American-Russian Economic Relations in the Post-Cold War Era

[Deb Palmieri on Russia Table of Contents]

The following article was published in the Russian Commerce News, November-December 1995. The Russian Commerce News is the official publication of The Russian-American Chamber of Commerce®.

What to Expect from Russia in '96

What is the present state of Russia's economy and what does this mean for present and future American business involvement in this part of the world? Despite all its problems, the Russian economy is recovering and will continue to do so in the short and long-term future. Right now, the "hope" and "desire" for an economic miracle will in a relatively short period of time-and sooner than many Americans think-become the reality of economic recovery for a strong Russian national economy.

Russia is in a unique position right now. The country is a late market developer, trying to rebuild, survive and compete in a downsizing, restructuring global economy fueled by new modernizing forces of technology and the information-age revolution in telecommunications, robotics and computer science. It is a challenge for all countries, including the West, to re-tool for survival and productivity in this context. But it is especially challenging for former command/planned economies who are in the midst of the entire transformation of the previous economic, political and social order.

These challenges are evident if we compare levels of economic development among the U.S., Japan and Russia. There are several striking facts. In the area of GDP, Russia lags significantly behind. GDP per capital for Russia is a fraction of that of the world's two largest economies. Real wages per hour for Russia are symbolic of a low standard of living. In fact, 40 million of Russia's 148 million citizens are living below the poverty line, which is about $68 per month. Illustrative of the health care crisis that Russia faces is a high infant mortality rate and a declining life expectancy rate that is more equivalent to a Third World state than a Western industrialized economy. The bright spot for Russia in an otherwise grim scenario is its $16.4 billion trade surplus, in contrast to our own burgeoning deficit. Clearly, Russia has a long way to go to achieve a level of economic development comparable with the West. Will Russia make it?

Given the enormity of the quest for a new order, one that most of Russia's present leaders have promised will be based on principles of market and democracy, Russia's track record is not all that bad, despite Mr. Chernomyrdin's recent pronouncement that economic performance this year remains unsatisfactory. All things considered, the economy looks relatively promising, and most experts agree that the worst of the crisis is behind and things will start to look up in '96.

There are several good signs. Inflation is decreasing. It dropped from 18% in January '95 to approximately 4.5% in September '95. Despite a slight increase in October, it is expected to continue to decline slowly through the end of the year and average 2% in '96. The ruble has experienced a rather remarkable rally and has gained strength against the U.S. dollar. It is now approximately R4,500 to the U.S. dollar, its strongest standing in recent memory. The decline in production in '95 has slowed considerably over the same period in '94. Key sectors have strengthen, including petroleum products, metallurgy, iron, steel, and chemicals. International Monetary Fund (IMF) projections forecast that production will increase by 2.4% in 1996. The GDP decline has slowed over the previous year. On the negative side, unemployment is up and real personal income has declined over the previous year.

Russian exports and imports increased 30% and 17% respectively over '94, resulting in a trade surplus of $16.4 billion, which constitutes a 28% increase over 1994. The largest export earner is crude oil, and the last two quarters showed large increases in nickel, copper, pulp and newsprint. Leading import items include food products and machine tools and equipment.

Not only are several of Russia's economic indicators suggesting positive progress, there are other signs as well. The basic institutions of a market-economy have developed remarkable quickly from ground zero in 1991. The Economist magazine recently reported that Russia has over 2,500 licensed commercial banks, over 600 investment funds and over 40 million shareholders.

Substantial progress has been made on the privatization of industry. The privatization of over 16,000 medium and large enterprises in a short period has created a private sector which last year produced 62% of officially recorded GDP. Proportionately, Russia's state owned sector is now smaller than Italy's. Between 60-65% of Russia's work force is employed in private enterprises. Over 95% of Russia's shops are privately owned. Russia now has hundreds of Western-style supermarkets and over 60,000 kiosks across Russia. The expansion of retailing is stimulating growth in the service sector and accounts for 50% of GDP growth.

Russia has made remarkable progress toward integrating with the global economy, joining the IMF in June 1992, the International Finance Corporation in April 1993 and the World Bank in June 1993. Russia held observer status in GATT and is expected to join the new International Trade Organization. Russian Minister of Foreign Economic Relations, Oleg Davidov, is pushing to get in by late 1996. Entry is critical for Russia to eliminate Cold War trade barriers and insure smooth integration into the global economy. Also of note is that Russia, along with four central European states, recently joined the successor to the Coordinating Committee on Export Controls, New Forum. New Forum will coordinate and control the export of arms from the 30 nations to certain yet unannounced target countries.

In sum, Russian's economic forecast for 1996 looks good. Minimally, levels of achievement for GDP, industrial and agricultural output are expected to perform at least to 1995 levels, and will likely exceed them. Inflation will likely run between 1-3% and investment and exports are expected to experience steady growth.

As for the United States, we are becoming more active and aggressive in Russia. Relatively speaking, we now lead foreign investors in the number of foreign enterprises in Russia. (U.S. investors account for 15% of investments in Russian enterprises; 12% for Germany; 6% for Britain; 6% for Italy; 5% for China and 5% for Austria. The total number of enterprises measured is 15,204). Our trade volume is increasing substantially over previous years. We are selling more meat products, computers, and equipment to Russia. We are buying mainly raw materials, especially aluminum, metals, chemicals and precious stones.

But Russia's trade and investment potential has hardly been tapped by Americans. Our trade turnover with Russia is just over $5 billion. Five billion is a tiny amount compared with what we trade with other nations. Our trade with Russia comprises less that 1% of total U.S. foreign trade. We trade $50 billion plus with Germany and England. Our trade with Mexico is over $80 billion; and with Canada and Japan it totals over $200 billion each. Our low trade turnover with Russia reflects the Cold War legacy which severely constrained our economic ties with the former Soviet Union and Eastern bloc. But these low numbers suggest enormous potential and room for growth. The development, expansion and growth of U.S.-Russian trade is important for the future of both economies. American companies will find profitable international growth opportunities and outlets in Russian's vast marketplace. Let's accept the challenge to substantially expand commercial ties with our former foe. While Russia's risks are substantial, its rewards are enormous. As the Russian proverb goes, he who takes no risks drinks no champagne.

Deborah Anne Palmieri
Russian Commerce News, November-December 1995