for real GDP and domestic demand in Russia, taken in percentage points, observed during the period of 1990 to 2019. As can be seen on the graph,

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domestic demand rises sharply in 1991. At the same time, real GDP in the Russian economy declines. After this initial dissonance of 1991, the values of these two main macroeconomic indicators start moving in unison. In 1992, both the total volume of domestic demand and the total volume of real GDP, recorded in the Russian economy, fall dramatically. After the series of falls in the 1990s, trends in the values of domestic demand and real GDP in Russia converge. The growth rates of domestic demand and real GDP reach around zero values only during the 1997 pre-crisis year. Value of real GDP growth stays around zero that year as well. Based on the dynamic, presented in Fig. 7.1, it appears that domestic demand in Russia has a lead in real GDP growth rates during both the increases and downfalls. During the 1992 post-disintegration crisis, the fall in domestic demand is much more significant than the fall in real GDP. During the 1998 financial and economic crisis, the fall in domestic demand, recorded in the Russian economy, is also much more significant than the fall in real GDP. The same is true for the post-crises years of 2009 and 2015. Overall, domestic demand in the Russian economy repeats the trends observed in real GDP. At the same time, the amplitude in the dynamic of domestic demand increases and decreases is clearly much more significant than the amplitude in the dynamic of real GDP. 25 20 15 10 5 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

0 -5 -10 -15 -20 -25 -30 Real GDP (% change pa) RUDGDP

Domestic demand (% real change pa) RUDDMD

Fig. 7.1 Growth rates for real GDP and domestic demand in Russia, 1990– 2019

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Prognosis of Economic Growth in Russia in the 2020s It would also be interesting to briefly consider the prognosis for the Russian economy, and specifically GDP growth and related major macroeconomic indicators. Such prognosis includes expenditure on GDP in Russia, by category, taken as a real percentage change per annum. This data covers the Russian economy during the period of 2020 to 2029. Such projections are offered based on the data from Economist Intelligence Unit. The data includes such major variables of the Russian economy as real GDP growth, private consumption, government consumption, gross fixed investment, stock-building, exports of goods and services, imports of goods and services, and domestic demand. The data on these major macroeconomic indicators in Russia is presented in Table 7.2. Although mere projections, it would make sense to briefly look through these main macroeconomic indicators that may well characterize the future of the Russian economy. As follows from the data, presented in Table 7.2, real GDP growth in Russia remains positive during the entire period. The rate of real GDP growth as the total percentage change in real GDP, taken over previous year, fluctuates between 1.6 and 1.8%. These values are more or less in line with what real GDP growth in Russia experiences during the 2010s, and especially during the last few years of the decade. The 2000s are marked with much higher rates of real GDP growth in Russia. Similar to real GDP growth, growth in private consumption in Russia remains positive during the entire projected period. The rate of growth in private consumption as the total percentage change in real private consumption, taken over previous year, fluctuates between 0.1 and 2.6%. These values are more or less in line with what real private consumption growth in Russia experiences during the 2010s, and especially during the last few years of the decade. At the same time, these rates are certainly less significant than rates of growth in real private consumption in 2000s. Similar to real GDP growth and growth in private consumption, growth in the total value of government consumption in Russia remains positive during the entire projected period. The rate of growth in government consumption as the total percentage change in real government consumption, taken over previous year, fluctuates between 1.5 and

1.6 1.7 1.8 1.8 1.8 1.8 1.8 1.7 1.7 1.7

2.7 3.7 3.4 1.5 1.8 2.2 2.4 2.6 2.6 2.7

0.4 0.3 0.1 1.0 1.7 2.2 2.5 2.6 2.6 2.4

Government consumption (% real change pa) 1.8 2.0 1.8 1.0 0.4 −0.1 −0.4 −0.6 −0.6 −0.6

Gross fixed investment (% real change pa) 1.1 1.1 −1.1 0.2 0.3 0.3 0.3 0.3 0.3 0.3

Stock-building (% real change pa) 2.3 4.6 4.2 3.7 3.4 3.0 2.8 2.6 2.5 2.4

Exports of G&S (% real change pa)

4.3 8.2 2.0 2.7 3.2 3.5 3.8 3.9 3.9 3.9

Imports of G&S (% real change pa)

Sources Economist Intelligence Unit (2021), the State Committee of Statistics of the Russian Federation, RosStat (2021)

2020 2021 2022 2023 2024 2025 2026 2027 2028 2029

Private consumption (real % change pa)

Expenditure on GDP in Russia, real percentage change per annum, 2020–2029

Real GDP (% change pa)

Table 7.2

3.2 3.7 1.3 1.5 1.7 1.9 2.0 2.1 2.2 2.2

Domestic demand (% real change pa)

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3.7%. These values are more or less in line with what real government consumption growth in Russia experiences during the 2000s. At the same time, these projected rates of increase appear to be very optimistic as compared with similar macroeconomic indicators taken during the 2010s. More specifically, these rates that characterize the Russian economy are certainly much more stable and significant than rates of growth in values of real government consumption in 2010s. This is especially true during the last few years of the decade in review. The total percentage change in real government consumption in the Russian economy, taken over previous year, is placed well above 2% from 2025 to 2029. In distinction of growth rates in real GDP, private consumption, and government consumption, growth in gross fixed investment does not remain positive during the entire period. Gross fixed investment growth in Russia is projected to remain positive only from 2020 to 2024. During these five years, the rate of real total percentage change in real gross fixed investment, taken over previous year, fluctuates between 0.4 and 2%. These values are clearly not in line with what real gross fixed investment growth in Russia experiences during the 2000s and 2010s. Gross fixed investment growth in Russia is projected to become negative during the period of 2025 to 2029. As follows from the data on major macroeconomic indicators, presented in Table 7.2, the rate of growth in the total value of stockbuilding in Russia remains positive during the entire projected period that covers the decade of 2020s. The only exception from this positive dynamic is in 2022, when growth in stock-building in the Russian economy is expected to be negative. The rate of the total percentage change in real stock-building, taken over previous year, fluctuates between 0.3 and 1.1%. These values represent a relatively smooth distribution as compared to the 2000s and 2010s. Growth in real exports of goods and services in Russia remains positive during the entire projected period of 2020 to 2029. The rate of the total percentage change in real exports of goods and services, taken over previous year, fluctuates between 2.3 and 4.6%. These values are more or less in line with what real exports of goods and services in Russia experience during the 2010s, and especially during the last few years of the past decade. The 2000s are marked with much higher rates of growth in the total value of real exports of goods and services, than projected for 2020s.

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Growth in real imports of goods and services in Russia remains positive during the entire period. The rate of the total percentage change in real imports of goods and services, taken over previous year, fluctuates between 2 and 8.2%. Trends in these values certainly do not match trends in real imports of goods and services in Russia experiences during the 1990s, 2000s, and 2010s. The 2000s in particular are marked with much higher rates of growth in real imports of goods and services, than projected for 2020s. Rates of growth in domestic demand in Russia remain positive during the entire period. The rate of the total percentage change in real total domestic expenditure, including stock-building, taken over previous year, fluctuates between 1.3 and 3.7%. These values are not in line with what real domestic demand in Russia experiences during the 1990s, 2000s, or 2010s. The volatility in values of real domestic demand during these three decades is much higher than projected for 2020s. Overall, it appears that the rates of growth in a set of macroeconomic indicators that characterize the Russian economy, presented in Table 7.2, are moderate. Furthermore, the approach in estimating these projected values, used by Economist Intelligence Unit, is quite cautious. Values of main macroeconomic indicators are placed in a range, which one would call a moderate-to-optimistic or cautiously-optimistic range, especially when it comes to the Russian economy. The amplitude in the values of main macroeconomic indicators during the projection period of 2020s is nowhere close to the amplitudes observed during the 1990s, 2000s, and 2010s. Obviously, the distribution of values in the prognosis period is much smoother than during the previous three decades.

Concluding Remarks Financial and economic crises in Russia cause real government consumption to shrink. The usually active role of the national government in promoting increases in government spending during and after the economic crises may hardly be a characteristic of the Russian government and the country’s economy. This inactivity makes the task of stabilizing the national economy more difficult. While the Russian economy continues to experience a significant increase in business activities and positive growth in real private consumption rates throughout most of the 2010s, the dynamic of real government consumption is much more modest, as this macroeconomic indicator experiences both increases and

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decreases. Furthermore, annual rates of real government consumption increase demonstrated in Russia in the 2010s are not nearly as impressive, as those demonstrated during the 2000s. Overall, the volume of government consumption maintained during the post-crises recovery years, experienced by the Russian economy, may be deemed insufficient. The 1997–1998 world financial and economic crisis negatively impacts national economies, including that of Russia. Naturally, the Russian economy suffers a significant fall in the value of real GDP. At the same time, the fall in the value of domestic demand, recorded in the Russian economy, is much more significant than the fall in real GDP. The same is true for the post-crises years of 2009 and 2015. Economic and financial crises of 2008 and 2014 cause notable reductions in volume of domestic demand. Changes in the total volume of domestic demand in the Russian economy repeat the trends in real GDP. However, the amplitude in the dynamic of the value of domestic demand is definitely much more significant than the amplitude in the dynamic of real GDP. The third stage of economic growth in Russia, defined and delineated in this chapter as covering the time period of 2010 to 2019, clearly indicates the dominance of positive trends in the value of domestic demand. Nevertheless, this positivity is nowhere near the dominance of positive trends in domestic demand, observed in the national economy during the previous decade. The 2000s demonstrate higher rates in positive economic dynamics in Russia than do 2010s. This predominant positivity is indicated by the data on the total percentage change in real total domestic expenditure, including stock-building, observed in the Russian economy during the period of 2010 to 2019. The steady trend of positive change in real exports of goods and services in the Russian economy continues during the entire period of 2010 to 2019. This steady increase is not compromised even by the economic and financial crisis of 2014. The sharp and continuous rise in the total volume of real exports of goods and services, recorded in the Russian economy during the third stage lays ground for potentially possible further sustainable economic growth. The third stage also demonstrates the dominance of positive trends in real imports of goods and services in Russia. Nevertheless, this dominance is nowhere near the dominance of rates of increase in real imports of goods and services indicated in the national economy in the 2000s. Furthermore, the rate of this annual increase in imports, recorded in the Russian economy during the 2010s, gradually declines.

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The third stage of economic growth in Russia indicates the dominance of positive trends in real imports of goods and services, but the rates of increase in real imports of goods and services are much less stable than the rates of increase in real exports of goods and services. Real imports of goods and services have both increases and decreases during the 2010s. Overall, the period of the 2010s in the Russian economy, or the third stage, may be characterized as a period of slow-down. In order to strengthen the national economy, make it more crisis-proof, and achieve sustainable economic growth, the Russian economy needs to achieve higher rates of gross fixed investment and higher rates of stock-building. The economic prognosis about the Russian economy, and specifically growth in GDP and related macroeconomic indicators, covers the period of 2020 to 2029. In these projections, the dynamic of such key macroeconomic variables as real GDP growth, private consumption, government consumption, gross fixed investment, and stock-building, exports of goods and services, imports of goods and services, and domestic demand is much more modest than during the 1990s, 2000s, and 2010s. Even this modest prognosis may appear somewhat optimistic in light of the recent unfortunate developments that take place in and around Russia. The Russian economy suffers significantly due to the health crisis that starts in 2020. The global pandemic has a serious and negative impact on the country’s demographics and thus, negatively affects the Russian economy. A higher than expected mortality rates reported in the country cause declines in consumer demand and shrinking domestic market. The volume of private consumption is negatively affected by the crisis.

References Economist Intelligence Unit. (2021). Economist Intelligence Unit Database. Bureau van Dijk Electronic Publishing. RosStat. (2021). The State Committee of Statistics of the Russian Federation. RosStat. https://rosstat.gov.ru/

CHAPTER 8

Consumption, Investment, Debt, Inflation, and Unemployment in Russia

Growth in Real GDP, Consumption, and Investment Private consumption, government consumption, gross fixed investment, stock-building, along with inflation, and unemployment, define the situation in the national economy. The dynamic of annual growth rates of real GDP, private consumption, government consumption, gross fixed investment, and stock-building in Russia, taken in percentage points, during the period of 1990 to 2019, may be better seen if depicted as graphs. The dynamic of these macroeconomic indicators, taken in clusters, is depicted in Figs. 8.1, 8.2, and 8.3. These separate figures that characterize the Russian economy depict the dynamic of each contributing cluster more clearly. The dynamic of annual contribution of private consumption, government consumption, and gross fixed investment to real GDP growth in Russia, taken in clusters, makes a better exposure of the economic crises. Figure 8.1 depicts the cumulative dynamic of annual growth rates for real GDP, private consumption, and government consumption in Russia, in percentage points, observed during the 20-year period from 1990 to 2019. As can be seen on the graph, the values of these three main macroeconomic indicators remain largely negative during the years of the transitional economic and social crisis of the 1990s. These values start rising only at the end of the 1990s, after the financial and economic crisis of 1998, suffered by the Russian economy. After the crisis, values for © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 A. L. Osipian, Sustainable Economic Growth in Russia, https://doi.org/10.1007/978-3-031-38874-3_8

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20 15 10 5

-5

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

0

-10 -15 -20 Real GDP (% change pa) RUDGDP Private consumption (real % change pa) RUDCPR Government consumption (% real change pa) RUDGCE

Fig. 8.1 Growth rates for real GDP, private consumption, and government consumption in Russia, 1990–2019

annual growth rates for real GDP, private consumption, and government consumption become largely positive. This positivity remains as a general trend during the 2000s and until 2014, with the exception of 2009, following the 2008 global financial and economic crisis, also suffered by the Russian economy. However, after the 2014 economic and financial crisis, this positivity in main macroeconomic indicators is interrupted yet again with negative postcrisis values during 2015. After this downfall, annual growth rates for real GDP, private consumption, and government consumption in the Russian economy, expressed in percentage points, indicate an increase. However, this increase comes with much lesser indicative values as compared to the increase experienced during the 2000s. Based on the macroeconomic dynamic of the 2000s, indicative of the Russian economy, it appears that private consumption has a lead in real GDP growth rates during both the increases and downfalls. During the 1998 crisis, the fall in private consumption, recorded in the Russian economy, is less significant than the fall in real GDP. However, this fall

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25 20 15 10 5

-5

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

0

-10 -15 -20 -25 Real GDP (% change pa) RUDGDP Gross fixed investment (% real change pa) RUDFIN Stockbuilding, contribution to real GDP growth (% points) RUDSTK

Fig. 8.2 Growth rates for real GDP, gross fixed investment, and stock-building in Russia, 1990–2019 80 70 60 50 40 30 20 10

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

0

Exchange rate LCU:US$ (av)

Fig. 8.3 Foreign currency exchange rate in Russia, RUB to US$, 1990–2024

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in private consumption continues in 1999, while real GDP experiences a sharp increase during this year. During the 2009 post-crisis year, the fall in private consumption, experienced by the Russian economy, is once again less significant than the fall in real GDP. At the same time, during the 2015 post-crisis year, the fall in private consumption is more significant than the fall in real GDP, suffered by the Russian economy. Along with private consumption, government consumption also plays its role in real GDP growth, as observed in the Russian economy. As follows from trends presented in Fig. 8.1, government consumption does not have a lead in real GDP growth rates during both the increases and downfalls. During the 1998 economic and financial crisis, government consumption in the Russian economy demonstrates an increase, unlike private consumption and real GDP. This increase in government consumption continues for over a decade, from 1998 to 2008. However, this increase continues at much lesser rates than the increases in private consumption and real GDP in Russia. The stability in rates of growth of government consumption in the Russian economy during 1998–2008 is not ideal, nor is it impressive. Furthermore, in 2001, government consumption experiences a negative rate of growth, while both private consumption and real GDP continue to increase. During the 2009 post-crisis year, the fall in government consumption, recorded in the Russian economy, is less significant than the fall in private consumption and in real GDP. At the same time, the fall in government consumption continues in 2010 and 2011, while private consumption and real GDP experience a steady increase. During the 2015 post-crisis year, the rate of decrease in government consumption in the Russian economy is about as significant as the rate of decrease in real GDP. At the same time, this fall is much less significant than the fall in private consumption, recorded in the Russian economy. Overall, the amplitude in the dynamic of government consumption increases and decreases is clearly much less significant than the amplitude in the dynamic of private consumption and real GDP, observed in the Russian economy. The former tends to fluctuate and change in its value much less significantly than the latter, ascribing the traditional stability function, as applied to Russia. In well-regulated market economies, government consumption is frequently used as a cushion against the negative consequences of an economic crisis. In such instances, increases in government consumption

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are also intended to compensate for a sharp decline in private consumption. Increases in government consumption are called to mitigate the negative impact of the economic crisis on the national economy. As follows from the dynamic of the contribution of government consumption to real GDP growth, observed in the Russian economy, the Russian government does not use government consumption as an effective tool in supporting the national economy. Figure 8.2 depicts the cumulative dynamic of annual growth rates for real GDP, gross fixed investment, and stock-building in Russia, in percentage points, observed during the 20-year period from 1990 to 2019. As can be seen on the graph, the values of these three main macroeconomic indicators remain largely negative during the years of the transitional economic crisis of the 1990s. These values start rising sharply only at the end of the 1990s, after the economic and financial crisis of 1998, suffered by the Russian economy, and the 1999 postcrisis year. After the 1998 crisis, values for annual growth rates for real GDP, gross fixed investment, and stock-building become largely positive. Stock-building demonstrates slightly negative rates of growth in 2002 and 2003. This positivity observed in the Russian economy remains as a general trend during the 2000s and until 2012, with the exception of 2009, following the 2008 economic and financial crisis. After the 2014 economic and financial crisis, this positivity in main macroeconomic indicators is interrupted yet again with negative post-crisis values during 2015. After this downfall, annual growth rates for real GDP, gross fixed investment, and stock-building in Russia, indicate an increase. However, this increase comes with much lesser indicative values as compared to the increase experienced during the 2000s. Based on this dynamic in the values of major macroeconomic indicators, it appears that gross fixed investment in Russia has a lead in real GDP growth rates during both the increases and downfalls. During the 1998 economic and financial crisis, the fall in gross fixed investment observed in the Russian economy is much more significant than the fall in real GDP. During the pre-crisis 1995, 1996, and 1997, the fall in gross fixed investment is much more significant than the fall in real GDP. During the 2009 post-crisis year, the fall in gross fixed investment recorded in the Russian economy is once again much more significant than the fall in real GDP. Similarly, during the 2015 post-crisis year, the fall in gross fixed investment is much more significant than the fall in real GDP.

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Along with gross fixed investment, stock-building that takes place in the Russian economy also plays its role in the process of real GDP growth. As follows from trends presented in Fig. 8.2, stock-building does not have a lead in real GDP growth rates during both the increases and downfalls. During the 1998 economic and financial crisis, suffered by the Russian economy, stock-building demonstrates a sharp decrease, similar to gross fixed investment and real GDP. This decrease in stock-building continues for over a decade, from 1999 to 2008. 2000 is the year when stockbuilding in Russia increases with a remarkably high rate, on par with real GDP, yet lower than gross fixed investment. A decrease in stock-building, although with much smaller rates, happens again in 2002 and 2003, as recorded in the Russian economy. This is while both gross fixed investment and real GDP continue to increase. After that, stock-building, observed in the Russian economy, becomes distinct with very insignificant rates of growth. During the 2009 post-crisis year, the fall in stock-building is more significant than the fall in real GDP and about as dramatic as in gross fixed investment. The fall in stock-building happens prior to major crises, suffered by the Russian economy, and after these crises as well. This happens even during years when gross fixed investment and real GDP experience a steady increase. Stock-building in Russia is characterized by negative rates of growth during the pre-crisis year of 2013 and economic and financial crisis year of 2014. During the 2015 post-crisis year, the fall in stock-building observed in the Russian economy, is about as significant as the fall in real GDP. At the same time, this fall is much less significant than the fall in gross fixed investment. Overall, the amplitude in the dynamic of stock-building increases and decreases, recorded in the Russian economy, is clearly much less significant than the amplitude in the dynamic of growth rates for gross fixed investment and real GDP. Except for the downfalls of 1998 and 2009 and peaks of 2000 and 2010, the rate of growth in stockbuilding in the Russian economy stays close to zero during the entire studied period.

Foreign Debt In addition to widely discussed Russia’s dependency on oil and gas revenues received from abroad, foreign indebtedness is also portrayed as a traditional part of the country’s external dependency. However, the reality for Russia might be quite different. Short-term foreign debt and interest

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arrears are usually used as indicators of a national economy in urgent need of financial resources that have trouble generating enough revenue to balance its budget. Short-term foreign debt is taken by a countryrecipient at a high-interest rate, and countries with continuous financial difficulties find it challenging to serve their foreign debt, thus defaulting on payments and carrying significant interest arrears. A country with a high short-term debt and high level of interest arrears—both as compared to real GDP—is highly unlikely to enter the trajectory of sustainable economic growth. Short-term foreign debt and interest arrears indicate that the Russian economy is not in urgent need of financial resources in the form of external financial assistance. The country does not experience any serious problems in generating enough revenue to balance its state budget. On the contrary, Russia is quite capable of managing its foreign debt and obviously does so. Based on the data on Russia’s short-term foreign debt and interest arrears, Russia cannot be characterized as a country with continuous financial difficulties. Russia does not have an external borrowing addiction problem, serves its foreign debt, does not default on payments, and carries no significant interest arrears. Thus, foreign debt and interest arrears do not serve as major obstacles for a steady development of the Russian economy and do not prevent the country from entering the trajectory of sustainable economic growth. Statistical data on the short-term debt, interest arrears, interest arrears owed to official creditors, and interest arrears owed to private creditors, in Russia for the period of 1990–2022 points to the changing structure of the inflow of foreign or external resources. The data on these macroeconomic indicators is presented in Table 8.1. In Table 8.1, the value of short-term debt denotes the total disbursed external debt owed by all sectors, having an original maturity up to one year, including capitalized interest arrears, at end-period, in billion US$. Interest arrears represents the total cumulative stock of unpaid interest charges due on long-term external debt at end-period, in billion US$. Interest arrears owed to official creditors indicates the total unpaid interest charges on long-term external debt at end-period owed to official creditors, in billion US$. Interest arrears owed to private creditors marks the total unpaid interest charges on long-term external debt at end-period owed to commercial creditors, in billion US$. The Russian economy carries total disbursed external debt owed by all sectors, having an original maturity up to one year, including capitalized

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Table 8.1 Foreign debt and interest arrears in Russia, billion US$, 1990–2022

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Short-term debt, billion US$

Interest arrears, billion US$

Interest arrears owed to official creditors, billion US$

Interest arrears owed to private creditors, billion US$

9.5949 7.5657 13.1119 8.2906 9.8617 10.3550 12.1199 6.0706 14.9788 15.6252 15.6302 18.9715 16.3185 30.4575 26.4485 27.1307 40.6008 100.2627 74.2076 53.0964 60.2136 69.8858 81.9018 84.0000 61.7000 42.1000 45.1000 82.4705 100.6163 117.4103 127.3091 153.0434 161.6875

8.3154 6.2175 4.4119 2.8906 5.1617 6.0050 7.5199 2.8706 4.8788 6.5252 4.5302 5.3715 4.3185 3.2575 3.1025 3.1507 0.7468 0.6060 0.6548 0.4271 0.0066 0.0018 0.0018 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000

6.5681 3.6501 0.4641 0.6036 0.9936 1.3842 1.9321 2.0717 3.8004 4.3264 4.4540 5.3044 4.2514 3.1903 3.0354 3.0817 0.6765 0.6060 0.6548 0.4271 0.0066 0.0018 0.0018 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000

1.7473 2.5674 3.9479 2.2870 4.1681 4.6208 5.5878 0.7989 1.0784 2.1988 0.0762 0.0671 0.0671 0.0671 0.0671 0.0690 0.0703 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000

Sources Economist Intelligence Unit (2021), the State Committee of Statistics of the Russian Federation, RosStat (2021)

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interest arrears, in 1990 constitute close to US$10 billion, declining to US$7.6 billion in 1991. The value of this macroeconomic indicator rises sharply with the fall of the Soviet Union, reaching over US$13 billion in 1991. The short-term debt stays at US$8 billion in 1993, US$10 billion in 1994, over US$10 billion in 1995, and reaches US$12 billion in 1996. During the pre-crisis 1997, short-term debt in Russia falls to US$6 billion. The economic and financial crisis year of 1998 is marked with the total short-term debt in Russia of US$15 billion. The post-crisis years of 1999 and 2000 indicate the total short-term debt of over US$15 billion. In 2001, the value of this macroeconomic indicator reaches US$19 billion, dropping to US$16 billion in 2002, and then rising to over US$30 billion in 2003. The total disbursed external debt owed by all sectors in the Russian economy, having an original maturity up to one year, including capitalized interest arrears, at end-period, stays around US$27 billion in 2004 and 2005, and then reaches over US$40 billion in 2006, skyrocketing to slightly over US$100 billion in pre-crisis 2007. During the 2008 economic and financial crisis, short-term debt in Russia declines to US$74 billion, further declining to US$53 billion in 2009. The new rise starts in 2010 with US$60 billion, reaching US$70 billion in 2011, and staying above US$80 billion in 2012 and 2013. The economic and financial crisis year of 2014 brings the drop in the value of short-term debt in Russia to US$62 billion. Post-crisis years of 2015 and 2016 are marked with a low of US$42 billion and US$45 billion, respectively. In 2017, the value of this macroeconomic indicator almost doubles, reaching over US$82 billion, and crossing the line of US$100 billion in 2018, first achieved in 2007. The projections show the continuing rise of the short-term debt in the Russian economy, reaching US$162 billion by the end of 2022. Total interest arrears in 1990 constitute over US$8 billion, declining to over US$6 billion in 1991, which is still under the Soviet system. Most of this debt is owed to official creditors, which is of no surprise, as the Soviet authorities would rarely deal with foreign private creditors. After the Soviet Union collapse in 1991, total interest arrears remain on the declining trajectory, falling to US$4.4 billion in 1992 and close to US$3 billion in 1993. At the same time, the correlation between interest arrears owed to official creditors and interest arrears owed to private creditors changes dramatically. With the introduction of market reforms, the total unpaid interest charges on long-term external debt at end-period

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owed to commercial creditors clearly dominate over the total unpaid interest charges on long-term external debt at end-period owed to official creditors. As the transitional economic crisis of the 1990 gains momentum, Russia starts accumulating the total cumulative stock of unpaid interest charges due on long-term external debt at end-period. Total interest arrears on foreign debt in the Russian economy starts rising rapidly. The value of this macroeconomic indicator rises to over US$5 billion in 1994, US$6 billion in 1995, and US$7.5 billion in 1996. During these years, the total unpaid interest charges on long-term external debt owed to commercial creditors significantly exceed the total unpaid interest charges on long-term external debt owed to official creditors. During the pre-crisis year of 1997, total interest arrears in Russia decline to slightly less than US$3 billion. In this year, interest arrears owed to official creditors exceed US$2 billion, while interest arrears owed to private creditors drops below US$1 billion. The world financial and economic crisis brought Russia to the total interest arrears of close to US$5 billion, of which interest arrears owed to official creditors amount to almost US$4 billion, while interest arrears owed to private creditors reach slightly above US$1 billion. Total interest arrears on foreign debt further increase to over US$6.5 billion during the post-crisis 1999. Apparently, due to the economic and financial crisis, the Russian economy starts accumulating total interest arrears on its foreign debt. The country is unable to serve its foreign debt on time, as it suffers the consequences of the world financial and economic crisis. The total cumulative stock of unpaid interest charges due on long-term external debt at end-period in Russia expectedly increases. The total unpaid interest charges on long-term external debt owed to official creditors continue to significantly exceed the total unpaid interest charges on long-term external debt owed to commercial creditors. From 2000 to 2003, the total cumulative stock of unpaid interest charges due on long-term external debt at end-period in Russia stays around US$5 billion. Then the values of this macroeconomic indicator fluctuate at slightly above US$3 billion for the next three years. Starting in 2000, interest arrears owed to private creditors drop below US$100 million, staying around US$70 million until 2006, after which they become equal to zero. On the contrary, interest arrears owed to official creditors fluctuate from above US$3 billion to over US$5 billion. In

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2006, the value of this macroeconomic indicator in Russia drops below US$1 billion and becomes insignificant starting 2010. In 2006, the value of total interest arrears in Russia drops below US$1 billion, constituting only US$0.75 billion, and then only around US$600 million in 2007 and 2008. During the following ear, the value of this macroeconomic indicator declines further to less than half a billion dollars. Finally, total interest arrears in Russia become insignificant in 2010, declining to less than US$7 million. Years that follow are characterized by the nullified values of this macroeconomic indicator during the rest of the studied period and in forecasts until 2022. Even 2014 economic and financial crisis does not produce any interest arrears on foreign loans absorbed by the Russian economy.

Inflation and Unemployment Foreign debt is not the only factor that impacts the current state of the Russian economy and its prospects for sustainable economic growth. More importantly, such major macroeconomic determinants as inflation and unemployment in Russia, considered during the period of 1990 to 2024 indicate high rates of volatility of the national economy. The economic instability caused by the market transition is especially obvious during the 1990s. Both high rates of inflation and the growing unemployment, observed in Russia during the first decade of the market transition, cause the increasing economic uncertainty, at times bordering panic. Both potential investors and Russia’s general public are uncertain about their economic perspectives. This uncertainty concerns monetary assets, including savings, investment, and the future of their personal income and revenue stream. This kind of economic uncertainty contradicts the potential for sustainable economic growth. Statistical data on the annual change in the value of GDP deflator, long-term bond yield, consumer prices, producer prices, exchange rate, and unemployment rate in the Russian economy for the period of 1991– 2024 points to the changing dynamic in economic stability and instability. The values of these macroeconomic indicators are expressed in percent real change per annum. The data on these macroeconomic indicators that characterize the Russian economy is presented in Table 8.2. In Table 8.2, the value of GDP deflator (2005 = 100; average) denotes GDP deflator index in local currency, period average (2005 = 100). The value of this indicator in 2005 is taken as 100%. GDP deflator (%

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Table 8.2 Inflation and unemployment in Russia, 1990–2024 GDP GDP deflator deflator (2005 = (% 100; av) change; av) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024

– – – – – – 0.944 – 3.906 313.729 9.571 145.034 14.058 46.883 16.221 15.385 19.164 18.141 33.026 72.337 45.571 37.986 53.114 16.551 61.360 15.526 69.768 13.702 83.813 20.131 100.000 19.313 115.374 15.374 131.070 13.604 154.755 18.071 157.896 2.030 180.266 14.167 209.902 16.440 229.001 9.099 241.414 5.421 259.359 7.433 281.026 8.354 290.605 3.409 306.000 5.300 331.700 8.400 345.000 4.000 360.700 4.600 380.400 5.500 402.700 5.900 420.000 4.300 437.600 4.200

Long-term Consumer Producer Exchange bond yield prices (% prices (% rate (%) change change LCU:US$ pa; av) pa; av) (av) – – – – – – – – – 87.376 35.163 19.383 15.824 9.115 8.289 8.108 6.977 6.718 7.523 9.874 7.832 8.061 8.154 7.331 8.464 10.887 10.438 8.993 7.700 8.500 9.200 8.800 8.600 – –

– – 107.188 – 1592.484 – 864.310 1024.444 296.036 335.870 196.272 244.638 47.249 52.931 14.807 14.549 27.697 3.883 85.917 59.034 20.782 46.805 21.478 18.214 15.778 10.533 13.651 16.537 10.886 23.386 12.672 20.689 9.660 12.512 9.016 14.363 14.112 21.294 11.631 −7.062 6.844 12.214 8.430 17.851 5.096 7.075 6.764 3.089 7.832 6.140 15.509 13.840 7.029 4.247 3.679 7.630 3.500 6.300 4.300 2.900 4.500 3.500 4.000 3.100 4.100 4.200 4.300 – 4.200 –

0.016 0.022 0.220 0.991 2.190 4.559 5.120 5.784 9.705 24.619 28.129 29.168 31.348 30.692 28.813 28.284 27.190 25.580 24.852 31.740 30.367 29.382 30.839 31.837 38.378 60.937 67.055 58.342 60.910 60.370 60.900 60.440 59.070 60.040 61.130

Unemployment rate (%)

– 0.000 2.000 4.000 7.017 8.300 9.258 10.808 11.875 13.033 10.558 8.942 8.042 8.233 7.733 7.150 7.050 6.025 6.233 8.242 7.358 6.508 5.450 5.500 5.158 5.575 5.525 5.200 5.100 4.900 5.200 5.000 4.900 – –

Sources Economist Intelligence Unit (2021), International Monetary Fund (2021), Organization for Economic Cooperation and Development (2021); the State Committee of Statistics of the Russian Federation, RosStat (2021)

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change; average) represents percentage change in GDP deflator index in local currency, period average (2005 = 100). The value of this indicator in 2005 is taken as 100%. Long-term bond yield (%) indicates long-term interest rate. Consumer prices (% change pa; average) mark percentage change in consumer price index in local currency (period average), over previous year. Producer prices (% change pa; average) denotes percentage change in producer price index in local currency, period average (December 2000 = 100). The value of this indicator in December 2000 is taken as 100%. Exchange rate LCU:US$ (average) represents national currency per US$, period average. LCU is the abbreviation that stands for local currency unit. Finally, unemployment rate (%) marks recorded official unemployment as a percentage of total labor force; expressed as average per year. Such major economic phenomena as inflation and unemployment, observed in Russia over the period from 1990 to 2024, demonstrate vulnerabilities of the national economy and Russian population. Changes in the value of such macroeconomic indicators as GDP deflator, longterm bond yield, consumer prices, producer prices, and exchange rate are indicative of the major inflation trends in the Russian economy. The value of GDP deflator increases from 0.9 in 1993 to 306.0 in 2017, and in projections to 437.6 in 2024. The value of GDP deflator in 2005 is taken as 100%. Percentage change in GDP deflator index in local currency is the highest in the first half of the 1990s, equaling 314% in 1994 and 145% in 1995. The 1997–1998 world economic and financial crisis in the Russian economy results in the value of GDP deflator index increasing from 18% in 1998 to 72% in 1999. On the contrary, the 2008 economic and financial crisis results in the value of GDP deflator index decreasing from 18% in 2008 to 2% in 2009. The 2014 crisis in the Russian economy leaves no print on the value of GDP deflator index, as it stays at 7.4% in 2014 and increases to 8.4% in 2015, falling to 3.4% in 2016. As presented in Table 8.2, data for consumer price index shows a most dramatic increase during the first half of the 1990s, reaching 1,593% in 1992. The crisis of 1997 is reflected in a significant rise in consumer prices. The economic and financial crisis of 2008, suffered by the Russian economy, also has a notable impact on the value of consumer price index. Specifically, the percentage change in consumer price index in local currency increased from 9% in 2007 to 14% in 2008, then dropping slightly to nearly 12% in 2009. The economic and financial crisis of 2014

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also brought an increase in the value of consumer price index in Russia. This macroeconomic indicator increased from 6.8% in 2013 to 7.8% in 2014 and to 15.5% in 2015. Percentage change in consumer price index in the Russian economy in 2016 drops to 7%. After that, the percentage change in consumer price index stays around 4% in projections until 2024. Similar to consumer prices, producer prices also indicate inflation trends in the Russian economy. According to the data, presented in Table 8.2, producer price index in local currency correlates with major economic and financial crises. The data for producer price index in Russia shows a most dramatic increase during the first half of the 1990s, reaching 1,025% in 1993. The financial and economic crisis of 1997 is reflected in a significant rise in producer prices, moving the producer price index from less than 4% in 1998 to almost 60% in 1999 and 47% in 2000. The economic and financial crisis of 2008, suffered by the Russian economy, also has a notable impact on the value of producer price index. Specifically, the percentage change in consumer price index increased from 14% in 2007 to 21% in 2008, dropping to −7% in 2009. This means that producer prices in Russia during the post-crisis 2009 declined 7% instead of experiencing a usual rise. The economic and financial crisis of 2014 also caused an increase in producer price index in Russia. The value of this macroeconomic indicator increased from 3% in 2013 to over 6% in 2014 and close to 14% in 2015. Percentage change in producer price index in the Russian economy in 2016 drops to 4%. After that, the producer prices that denote percentage change in producer price index in local currency, period average, taken over previous year, stay below 4% in projections until 2022. Long-term bond yield (%) that indicates long-term interest rate offered by Russian banks is the highest in 1999, reaching 87% after the crisis of 1997–1998. During the next financial and economic crisis, long-term interest rate observed in the Russian economy increases from 7.5% in 2008 to almost 10% in 2009. Finally, the 2014 crisis results in long-term interest rate increasing from 8.5% to close to 11% in 2015 and 2016. These are clear indications of the rising inflation. After this, the value of the long-term interest rate in the Russian economy stabilizes around 9%. Exchange rate of the national currency to a major hard currency, such as US$, is yet another indicator used to trace inflation in the national economy. This is certainly the case in the Russian economy that was especially dependent on the US$ in the 1990s and is still dependent on the US currency. This was part of the country’s dollarization. In Russia, exchange

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rate increased from RUB2.19 for US$1 in 1994 to RUB4.56 for US$1 in 1995, reflecting the inflation of the early transition of 1990s. The fast pace of inflation during the socio-economic transition to the market in Russia reflects the falling economy and conveys the sense of acute uncertainty of the general public regarding their savings and future economic perspectives overall. The 1997 global financial and economic crisis and its aftermath in 1998 and 1999 that negatively impacted the Russian economy also leave a significant print on the RUB. Specifically, exchange rate increased from RUB5.78 for US$1 in 1997 to RUB9.70 for US$1 in 1998. In 1999, the exchange rate further increased to RUB24.62 for US$1. The next global financial and economic crisis that leaves its print on the RUB pulls up the exchange rate from RUB24.85 for US$1 in 2008 to RUB31.74 for US$1 in 2009. The exchange rate in Russia jumped from RUB38.38 for US$1 in 2014 to RUB60.94 for US$1 in 2015. In 2016, the value of RUB on the world market further decreases with the exchange rate declining to RUB67.06 for US$1. Nevertheless, the following year, as the Russian economy starts recovering from the crisis, the exchange rate bounces back to RUB58.34 for US$1. In the long run, after the 2014 economic and financial crisis and its aftermath, the exchange rate continues to fluctuate around RUB60 for US$1, characterizing the relative stability of the Russian economy. The dynamic in foreign currency exchange rate in Russia, RUB to US$, from 1990 and in projections until 2024, is presented in Fig. 8.3. Inflation in the macroeconomic analysis is usually closely tied to unemployment. Analysis of the Russian economy is no exception in this sense, coupling inflation with unemployment. During the Soviet era, there was no unemployment in Russia. This is of no surprise, since Russian socialism was known—among other characteristics—for absence of official unemployment. On the verge of the Soviet Union formal disintegration in 1991, the total recorded official unemployment presented as a percentage of total labor force is equal to zero. With the market reforms gaining pace, the Russian economy starts facing the unemployment problem. 1992 is marked with the unemployment rate of only 2%. As the socio-economic transitional crisis in Russia continues and proliferates, the levels of unemployment continue to climb up. The total recorded official unemployment presented as a percentage of total labor force, taken as average per year, soon doubles and reaches 4% in 1993. In 1995, the value of this macroeconomic indicator in the Russian economy

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doubles again, reaching 8%. The high and growing unemployment rates negatively impact the Russian economy. The negative impact of high unemployment on socio-economic conditions of the population is also obvious. During the pre-crisis year of 1997, the level of official unemployment in the Russian economy crosses the high and psychologically important threshold of 10%, reaching as high as almost 11%. In 1998, as the Russian economy is hit with the negative consequences of the global financial and economic crisis, the officially registered unemployment rate reaches the high of close to 12%. In 1999, the national economy experiences an unprecedented unemployment rate of 13%. This comes as a shock to Russia, the country that had no unemployment less than a decade ago. The post-Communist economic transition in Russia and changes in the structure of the national economy necessitate changes in the structure of employment and labor force qualifications. However, the Russian economy is hard to adopt to the new market realities. After the 1998 global financial and economic crisis, the rate of unemployment in Russia starts declining. However, this decline is very slow. The official unemployment rate in Russia declines from nearly 11% in 2000 to less than 8% in 2004 and to 6% in 2007. In 2008, as the Russian economy faces another global financial and economic crisis, the official unemployment rate exceeds 6%. The post-crisis year of 2009 brings the unemployment rate to well over 8%. This level of unemployment is similar to unemployment suffered by the Russian economy in 1995. The situation with unemployment in the Russian economy remains disturbing even long after the transitional socio-economic crisis of the 1990s and economic and global economic and financial crises of 1998 and 2008. Following the 2009 post-crisis year, the level of official unemployment in Russia declines from 7.4% in 2010 to 5.5% in 2012. More optimistically, economic crisis of 2014 had no impact on the level of official unemployment in Russia. The value of this macroeconomic indicator was 5.5% during the 2013 pre-crisis year and 5.6% during the 2015 postcrisis year. The economic crisis itself is marked with the unemployment rate of slightly over 5%. Starting in 2013 and through the projected period of 2024, official unemployment recorded in the Russian economy does not exceed 6%. In the long run, during the period of 1990 to 2024, the unemployment rate increases from zero unemployment that characterizes the Soviet era to about 5% after 2016. The unemployment rate of about 5% is

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typical for developed market economies. Thus, in the sense of unemployment, the Russian economy is doing reasonably well, on par with other industrialized nations. At the same time, the use of labor can be more effective. The data demonstrates that inflation in the Russian economy increases after the crises, and so does unemployment. This finding is hardly surprising. Furthermore, both sharp and rapid increases in the rates of inflation and unemployment that occur in the Russian economy create a strong sense of instability and uncertainty among the general public. This is also typical for socio-economic and financial crises. However, the post-crisis increases in both inflation rates and unemployment rates are only characteristic of 1998 and 2008 financial and economic crises. The 2014 economic and financial crisis causes a very significant inflation in the Russian economy and yet has no impact on the official level of unemployment. Inflation in these cases is approached in terms of exchange rates.

Concluding Remarks The dynamic in the values of private consumption and real GDP growth rate shows that private consumption has a lead in real GDP growth during both the increases and downfalls that characterize the Russian economy. During the 1998 world economic and financial crisis, the fall in private consumption, recorded in the Russian economy, is less significant than the fall in real GDP. This fall in private consumption continues in postcrisis 1999, while real GDP experiences a sharp increase during this year. During the 2009 post-crisis year, the fall in private consumption, experienced by the Russian economy, is once again less significant than the fall in real GDP. At the same time, during the 2015 post-crisis year that follows the 2014 economic and financial crisis, the fall in private consumption is more significant than the fall in real GDP. Apparently, with the development of the market, private consumption partially loses its lead in real GDP growth in Russia. In distinction of private consumption, government consumption does not have a lead in real GDP growth rates during both the increases and downfalls. Similar to private consumption, gross fixed investment has a lead in real GDP growth rates during both the increases and downfalls. At the same time, the rate of increase in stock-building in the Russian economy stays close to zero during the entire studied period, except

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for the downfalls of 1998 and 2009 and peaks of 2000 and 2010. The Russian government needs to increase government consumption during the periods of economic and financial crises in order to support the national economy, while the Russian economy needs to increase its rate of stock-building. As follows from the macroeconomic data analysis, indebtedness to foreign donors may not be considered as a traditional part of Russia’s external dependency. Short-term foreign debt and total interest arrears do not characterize the Russian economy as an economy in urgent need of external financial resources. Russia is capable of serving its foreign debt, does not default on payments, and carries no interest arrears, counting both interest arrears owed to official creditors and commercial or private creditors. The growing volume of short-term foreign debt in the Russian economy points to the willingness of the country to support its national currency in order to facilitate its international trade and manage foreign trade balance effectively. It is normal to borrow hard currency on the international market during the short periods of financial instability. This is done in order to avoid any possible serious disruptions in foreign trade. Having no external borrowing addiction problem, the Russian economy is quite capable of moving onto the trajectory of sustainable economic growth. Both inflation and unemployment are present in the Russian economy. Changes in the value of such macroeconomic indicators as GDP deflator, long-term bond yield, consumer prices, producer prices, and exchange rate are indicative of the major inflation trends. Inflation, observed in Russia over the period of 1990 to 2024, was most significant in the 1990s. After 2016, the value of the long-term interest rate in the Russian economy stabilizes around 9%. The most significant increase in exchange rate in Russia is observed in the aftermath of the 2014 economic and financial crisis, when the national currency depreciates the most. The value of the US$ increased from RUB38.38 for US$1 in 2014 to RUB60.94 for US$1 in 2015. In 2016, the value of the US$ against RUB further increased, with the exchange rate of RUB67.06 for US$1. In the long run, after the 2014 economic and financial crisis and its aftermath, the exchange rate continues to fluctuate around RUB60 for US$1, characterizing the relative stability of the Russian economy. During the studied period, the unemployment rate in Russia increases from zero unemployment that characterizes the Soviet era, to about 5% after 2016.

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References Economist Intelligence Unit. (2021). Economist Intelligence Unit Database. Bureau van Dijk Electronic Publishing. International Monetary Fund. (2021). Statistics of the Russian Federation. The International Monetary Fund. Organization for Economic Cooperation & Development. (2021). Long Term Interest Rate. OECD. RosStat. (2021). State Committee of Statistics of the Russian Federation. RosStat. https://rosstat.gov.ru/

CHAPTER 9

Structure of Foreign Trade in Russia

Growth in Real GDP and Foreign Trade Foreign trade, including both exports and imports, plays a key role in Russia’s economic growth and development. The dynamic of annual growth rates of real GDP, and exports and imports of goods and services in Russia may be better seen if depicted as graphs. Figure 9.1 depicts the cumulative dynamic of annual growth rates for real GDP, exports of goods and services, and imports of goods and services in Russia, taken in percentage points, observed during the entire studied period from 1990 to 2019. As can be seen on the graphs in Fig. 9.1, the total volume of exports of goods and services and imports of goods and services in Russia rise sharply in 1991. However, the next year, the values of these two main macroeconomic indicators that characterize the Russian economy fall dramatically, marking the transitional crisis. These macroeconomic indicators demonstrate both positive and negative values during the years of the post-socialist transitional socio-economic crisis of the 1990s. The values of exports of goods and services from Russia and imports of goods and services in Russia summit at around zero point in the 1997 pre-crisis year. Value of real GDP growth recorded in the Russian economy stays around zero that year as well. After that year, the values of exports and imports diverge. This significant divergence takes place during the 1998 financial and economic crisis year and 1999 post-crisis © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 A. L. Osipian, Sustainable Economic Growth in Russia, https://doi.org/10.1007/978-3-031-38874-3_9

159

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40 30 20 10

-10

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

0

-20 -30 -40 Real GDP (% change pa) RUDGDP

Exports of G&S (% real change pa) RUDEXP

Imports of G&S (% real change pa) RUDIMP

Fig. 9.1 Growth rates for real GDP, exports of goods and services, and imports of goods and services in Russia, 1990–2019

year. Specifically, exports of goods and services in the Russian economy rise during these two years, while imports of goods and services fall significantly. This dynamic does not correspond with the changes in the value of real GDP. During the 1998 economic and financial crisis year, real GDP experiences negative growth, while in 1999 post-crisis year real GDP experiences positive growth. Positivity becomes a characteristic of the dynamic in values of exports of goods and services and imports of goods and services in the Russian economy only in the 2000s. This positivity remains as a general trend during the 2000s and ends abruptly in 2009, following the 2008 economic and financial crisis. During that year, the value of exports of goods and services in the Russian economy plunge almost as much as real GDP, while the value of imports of goods and services plunge even more significantly. This serious plunge of 2009 is the second most significant decline in the value of imports of goods and services, recorded in the Russian economy, next only to the dramatic plunge of 1992. The same is true for the plunge in the value of exports of goods and services. After the 2008 financial and economic crisis, suffered by the Russian economy, the dynamic in values of exports of goods and services and

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imports of goods and services becomes positive again. However, due to the 2014 economic and financial crisis, this positivity in main macroeconomic indicators is interrupted yet again with negative post-crisis values during 2015. Specifically, growth rates for real GDP recorded in the Russian economy become negative in 2015, growth rates for exports of goods and services remain positive, and growth rates for imports of goods and services become negative in 2014 and remain negative in 2015. After this downfall, all three macroeconomic indicators—annual growth rates for real GDP, exports of goods and services, and imports of goods and services in Russia, taken in percentage points—indicate an increase. However, this increase comes with much lesser indicative values as compared to the increase experienced during the 2000s. Based on this dynamic, it appears that imports of goods and services in Russia have a lead in real GDP growth rates during both the periods of increases and the periods of downfalls. During the 1992 postdisintegration crisis, suffered by the Russian economy, the fall in imports of goods and services is much more significant than the fall in real GDP. During the 1998 economic and financial crisis, the fall in imports of goods and services is also much more significant than the fall in real GDP. The same is true for the financial and economic crises of 2008–2009 and 2014–2015, observed in the Russian economy. Along with imports of goods and services, exports of goods and services also play a role in real GDP growth in Russia. As follows from trends presented in Fig. 9.1, exports of goods and services go very close with real GDP growth rates during both the increases and downfalls. During the 1998 financial and economic crisis, exports of goods and services demonstrate an increase, unlike imports of goods and services and real GDP. The increase in exports of goods and services continues for over a decade, being a characteristic of the Russian economy during the period from 1998 to 2008. This increase in the value of exports of goods and services continues at similar rates as real GDP and much lesser rates than the increases in imports of goods and services in Russia. The stability in rates of growth in exports of goods and services in the Russian economy during 1998–2008 is not ideal, nor it is impressive. Furthermore, in 2001, government consumption experiences a negative rate of growth, while both private consumption and real GDP continue to increase. During the 2009 post-crisis year, the fall in exports of goods and services, recorded in the Russian economy, is less significant than the fall in imports of goods and services and in real GDP.

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Exports of goods and services done in the Russian economy in 2014 and 2015 continue to increase, while imports of goods and services in the country and real GDP experience a downfall. During the 2015 post-crisis year, the fall in the value of imports of goods and services is more significant than in any other year, except 1992 and 2009. Overall, the amplitude in the dynamic of imports of goods and services increases and decreases, recorded in the Russian economy, is clearly much more significant than the amplitude in the dynamic of exports of goods and services and real GDP.

Total and Principal Exports In the open globalized market economy, a high volume of principal exports and imports of goods and services can play a significant role in economic growth and prosperity. Statistical data on the total and principal exports of goods, including oil, fuel, and gas, metals, chemicals, and machinery and equipment in the Russian economy for the period of 1994–2016 points to the changing structure of principal exports. The values of these macroeconomic indicators are expressed in billion US$. The data on the value of these macroeconomic indicators in Russia is presented in Table 9.1. In Table 9.1, goods exports denote the total exports of goods from Russia on a free-on-board (fob) basis, taken in billion US$. Oil, fuel, and gas represent the total revenue received by the Russian economy from export of oil, fuel, and gas as a percentage of total exports on a free-on-board (fob) basis, taken in billion US$. Metals indicate the total revenue received from export of metals as a percentage of total exports on a free-on-board (fob) basis, taken in billion US$. Chemicals mark the total revenue obtained by the Russian economy from export of chemical products as a percentage of total exports on a free-on-board (fob) basis, taken in billion US$. Machinery and equipment denote the total revenue received from export of machinery and equipment as a percentage of total exports on a free-on-board, (fob) basis, measured in billion US$. According to the data on total and principal exports of goods from Russia, including products and raw materials, during the period from 1994 to 2016, oil, fuel, and gas form the country’s largest single export type. Second largest single export type is metals. Third largest single export type is chemical products. Fourth largest single export type in the Russian economy is machinery and equipment.

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Table 9.1 Total and principal exports of goods in Russia, billion US$, 1994– 2016

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Goods: exports, billion US$

Oil, fuel & gas, billion US$

Metals, billion US$

Chemicals, billion US$

Machinery & equipment, billion US$

67.826000 82.913000 90.564000 86.895000 71.313700 72.885400 103.092700 99.969600 106.716000 133.653000 181.663000 241.472000 301.528000 351.930000 467.580500 301.666400 397.067500 516.718000 524.697400 527.266400 497.833500 343.542700 285.772600

27.900000 33.300000 40.900000 41.100000 30.500000 32.700000 52.834800 52.134800 56.263600 70.189900 99.130320 154.114000 196.804000 231.000000 323.520000 203.000000 275.418000 363.000000 375.158600 375.815000 350.817000 219.226000 169.000000

17.700000 20.900000 20.500000 20.400000 19.700000 19.000000 22.300000 14.600000 14.923260 17.431830 28.667060 34.252000 41.835000 47.890000 55.178000 38.700000 42.265000 57.400000 58.241410 55.080000 52.275000 40.775000 38.000000

5.400000 7.800000 7.400000 7.100000 6.200000 6.200000 7.400000 7.400000 7.364533 8.426437 10.870980 14.347000 16.916000 19.553000 30.654000 18.700000 24.396000 31.000000 26.759570 30.827000 29.209000 25.377000 20.800000

5.600000 8.000000 8.600000 9.200000 8.100000 8.000000 9.200000 10.400000 10.048120 10.763340 12.268040 13.521000 17.512000 17.795000 23.109000 17.900000 22.000000 23.200000 32.006540 28.841000 26.411000 25.440000 24.300000

Sources Economist Intelligence Unit (2021), International Monetary Fund (2021); the State Committee of Statistics of the Russian Federation, RosStat (2021)

Russia’s total exports of goods increase from US$48.8 billion in 1990 to US$54.7 billion in 1991. In 1992, the value of this macroeconomic indicator falls to US$42.4 billion, but then increases again in 1993, reaching US$57.6 billion (Economist Intelligence Unit, 2021; RosStat, 2021). As follows from the data on foreign trade in the Russian economy, presented in Table 9.1, goods exports increase from US$50.5 billion in 1994 to US$82.9 billion in 1995. In 1996, the value of this macroeconomic indicator further increases to US$90.6 billion. In 1997 pre-crisis year, the total exports of goods from the Russian economy on a free-onboard basis constitute US$86.9 billion. During the 1998 economic and

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financial crisis year, goods exports decrease to US$71.3 billion. In the following year, the value of this macroeconomic indicator in the Russian economy increases slightly to US$72.9 billion. The total value of exports of goods from Russia on a free-on-board basis increases significantly in 2000 and reaches a high of US$103.1 billion. This is the first year when the Russian economy crosses the threshold of US$100 billion in goods exports. This year also starts a continuous increase in total exports of goods from Russia that lasts until 2008 economic and financial crisis year. In 2001, the value of this macroeconomic indicator remains at US$100 billion. Goods exports in the Russian economy continue to grow, reaching US$106.7 billion in 2002, US$133.7 billion in 2003, and US$181.7 billion in 2004. The similar situation characterizes 2005, 2006, and 2007 with US$241.5 billion, US$301.5 billion, and US$351.9 billion, respectively. As the volume of exported goods continues to rise, the flow of export revenues in the Russian economy continues. During the 2008 economic and financial crisis year, growth in the volume of goods exports in the Russian economy brings this major macroeconomic indicator to US$467.6 billion. In 2009 post-crisis year, the volume of export goods falls significantly to US$301.7 billion. In 2010, Russian economy becomes capable to restore the volume of exports of goods, almost reaching the pre-crisis level with US$397.1 billion. The total revenue received from exports of goods in Russia continues to rise and stays well above US$500 billion during the next 3 years, including US$516.7 billion in 2011, US$524.7 billion in 2012, and US$527.3 billion in 2013. The total value of exports of goods from Russia on a free-on-board basis of US$527.3 billion in 2013 is the highest value for this major macroeconomic indicator achieved by the Russian economy during the entire studied period. During the 2014 economic and financial crisis, the total exports of goods in the Russian economy almost reach US$500 billion, scoring US$497.8 billion. The post-crisis 2015 indicates the value of this macroeconomic indicator at US$343.5 billion. In 2016, the revenue received by the Russian economy from total exports further decreases to US$285.8 billion. Overall, the volume of exports of goods in Russia exceeds US$100 billion starting 2000, US$300 billion starting 2006, and US$500 billion starting 2011. Economic and financial crises of 1998, 2008, and 2014, suffered by the Russian economy, leave their mark on the total volume of goods exports, but only temporarily, as the export recovers each time.

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Russia’s total exports of goods demonstrate a continuous increase from US$357.8 billion in 2017 to US$426.5 billion in 2018, US$445.9 billion in 2019, and US$458.5 billion in 2020. In 2021, total exports of goods in the Russian economy are expected to cross the threshold of US$0.5 trillion, reaching US$504.3 billion and further increasing to US$546.3 billion in 2022 (Economist Intelligence Unit, 2021; RosStat, 2021). This projected increase points to the expected positive dynamic in the values of major categories of exports of goods, including oil, fuel, and gas, metals, chemical products, and machinery and equipment. The dynamic of total and principal exports of goods in Russia, in billion US$, during the period from 1990 to 2016 is depicted in Fig. 9.2.

600 Goods: exports (fob) (US$) RUEXPS

500

Oil, fuel & gas RUXPD1

billion US$

400

Metals RUXPD2

300

Chemicals RUXPD3

200

100 Machinery & equipment RUXPD4 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Fig. 9.2 Total and principal exports of goods in Russia, billion US$, 1990– 2016

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Total and Principal Imports Statistical data on the total imports of goods, including machinery and equipment, food and agricultural products, chemicals, and metals in the Russian economy for the period of 1994–2016 points to the changing structure of principal imports. The values of these macroeconomic indicators are expressed in billion US$. The data on these macroeconomic indicators is presented in Table 9.2. Goods imports denote the total imports of goods from Russia on a cost, insurance, and freight (cif) basis, in billion US$. Machinery and Table 9.2 Total and principal imports of goods in Russia, billion US$, 1994– 2016

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Goods: imports, billion US$

Machinery & equipment, billion US$

Food & agricultural products, billion US$

Chemicals, billion US$

Metals, billion US$

50.451000 62.603000 68.093000 71.983000 43.579600 30.277900 33.878500 41.881100 46.173000 57.347000 75.571000 98.707000 137.762000 199.754100 267.100700 167.348000 228.911700 305.760400 317.177100 314.967100 286.669100 182.718600 182.346900

13.600000 15.700000 14.900000 18.700000 15.500000 10.000000 10.800000 14.100000 16.653740 19.447490 28.751920 43.379000 65.554000 98.074000 153.811000 72.600000 102.000000 147.000000 157.637000 152.773000 136.318000 81.868000 86.300000

10.700000 13.100000 11.600000 13.300000 10.800000 8.100000 7.400000 9.100000 10.341010 11.157930 12.812740 17.403000 21.591000 26.142000 38.526000 30.100000 36.400000 42.500000 47.893740 43.255000 39.905000 26.584000 24.900000

3.800000 5.100000 6.600000 7.600000 6.600000 4.900000 6.100000 7.500000 7.677031 9.103431 11.435300 16.245000 21.759000 26.715000 38.234000 27.900000 37.000000 45.400000 40.281490 50.004000 46.462000 33.974000 33.800000

2.600000 4.000000 4.600000 3.800000 3.200000 2.200000 2.800000 3.000000 2.914982 3.614000 5.143588 6.801438 9.615373 14.810000 20.138000 11.300000 16.900000 21.800000 22.836750 22.631000 20.458000 12.339000 11.800000

Sources Economist Intelligence Unit (2021), the State Committee of Statistics of the Russian Federation, RosStat (2021)

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equipment marks the total expenses on import of machinery and equipment on a cost, insurance, and freight (cif) basis, in billion US$. Food and agricultural products denote the total expenses on import of food and agricultural products as a percentage of total imports on a cost, insurance, and freight (cif) basis, in billion US$. Chemicals indicate the total expenses on import of chemicals on a cost, insurance and freight (cif) basis, in billion US$. Metals represent the total import of metals on a cost, insurance and freight (cif) basis, in billion US$. According to the data on total imports of goods, including products and raw materials, flowing into Russia during the period from 1994 to 2016, machinery and equipment form Russia’s largest single import type. Second largest single import type is food and agricultural products. Third largest single import type is chemicals. Fourth largest single import type in the Russian economy is metals. It appears that Russia does not invest enough resources in human capital accumulation. As a result, the country has to import significant amounts of machinery and equipment. Products that require high-level technology may be produced only in countries that generate a sufficient stock of human capital. This machinery and equipment, imported into the country, is intended for the extraction industry and other industries that require high technology inputs for their products. This is one of the preconditions for initiating sustainable economic growth in Russia. Russia’s total value of imports of goods decreases from US$50.2 billion in 1990 to US$45.6 billion in 1991, and US$36.9 billion in 1992. In 1993, the value of this macroeconomic indicator then increases in 1993, reaching US$46.8 billion (Economist Intelligence Unit, 2021; RosStat, 2021). As follows from the data on foreign trade in the Russian economy, presented in Table 9.2, import volume of goods increases US$50.5 billion in 1994 to US$62.6 billion in 1995 and US$68.1 billion in 1996. In 1997 pre-crisis year, the volume of imports of goods in Russia increases to US$72 billion. During the 1998 economic and financial crisis year, volume of imported goods in the Russian economy falls to only US$43.6 billion. In the following year, this significant fall continues. The value of this macroeconomic indicator in 1999 post-crisis year falls to US$30.3 billion. The Russian economy experiences a significant downfall in income and volatility in national currency exchange rates, and thus the total imports

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of goods from Russia on a cost, insurance, and freight basis fall. Businesses in Russia are not able to maintain the pre-crisis level of imports of goods. The Russian economy compensates for this significant decline in import volume of goods. The post-crisis 2000 and 2001 indicates the ability of private businesses to restore the high level of imports of goods, but not reaching the pre-crisis level. The total value of imports of goods coming in the Russian economy reaches US$33.9 billion in 2000 and US$41.9 billion in 2001. The value of this macroeconomic indicator continues to grow, as it reaches US$46.2 billion in 2002, US$57.3 billion in 2003, and US$75.6 billion in 2004, finally achieving and exceeding the pre-crisis level of goods imports. The recovery from the financial and economic crisis of 1998 appears to be relatively slow in terms of the total imports of goods in Russia on a cost, insurance and freight basis. The total value of imports of goods in the Russian economy reaches the threshold of US$100 billion in 2005 with the recorded US$98.7 billion. The value of this macroeconomic indicator continues to grow, as it crosses the US$100 billion threshold and reaches US$137.8 billion in 2006. Next year, the total value of imports of goods in the Russian economy reaches the threshold of US$200 billion. During the 2008 economic and financial crisis year, growth in the volume of imports of goods continues, as it reaches a new high of US$267.1 billion. In 2009 post-crisis year, the value of this macroeconomic indicator in the Russian economy plunges to US$167.3 billion. In 2010, the national economy restores the level of goods imports. Specifically, the value of this macroeconomic indicator in the Russian economy in 2010 constitutes US$228.9 billion, and in 2011, it crosses the US$300 billion threshold with US$305.8 billion. Next 2 years demonstrate even higher values of imports of goods in Russia. The total cost of imports of goods brought to the country continues to rise and reaches US$317.2 billion in 2012 and US$315 billion in 2013. The total value of imports of goods in Russia on a cost, insurance, and freight basis of US$317.2 billion in 2012 is the highest value for this macroeconomic indicator achieved during the entire studied period. During the 2014 economic and financial crisis, suffered by the Russian economy, the total imports of goods decline to US$286.7 billion. This decline continues and becomes more significant during the post-crisis years. Specifically, 2015 indicates the value of this macroeconomic indicator at US$182.7 billion, while 2016 US$182.3 billion. Overall, the

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volume of imports of goods in Russia reaches US$100 billion starting 2005, exceeds US$200 billion starting 2010, and US$300 billion starting 2011. Economic and financial crises of 1998, 2008, and 2014 leave their mark on the total volume of goods imports, but only temporarily, as the import recovers. Russia’s total imports of goods demonstrate a continuous increase from US$226.5 billion in 2017 to US$258.2 billion in 2018, US$279.5 billion in 2019, and US$292.5 billion in 2020. In 2021, total volume of imports of goods is expected to cross the threshold of US$3 billion, reaching US$322.8 billion and further increasing to US$336.2 billion in 2022. This projected increase points to the expected positive dynamic in the Russian economy in the values of major categories of imports of goods, including machinery and equipment, food and agricultural products, chemicals, and metals. The dynamic of total and principal imports of goods in Russia, in billion US$, during the period from 1990 to 2016 is depicted in Fig. 9.3. Statistical data on the foreign trade volume and prices in Russia for the period of 1990–2022 includes such macroeconomic indicators as export 350 Total imports fob RUIMPS 300 Machinery & equipment RUMPD1

billion US$

250

200

Food & agricultural products RUMPD2

150

Chemicals RUMPD3 100 Metals RUMPD4

50

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

0

Fig. 9.3 Total and principal imports of goods in Russia, billion US$, 1990– 2016

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volume of goods and services, import volume of goods and services, export prices, import prices, and terms of trade. The values of these macroeconomic indicators are expressed in percent change per annum. The data on these macroeconomic indicators is presented in Table 9.3. Export volume of goods and services, % change per annum, denotes the total percentage growth in the volume of exports of goods. Import volume of goods and services, % change per annum, represents the total percentage growth in the volume of imports of goods. Export prices, % change per annum; US$, indicates the total percentage growth in the US$ export price index of goods. Import prices, % change per annum; US$, marks the total percentage growth in the US$ import price index of goods. Terms of trade (1996 = 100) denotes the total ratio of the export price index to the import price index (1996 = 100). As follows from the data on foreign trade in Russia, presented in Table 9.3, total export volume of goods and services increases annually by 4.9% in 1994 and 1995. In 1996, the value of this major macroeconomic indicator falls to 3.7%. In 1997 pre-crisis year, the total percentage growth in the volume of exports of goods and services in the Russian economy becomes negative, falling 0.6%. During the 1998 economic and financial crisis year, export volume of goods and services increases by 2%. In the following year, the value of this major macroeconomic indicator that characterizes the Russian economy increases to a high of 11.4%. The total percentage growth in the volume of exports of goods and services in the Russian economy reaches an annual increase of 9.6% in 2000. Year 2001 marks an increase in the value of this major macroeconomic indicator of 4.1%. Export volume of goods and services in Russia, taken as percent change per annum, continues to grow, as it reaches 10.1% in 2002, 11.1% in 2003, and 11.7% in 2004. The similar situation characterizes 2005, 2006, and 2007 with 6.4%, 7.2%, and 6.2%, respectively. As the volume of exported goods and services continues to rise, export revenues continue to flow in the Russian economy. During the 2008 economic and financial crisis year, the total percentage growth in the volume of exports of goods and services in the Russian economy slows down to only less than 0.8%. In 2009 post-crisis year, the total percentage growth in the volume of exports of goods and services becomes negative, falling to the negative 4.9%. In 2010, Russian economy becomes capable to recreate the rates of growth in the export of goods and services typical of the late 2000s, but only briefly. Specifically, the value of this macroeconomic indicator in 2010 constitutes 7.3%.

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Table 9.3 Foreign trade volume and prices (%) in Russia, 1990–2022

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Export volume of goods and services (% change per annum)

Import volume of goods and services (% change per annum)

– 27.798 −20.038 −2.113 4.887 4.909 3.710 −0.629 2.055 11.406 9.570 4.105 10.126 11.122 11.689 6.360 7.205 6.222 0.757 −4.863 7.258 4.129 1.348 4.533 0.618 3.602 3.640 5.091 3.100 4.200 2.500 5.000 4.400

– 32.993 −35.805 −9.595 9.230 10.534 2.949 0.283 −15.484 −18.663 31.644 18.784 14.682 17.418 23.160 16.512 21.107 26.043 15.042 −30.616 25.316 15.025 9.495 3.556 −7.164 −25.885 −3.314 17.305 6.300 7.800 3.800 8.500 1.200

Export prices (% change per annum; US$)

Import prices Terms of (% change per trade annum; US$) (1996 = 100)

– −12.217 −3.122 38.947 12.203 16.524 5.320 −3.444 −19.584 −8.260 29.091 −6.853 −3.067 12.707 21.696 24.974 16.478 9.879 31.864 −32.185 22.718 24.973 0.193 −3.868 −6.162 −33.391 −19.738 19.128 15.600 0.400 0.400 4.700 3.800

– −31.693 25.935 40.513 −1.372 12.261 5.653 5.415 −28.367 −14.581 −15.004 4.072 −3.867 5.776 6.997 12.104 15.242 15.039 16.232 −9.701 9.154 16.124 −5.262 −4.107 −1.961 −14.000 3.218 6.340 7.300 0.400 0.800 1.700 2.900

86.901 111.679 85.911 84.954 96.646 100.316 100.000 91.596 102.827 110.436 167.730 150.122 151.371 161.290 183.447 204.507 206.702 197.430 223.982 168.210 189.112 203.523 215.242 215.779 206.534 159.965 124.389 139.348 150.200 150.100 149.400 153.800 155.200

Sources Economist Intelligence Unit (2021), the State Committee of Statistics of the Russian Federation, RosStat (2021)

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However, following years demonstrate much lower rates of growth in the volume of exports of goods and services. The total revenue received from exports of goods and services in Russia continues to rise and increases 4.1% in 2011, 1.3% in 2012, and 4.5% in 2013. However, during the 2014 economic and financial crisis, the total exports of goods and services rise by only 0.6%. Apparently, Russia continues to increase the total value of its exports of goods and services even during the economic and financial crisis. The post-crisis 2015 indicates the value of this macroeconomic indicator at 3.6%. In 2016, the revenue received by the Russian economy from total exports increases by another 3.6%. Clearly, the total percentage growth in the volume of exports of goods and services in Russia remains positive during the entire period of study. The only two exceptions are 1997 and 2009, when the volume of exports falls insignificantly. In 2004, the total percentage growth in the volume of exports of goods and services constitutes 11.7%, the highest value of export in the Russian economy during the entire studied period. The lowest percent change per annum in the export volume of goods and services occurs in the post-crisis 2009, when the value of this macroeconomic indicator reaches the negative of 4.9%. As follows from the data on the volume of foreign trade in Russia, presented in Table 9.3, import volume of goods and services increases annually by 9.2% in 1994 and 10.5% in 1995. In 1996, the value of this macroeconomic indicator falls to 2.9%. In 1997 pre-crisis year, the total percentage growth in the volume of imports of goods and services in the Russian economy increases only 0.3%. During the 1998 economic and financial crisis year, import volume of goods and services becomes negative, falling to negative 15.5%. In the following year, this dramatic fall continues, characterizing the Russian economy. The value of this macroeconomic indicator in 1999 post-crisis year falls to another negative 18.7%. The Russian economy experiences a significant downfall in income and volatility in national currency exchange rates, and thus businesses are not able to maintain the pre-crisis level of imports of goods and services. The national economy compensates for this significant decline in import volume of goods and services very quickly. The post-crisis 2000 and 2001 indicates the ability of businesses to restore the high level of imports of goods and services, exceeding the pre-crisis level of imports of goods and services in the Russian economy. The total percentage growth in the volume of imports of goods and services reaches an annual

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increase of the record 31.6% in 2000. This is the highest value achieved by this macroeconomic indicator in the Russian economy during the entire studied period. Year 2001 marks an increase in the value of this macroeconomic indicator of 4.1%. Import volume of goods and services in Russia, taken as percent change per annum, continues to grow, as it reaches 14.7% in 2002, 17.4% in 2003, and 23.2% in 2004. The similar situation characterizes 2005, 2006, and 2007 with 16.5, 21.1, and 26%, respectively. The period from 2000 to 2008 in the Russian economy is characterized by exceptionally high total percentage growth in the volume of imports of goods and services. As the volume of imported goods and services continues to rise, the Russian economy continues to demonstrate highly positive and strong trends in many major macroeconomic indicators. During the 2008 economic and financial crisis, experienced by the Russian economy, the total percentage growth in the volume of imports of goods and services is equal to 15%. In 2009 post-crisis year, the total percentage growth in the volume of imports of goods and services becomes negative, plunging to the negative 30.6%. This is the lowest negative rate of growth in the volume of imports of goods and services in Russia observed during the entire studied period. Similar to 1999 postcrisis year, in 2009 the Russian economy experiences a significant downfall in income and volatility in national currency exchange rates. Due to this downfall and national currency depreciation, businesses are not able to maintain the pre-crisis level of imports of goods and services. In 2010, the Russian economy becomes capable to restore the rates of growth in import of goods and services, typical of the late 2000s, but only briefly. Specifically, the value of this major macroeconomic indicator in 2010 constitutes a very high of 25.3%, and in 2011, 15%. Nevertheless, next 2 years demonstrate much more modest rates of growth in the volume of imports of goods and services coming in the Russian economy. The total cost of imports of goods and services brought to Russia continues to rise and increases by 9.5% in 2012, and by 3.6% in 2013. However, during the 2014 economic and financial crisis, the total imports of goods and services fall by 7.2%. The post-crisis 2015 indicates the value of this macroeconomic indicator in the Russian economy at negative 25.9%, while in 2016 negative 3.3%. Clearly, the total percentage growth in the volume of imports of goods and services in Russia remains positive during most of the period of study. However, there are few significant exceptions. These are years of 1998

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and 1999 economic and financial crisis, the sharpest fall of the postcrisis 2009, and 2014, 2015, and 2016 crisis and post-crisis years in the Russian economy. The highest total percentage growth in the volume of imports of goods and services constitutes 31.6% in 2000, when the economy recovers from 1998 economic and financial crisis. The lowest rate of growth in the value of import observed in the Russian economy during the entire studied period is recorded in the post-crisis 2009, when the value of this macroeconomic indicator reaches the negative of 30.6%. The dynamic of foreign trade volume and prices in Russia, taken as a percent change per annum during the period from 1990 to 2022 is depicted in Fig. 9.4. Given the significance of revenues received from the export of raw materials, combined with the oil dependency problem in the Russian economy, it would be most useful to consider the data on oil, fuel, and gas in Russian export. Extraction industry dominates exports, while human capital is lacking. Specifically, the data on the share of oil, fuel, and gas in the structure of total exports in Russia would be of most interest. In 1994, the share of oil, fuel, and gas in the structure of total exports in Russia constitutes 41%. This is the time when the country is suffering from a significant socio-economic transitional crisis. In 1995, the value of this macroeconomic indicator falls to 40%, which implies that only 2 out 40 30 20 10

-10

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

0

-20 -30 -40 Export volume of goods and services (% change pa) RUXGRO Import volume of goods and services (% change pa) RUMGRO

Fig. 9.4 Foreign trade volume and prices in Russia, % change per annum, 1990–2022

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of every 5 US dollars received by Russia from export is brought by the export of oil, fuel, and gas. This 40% seems to be a high share, but the post-1990s dynamic demonstrates even higher values of this indicator. While the volume of production in the struggling Russian economy continues to fall, the revenue received in hard currency from export of raw materials becomes more and more significant. The share of the total revenue received from export of oil, fuel, and gas as a percentage of total exports on a free-on-board basis in Russia rises to 45% in 1996. The value of this macroeconomic indicator continues to rise, making Russia more and more dependent on oil. In 1997 pre-crisis year, the share of oil, fuel, and gas in total export revenues constitutes well over 47%. During the 1998 economic and financial crisis year, the share of oil, fuel, and gas in the structure of total exports in the Russian economy falls slightly to 43%. Next year, the value of this macroeconomic indicator increases to 48% and exceeds 51% in 2000. This implies that in 2000, Russia receives more than half of all of its export revenues from exporting oil, fuel, and gas. Similarly, 2001, 2002, 2003, and 2004 are characterized with 52, 53, 53, and 55% share of oil, fuel, and gas in total export revenues, respectively. During all these years, oil, fuel, and gas remain the single most important source of export revenue for the Russian economy. In 2005, the share of oil, fuel, and gas in the structure of total exports in the Russian economy reaches a new high of almost 64%, which is almost two-thirds of total export revenues. Next year, the value of this macroeconomic indicator increases to more than 65% and exceeds 66% in 2007. The share of oil, fuel, and gas in the structure of total exports reaches over 69% in 2008. This implies that oil, fuel, and gas remain the single most important source of export revenue for the Russian economy during the 2008 economic and financial crisis. Years 2009 and 2010 come with the values of this macroeconomic indicator of 67 and 69%, respectively. In 2011, the share of the total revenue received from export of oil, fuel, and gas as a percentage of total exports in Russia exceeds 70%. The same applies to 2012, 2013, and 2014. Specifically, 2012, 2013, and 2014 are characterized with 71.5%, 71.3%, and 70.5% share of oil, fuel, and gas in total export revenues, respectively. After the 2014 economic and financial crisis, the share of oil, fuel, and gas in the structure of total exports in the Russian economy declines. The post-crisis 2015 indicates the value of this macroeconomic indicator at 64%. Overall, the years 2005 to 2015 demonstrate an absolute dominance of oil, fuel, and gas in

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80 70 60 50 40 30 20 10 0

Oil, fuel & gas, % share of total exports

Fig. 9.5 Share of oil, fuel & gas in the structure of total exports in Russia, %, 1994–2016

Russian exports. In 2016, the revenue received by the Russian economy from exporting oil, fuel, and gas in the structure of total exports declines to 59%, remaining the single largest source of export revenue. The dynamic in the share of oil, fuel, and gas in the structure of total exports in Russia, taken as percent, during the period from 1994 to 2016 is presented in Fig. 9.5.

Concluding Remarks Russia enjoys inflow of revenue from foreign trade. The total percentage increase in the value of exports of goods and services in the Russian economy remains positive during the entire period of study. The only two exceptions are 1997 and 2009, when the volume of exports declines insignificantly. In 2004, the total percentage growth in the volume of exports of goods and services constitutes almost 12%, the highest value of export in the Russian economy during the entire studied period. The

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lowest percent change in the export volume of goods and services occurs in the post-crisis 2009, when the value of this macroeconomic indicator drops to the negative of almost 5%. The data on total and principal exports of goods from Russia, including products and raw materials from 1994 to 2016, indicate that oil, fuel, and gas form the country’s largest single export type, during the studied period. Second largest single export type is metals. Third largest single export type is chemical products. Fourth largest single export type in the Russian economy is machinery and equipment. The total percentage increase in the value of imports of goods and services that flow in Russia remains positive during most of the studied period. However, there are a few significant exceptions. These exceptions include the economic and financial crisis year of 1998 and the post-crisis 1999, the sharpest fall of the post-crisis 2009, and 2014, 2015, and 2016 economic and financial crisis and post-crisis years that leave their print on the Russian economy. The highest total percentage growth in the volume of imports of goods and services in Russia constitutes almost 32% in 2000, when the national economy recovers from the 1998 economic and financial crisis. The lowest rate of growth in the value of import observed in the Russian economy during the entire studied period is recorded in the post-crisis 2009, when the value of this major macroeconomic indicator drops to the negative of almost 31%. The data on total imports of goods, including products and raw materials, to Russia from 1994 to 2016, demonstrate that machinery and equipment form Russia’s single largest import type, during the entire studied period. Second largest single import type is food and agricultural products. Third largest single import type is chemical products. Fourth largest single import type in the Russian economy is metals. As follows from the data on exports and imports, the Russian economy extracts and exports raw materials, while absorbing machinery and equipment, imported from developed market economies. Although this international exchange brings a steady stream of revenue into the Russian economy, it makes the economy dependent on price volatility on the world market. Furthermore, when economic and financial crises hit the global economy, production shrinks, and thus prices on raw materials fall. As a result, the Russian economy suffers, as it is vulnerable to such price fluctuations.

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References Economist Intelligence Unit. (2021). Economist Intelligence Unit Database. Bureau van Dijk Electronic Publishing. International Monetary Fund. (2021). Statistics of the Russian Federation. The International Monetary Fund. RosStat. (2021). State Committee of Statistics of the Russian Federation. RosStat. https://rosstat.gov.ru/

CHAPTER 10

Conclusion: Transition to Sustainable Economic Growth

Although the early concepts of economic growth and thoughts concerning economic growth in the classical political economy were developed centuries ago, there are quite a few inferences for the postSoviet Russia that may be drawn from the presented literature review. This is explained by the fact that the economy of the post-Soviet Russia presents mosaics of different economic forms and relations. The clash of the old and new, Stalinist bureaucracy and Soviet industries with newly emerging market institutions and businesses, explain this mosaic. Being especially characteristic of the earlier stages of socio-economic transition in the 1990s, this mosaic explains the applicability of different concepts of economic development and growth to Russia’s economic realities. Slowly but steadily, the Russian economy starts aligning along the ideas of structuralism. This trend finds its expression in development of the domestic market and reemergence of many fundamental branches of the national economy. This trend demonstrates a slow move away from prioritization of export-oriented industries, especially those based on the extraction of raw materials. Other issues, raised by the classics of economic growth remain relevant to the Russian economy as well, including issues of capital accumulation, technological progress, and division of labor. Schumpeter’s contribution to the theory of business cycles may be of help in making forecasts regarding economic growth in Russia. The Russian economy is affected by periodic economic fluctuations. Cyclical © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 A. L. Osipian, Sustainable Economic Growth in Russia, https://doi.org/10.1007/978-3-031-38874-3_10

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economic development is not necessarily one of the features of the national economy, but rather a consequence of global economic and financial crises. Possible technological advancements can have the potential to change economic dynamics and bring the Russian economy to the new, higher level equilibrium. A massive renovation of principal capital lays the ground for economic cycles. Early concepts of economic growth, including mercantilism and Physiocrats, as well as concepts of economic growth presented in the classical political economy, are fully applicable to Russia. At the same time, these concepts are insufficient for understanding economic growth in Russia. With this emerges a clear need for modern theories and models of economic growth that explain proportions in production, can be empirically tested, and estimate the probability of initiating sustainable economic growth. As a result of the review of a broad spectrum of literature in historical perspective, it has been found that the early, classical, and exogenous models of economic growth do not offer a complete reflection of the transition experience of the Russian economy. In this research of the Russian economy, preference is given to the endogenous models of economic growth. Russia’s vast energy sector, much of which is export-oriented, is considered as an engine of economic growth, including in the long run. Analyses of the country’s energy sector and business and economic aspects, in general, are often formulated within the frame of how to do business in Russia. These business recommendations-like scholarly works have an explicitly applied character. Much fewer works, however, look into specific segments of the Russian economy. Equally few scholarly works offer a comprehensive analysis of Russian transition to the market with an emphasis on the economic side of this complex process. There is a clear need to consider a set of key issues in Russia’s post-Soviet socio-economic transition through the lenses of basic economic approaches, including primarily such theorized and empirically tested topic as economic growth. The structure of the Russian economy remains to a large extent resource-driven. Revenues received from natural resources, and revenues received from the export of oil and gas in particular, constitute a significant part of the national income. Accordingly, a bulk of the state budget in Russia is formed from the oil and gas revenues. Any reduction in the share of oil and gas revenues in the structure of the state budget is considered as a small victory for the state and the economy. Most certainly, no economy wants to be regarded as addicted to oil revenues. At the same

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time, Russia does not have the external dependency in terms of financial resources obtained through foreign loans. Russia is capable of continuously serving its foreign debt, does not default on payments, and carries no interest arrears, counting both interest arrears owed to official and private creditors. In this study, economic growth in Russia is conditionally split on the three stages—1990s, 2000s, and 2010s—based on the values and trends in major macroeconomic indicators. These are such economic indicators as real GDP growth, private consumption, government consumption, gross fixed investment, stock-building, exports and imports of goods and services, and domestic demand. Economic growth in Russia is split on the three stages also based on predicted or observed dynamic in these macroeconomic indicators, and estimates and values of overall economic performance. Interestingly, each of the three stages ends with economic crisis and post-crisis recovery years of 1998–1999, 2008–2009, and 2014–2016. The first stage of economic growth in Russia is characterized by the dominance of negative trends. This predominant negativity is indicated in the steady and significant decline in real GDP that takes place during the transitional crisis of the 1990s and world financial and economic crisis of 1997–1998. The second stage differs drastically from the first stage. The Russian economy continues to experience a significant increase in business activities and demonstrates positive real GDP growth rates throughout most of the 2000s. This growth may be considered as a steady economic growth in Russia, achieved in the post-crisis period. However, the negative economic trends that result from the consequences of the global financial and economic crisis of 2008 undermine the possibility of moving to sustainable economic growth in Russia. The third stage of economic growth in Russia indicates a clear dominance of positive trends. Nevertheless, this positivity is nowhere near the dominance of positive trends, observed in the national economy during the 2000s. The dynamic in the values of private consumption and real GDP growth rate in the Russian economy shows that private consumption has a lead in real GDP growth during both the economic increases and downfalls. During the 1998 world economic and financial crisis, the fall in private consumption is less significant than the fall in real GDP, recorded in the Russian economy. This fall in the value of private consumption continues during the post-crisis 1999, while real GDP experiences a sharp increase in this year. During the 2009 post-crisis year, the fall in private

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consumption is once again less significant than the fall in real GDP, experienced by the Russian economy. At the same time, during the 2015 post-crisis year that follows the 2014 economic and financial crisis, the fall in private consumption is more significant than the fall in real GDP. It appears that with the development of the market, private consumption partially loses its lead in real GDP growth in Russia. Russia’s government consumption does not have a lead in real GDP growth rates during both economic rises and downfalls. This distinct government consumption from private consumption. Similar to private consumption, at the same time, gross fixed investment has a lead in real GDP growth rates in Russia during both the rises and downfalls. The value of another crucially important macroeconomic indicator—the rate of increase in stock-building—observed in the Russian economy, stays close to zero during the entire studied period. The only exceptions are economic downfalls of 1998 and 2009 and peaks of 2000 and 2010. The only advice that may be rendered to the Russian government is that the state needs to increase government consumption during the periods of economic and financial crises in order to support the national economy. This increase would act as a stabilizer for the national economy. At the same time, the Russian economy needs to increase its rate of stock-building. Russia’s external financial dependency is at least in part a myth, cultivated by some economists and politicians. The results of the macroeconomic data analysis, presented in this study, indicate that indebtedness to foreign donors may not be considered as a traditional part of Russia’s external dependency. Short-term foreign debt and total interest arrears do not characterize the Russian economy as an economy in a continuous and urgent need of external financial resources. The data indicates that the Russian government is perfectly capable of serving its sovereign debt. Russia does not default on payments abroad and carries no interest arrears in foreign debt. This finding equally applies to both interest arrears owed to official creditors and commercial or private creditors. The growing volume of short-term foreign debt points to Russia’s willingness to support its national currency in order to facilitate its international trade and manage foreign trade balance effectively. Contrary to many beliefs, Russia does not have an external borrowing addiction problem. There was an issue with the rapidly amassing foreign debt during the transitional socio-economic and financial crisis of the 1990s, but Russia has managed to overcome this crisis a long time ago. In terms

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of low dependency on foreign loans, the Russian economy is not externally dependent and appears to be quite capable of moving onto the trajectory of sustainable economic growth. Despite the absence of any significant problems in serving its foreign debt, Russia faces the problem of inflation. Changes in the value of such macroeconomic indicators as GDP deflator, long-term bond yield, consumer prices, producer prices, and exchange rate point to major inflation trends in the Russian economy. However, no significant inflation is observed after 2016 and in perspective until 2024. Along with inflation and foreign debt, unemployment is also indicative of major economic crises. Unemployment in the Russian economy stays at the same levels as in developed market economies. At the same time, the transition to sustainable economic growth would generally require a more effective use of human resources. The unemployment rate in the Russian economy would have to fall to 2–3%. Furthermore, the officially recorded unemployment may not reflect the entire scale and scope of the unemployment problem in the country. The real unemployment in Russia may be higher than the officially recorded unemployment and include hidden unemployment and underemployment. In addition to low dependency on foreign loans, the Russian economy enjoys inflow of revenue from foreign trade. The total percentage increase in the value of exports of goods and services in Russia remains positive during the entire studied period. The only two exceptions are observed in 1997 and 2009, when the volume of exports slightly declines. The highest value of export in the Russian economy during the entire studied period is reached in 2004. In that year, the total percentage growth in the volume of exports of goods and services constitutes almost 12%. The lowest percent change in the export volume of goods and services in the Russian economy occurs in the post-crisis 2009. In that year, the value of this macroeconomic indicator drops to the negative of almost 5%. The data on principal exports of goods from Russia is reflective of the structure of the national economy. Russia exports in large quantities both products and raw materials. Oil, fuel, and gas form the country’s largest single type of export type, dominating total exports during the entire studied period from 1994 to 2016. The second largest single type of export is metals. The third largest single export type is chemical products. Finally, the fourth largest single export type in the Russian economy is machinery and equipment.

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While the total value of exports continuously increases, the total percentage increase in the value of imports of goods and services that flow in Russia also remains positive during most of the studied period. Nevertheless, there are a few significant exceptions from this increase. These exceptions include the economic and financial crisis year of 1998 and the post-crisis 1999, the sharpest fall of the post-crisis 2009, and 2014, 2015, and 2016 economic and financial crisis and post-crisis years. The highest total percentage growth in the volume of imports of goods and services in Russia constitutes almost 32% in 2000, when the national economy recovers from the 1998 economic and financial crisis. The post-crisis year of 2009 is marked with the lowest rate of increase in the value of import, recorded in the Russian economy during the entire studied period. Specifically, the value of import drops to the negative of over 30%. Machinery and equipment form Russia’s single largest type of imported products during the period from 1994 to 2016. The second largest single type of import is food and agricultural products. The third largest single type of import is chemical products. Finally, metals constitute the fourth largest single type of import in the Russian economy. Clearly, Russia does not import raw materials, while giving preference to bringing to the country completed products. The structure of the Russian economy is to a significant degree defined by exploitation of abundant natural resources extracted and converted into raw materials. This abundance of natural resources guarantees revenue streams, but at the same time slows down the development of production capacity. The dependency on raw materials is not likely to become less significant, unless structural changes are introduced in the Russian economy. This restructuring should be supported by human capital accumulation. The main task for the Russian economy appears to be the channeling of the revenues from the trade in natural resources, so that the new reconfiguration would allow for a faster human capital accumulation. Sustainable economic growth in Russia does not entail economic growth without crises. Economic development, based on cycles, remains typical for industrialized market economies. Furthermore, global economic and financial crises affect all national economies, even the most stable and sustainable ones. The Russian economy, being integrated into the global economy through international trade, capital flow, and technology transfer, unavoidably suffers of negative consequences caused by

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global economic and financial crises. This negative external impact affects the Russian economy as an integrated national economy, no matter how sustainable it may be in the future. Sustainable economic growth in Russia, if achieved, would still be dependent on the exploitation of natural resources and export of raw materials. The country’s dependency on natural resources is perhaps as unavoidable as its suffering of negative consequences caused by global economic and financial crises. The Russian economy benefits significantly from foreign trade, exporting raw materials. This trade may negatively impact the structure of the Russian economy, but at the same time, it guarantees a significant and continuous flow of revenue. Even if the Russian economy would be free from a significant price volatility on raw materials on the international market, this independency alone would hardly be sufficient to consider it as an economy enjoying sustainable economic growth. In order to become more sustainable, the Russian economy needs to increase the volume in production of and trade in intermediary goods and final products or consumer goods. During the studied period of the post-Soviet transition and development, the Russian economy suffers of the negative consequences caused by three major economic and financial crises. Nevertheless, the Russian economy needs deeper integration in global value chains, which will enable the country to broaden its export composition. Next advancement of the Russian economy will become possible based on massive renovation of principal capital. An accumulation of human capital will be needed in order to both conduct such a massive renovation and utilize the newly renovated principal capital. This would require high skilled labor. The Russian economy should focus on modernizing already existing industries, including extraction industry. These industries require new technologies and human capital. In addition, instead of exporting raw materials, the Russian economy would be better off in trading intermediary and final products. At present, the Russian economy faces certain large-scale idiosyncratic risks that are hard to predict and when occur, hard to cope with both economically and politically. The end of these health and geopolitical crises is hard—if not impossible—to predict. Accordingly, the prognoses presented and analyzed in this study are very conditional and this conditionality impacts the validity and reliability of these prognoses. Despite

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the systemic prognoses, the future of the Russian economy and the determinants for possible sustainable economic growth in Russia remain largely unclear. Uncertainty remains a key term that characterizes the national economy and the societal development in general. Under such terms, it is hard to talk about the inevitability of sustainable economic growth in Russia. The next economic advancement in Russia will become possible based on the process of renovation and investment into principal capital. A massive renovation of principal capital will require a significant investment and, in addition, an equally significant investment in human capital. This human capital will be needed to supplement the newly renovated principal capital. Highly skilled workers will operate new machinery and equipment based on more developed technologies. Further institutional and structural changes in the Russian economy are needed. Such changes will lead to an increase in both domestic and foreign investment, facilitate a further development of the domestic market, and sustain already achieved steady GDP per capita growth. In the future, one would like to see further development of the research on sustainable economic growth in those economic systems that are currently not in equilibrium and only move toward their steady state. Russia is obviously one example of such an economic system, but certainly not the only one. The book will be of interest to those who want to learn more about specific problems in Russia’s newly built capitalism, the country’s economic perspectives, and its semi-peripheral status. The book will also be an excellent supplement for students in Russian studies programs, as well as for investors who want to do business in Russia and try to understand the country’s domestic conditions and processes. Present and potential economic growth in Russia is of interest in the global West, global East, and global South. Along with the EU and the US, such economic giants as China, India, Brazil, and Indonesia experience an increasing volume of trade and economic cooperation with Russia. They too need to understand the Russian economy, its major long-term trends, and its proven ability to overcome major economic difficulties, including negative consequences of economic and financial crises as well as macroeconomic poverty traps, and initiating sustainable economic growth in the country. The Russian economy has been caught out by sudden contemporary economic and geopolitical changes. These changes are global, regional, and national and they all impact the Russian economy. At present, this

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impact is obviously negative. The economic position of the country was relatively stable and its future economic perspectives were modestly optimistic or even reasonably good. Although not without serious structural problems, the state of the Russian economy presented no good reason for a full-scale military aggression to begin. The unfortunate events of 2022– 2023 became the turning point that changed the situation drastically. The impact of the military conflict and geopolitics overall on the current state of the Russian economy and its future path of development may be way too serious to be missed or diminished in the political rhetoric, let alone dismissed or ignored altogether. Simply put, Russia may have diverted from sustainable economic path. While this study is completed, the reader may have questions about the impact of economic sanctions and military conflict on the Russian economy and its structure, economic transformations and deformations, and viability of the current economic model. These are all burning questions that the general public both in Russia and outside the country has and will search for answers. A serious reflection on what the military conflict has done to the trajectory of sustainability in the Russian economy observed until 2022 is needed. The changes may be dramatic and would most certainly warrant a scholarly discussion. This study will add just a few points to initiate this future discussion. While this study focuses on the economic evolution in Russia up until the turning events of 2022, some speculations may be permissible, given the current circumstances and seriousness of geopolitical situation in general. Aggravation of the military conflict elevates the level of economic sanctions, imposed against Russia. Economic sanctions continue to accumulate, and so is their negative impact on the Russian economy. The emerging need to sustain its military aggression may push the Russian economy away from the trajectory of sustainable economic growth and development. The only right choice would be to make an attempt to return to the relative normalcy of economic development observed in Russia prior to 2022. However, as long as the military aggression persists, the feasibility of initiating sustainable economic growth in Russia is highly questionable, or perhaps is out of question at all. The new Russian economic model that the political elites try to impose on the country as something given or unavoidable is not sustainable. This model is unsustainable in the medium- to long-term. In fact, such a model is not even clearly determined yet. The restart of the defense industry on

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the whole new—much higher—level, as necessitated by the on-going military conflict, may throw the Russian economy into the state of stagnation instead of economic growth. Even for a temporary boost in the defense industry, financial resources of the country are limited, while the absolutely necessary human capital and technologies are simply not in place. Furthermore, such an attempted temporary boost for the defense industry in Russia will lead to disproportionality in the structure of the national economy. This disproportionality itself will make the national economy and the defense industry in particular unsustainable. The disproportionality developed and rapidly expanding defense industry in Russia will unavoidably cause higher rates of inflation and national currency devaluation, which will mean a significant step away from the sustainable development trajectory for the national economy. Furthermore, this disproportionality will lead to the unbalanced federal budget, most likely with a growing budget deficit and unsustainable way of expenditures. Other reasonably expected or predictable negative consequences for the national economy may also be obvious. For instance, the labor market in Russia may suffer significantly due to the exodus of substantial groups of population. These groups will include men of conscription age, specialists who will seek better opportunities and more stable future abroad, and those in serious discontent with the state policies. At the same time, fewer qualified workers will come to Russia. With technology transfer severed due to sanctions, the development of production based on value-added principle becomes problematic, with already existing technological processes being interrupted. International financial flows are interrupted as well. As a result, in Russia, economic uncertainty as an antipode of sustainable economic growth and development becomes dominant. The crisis of 2014 was not just a typical economic and financial crisis as it involved a serious devaluation of the national currency and also involved economic sanctions imposed internationally. In 2022– 2023, Russian national currency also demonstrates signs of volatility. The national economy becomes more vulnerable. While Russia was not addicted to foreign debt, economic sanctions are taking a bite out of the Russian economy, not only financially, but also technologically and in terms of human capital accumulation. The Russian economy has foundations for resilience to confront the economic and geopolitical crisis caused by the large-scale military conflict that started in the early 2022, but this resilience is not likely to last for many years—or even for a few

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more years—especially if internationally imposed economic sanctions will continue to mount. Business persons who plan on making major and sustainable longterm investment in the Russian economy would also be interested in learning the results of this study, including the expectations of sustainable economic growth. Eurasia and the Russian economy in particular remain of high interest in the rapidly globalizing world. Thus, this book would be very helpful not only for students and scholars interested in the Russian economy, but also for those who plan on investing, working, or being involved in other business activities in Russia in the near and not-so-near future. This book is for those who plan on a long-term economic involvement with Russia and are in need of better understanding of Russia’s current and likely future economic processes and developments.

Index

A Aghion and Howitt model, 45 Aghion, Philippe, 9, 45, 48, 49, 69 Arrow, Kenneth, 43 Augmented Solow model, 48

B Barro, Robert, 52, 53, 67, 69 Becker, Gary, 51, 52 Becker, Torbjörn, 11 Beck, Roland, 8 Bernanke, Ben, 69, 72

C Chakraborty, Shankha, 52, 69 Cobb-Douglas production function, 43 corruption, 3, 38, 85 Creative destruction, 31, 45

D Dependency theory, 10 Dollarization, 3–5, 7, 13, 33, 34, 38, 152 Domar, Evsey, 43

E economic development, 7–9, 11, 13, 28–30, 32, 36, 37, 52, 64–69, 72, 74, 81, 88, 92, 94, 179, 180, 184, 187 education corruption, xiv endogeneity of human capital, 43 endogenous growth, 11, 48, 54

F foreign direct investment, 90 Foster, Jame, 65

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 A. L. Osipian, Sustainable Economic Growth in Russia, https://doi.org/10.1007/978-3-031-38874-3

191

192

INDEX

G Galor, Oded, 57, 69–71 Guerrieri, Paolo, 10 H Harrod-Domar growth model, 43 Harrod, Roy, 43 Hass, Jeffrey, 2, 8, 86 Howitt, Peter, 45, 48, 49, 69 human capital, 11, 12, 14, 17, 47–59, 68, 69, 74, 93–95, 167, 174, 184–186, 188 Hume, David, 25, 27, 36 I Institutionalism, 59, 70 International Monetary Fund (IMF), 73, 150, 163 J Johnson, Vincent, 55, 69 K Kaldor and Mirrlees model, 44 Kaldor, Nicholas, 44–46, 50, 93 Kamps, Annette, 8 L laissez-faire, 26 Lucas, Robert, 43, 52 M Malthus, Thomas, 28, 29, 37, 38 Mankiw, Gregory, 43, 47, 48, 53, 54 Mercantilism, 4, 6, 13, 22–26, 33, 38, 180

Mileva, Elitza, 8 Mill, John Stuart, 25, 29, 37 Mincer, Jacob, 51, 52, 69 Moav, Omer, 69

O Osiobe, Ejiro, 47 Oxenstierna, Susanne, 11

P Physiocrats, 13, 22, 26, 27, 35, 36, 38, 180 poverty trap, 86, 123, 186 privatization, 9 public capital, 56, 57

R recession, 92 Research and Development (R&D), 31, 37, 46, 48–50 Ricardo, David, 25, 29, 36 Romer, Paul, 43, 46–48, 53, 54, 69 Rostow, Walt, 3, 27–30, 49

S Sala-i-Martin, Xavier, 52, 53, 69 Schultz, Theodore, 51, 52, 69 Schumpeter, Joseph, 30, 31, 37–39, 179 Sergi, Bruno, 11 Shioji, 56, 57 Smith, Adam, 25–28, 30, 36 Snooks, Graeme, 65, 89 socioeconomic development, vii Solow model, 43, 48 Solow, Robert, 43, 44 Structuralists, 10

INDEX

sustainable economic growth, 2, 7, 11, 13, 14, 16, 37, 43, 47, 58, 59, 64, 68, 70–74, 81, 88–90, 92–96, 109, 112, 117, 121, 127, 128, 136, 137, 145, 149, 156, 167, 180, 181, 183–189

Swan-Solow model (S&S), 50, 51

193

U unofficial economy, 7, 8 V Valdes, Benigno, 50, 51 W Weil, David, 43, 47, 48, 53, 54, 69