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Claus Vistesen and I also have a number of country briefings and study papers available for download in PDF format. The latest are:

Bank Rossii Eases Further As Russia's Economy Contracts At A Record Rate

The ECB's Balance Sheet At A Glance.

Wednesday, December 5, 2007

Russia Balance of Payments Components

Total factor productivity growth in Russia has been strong in recent years (averaging 5.8 percent over the 1999 - 2005 period according to World Bank calculations), and TFP growth has been the principal driving force behind average GDP growth. In part this surge in Russian productivity can be explained by increasing utilization of excess capacity, but this is only one part of the story, and the strong performance isalso attributable to major structural shifts in the economy with the reallocation of labor and capital from less to more productive sectors.

The World Bank calculates that efficiency gains within firms accounted for 30 percent of total manufacturing productivity growth over the period 2001-2004, while a more efficient allocation of resources across firms accounted for a further 24 percent. Firm turnover (entry of new firms and exit of obsolete ones) accounted for 46 percent of manufacturing productivity growth. The main contribution to manufacturing productivity growth came from the exit of obsolete firms, releasing resources that could be used more effectively by new or existing firms.

So even allowing for capacity utilization issues, the World Bank found that out of the overall GDP growth of 6.5 percent achieved in Russia over the 1999-2005 period, productivity gains from employed resources accounted for 4.15 percentage points (or approximately two thirds).

So Russia's economic transformation has been accompanied by a dramatic shift of resources (both capital and labour) into previously underdeveloped services areas and sectors. At the sectoral level, the shift of labor into services has spurred higher productivity in agriculture, as result of labor shedding (but note below how a rural inflation problem can arise if the labour outflow is not accompanied by a capital inflow in a supply-side constrained economy like Russia), as well as in manufacturing. Over the 1999-2003 period labor in-particular transited away from low-productive sectors (agriculture) towards more productive sectors (services).

The Russian economy also continues to experience an investment boom - although levels of investment still remain comparatively low (for a developing economy) as a share of GDP, and investment is overly concentrated in a few sectors. Aggregate fixed capital investment grew by 21.2 percent in the first nine months of 2007 as compared with the 11.8 percent growth reported for the same period in 2006. While capital investments decelerated in September 2007 they still posted double-digit growth rates (16.1 percent, relative September 2006). Most manufacturing sectors of the economy, and especially those with higher value added, still receive a relatively low share of investment. For example, machine building received only 1.1 percent of the total fixed capital investment in the first half of 2007, while transport, communication and real estate operations accounted for over 35 percent of the total. This is a picture that anyone following in detail the evolution of the EU10 economies (or Ukraine for that matter) should now be pretty much familiar with.

Foreign investment surged during the first half of 2007, reaching 5 percent of GDP. The Russian central bank has estimated that inward FDI reached almost 28 billion USD during the first half of 2007 (5 percent ofGDP), 10 billion more than a year earlier.

Preliminary estimates show FDI inflows at USD 37 billion for the first three quarters of 2007 in the non-banking sector alone. However, FDI remains concentrated in resource extraction industries and non-tradable sectors, playing only a marginal role in manufacturing. Mineral resource extraction, metals and non-tradables sectors (particularly trade) remain the favorite directions of foreign investments. Mineral resource extraction industries received USD 11.2 billion in FDI during the first half of this year (of which USD 10.7 bln. from Netherlands. To get some idea of the scale of involvement in Russia from Dutch energy companies such as, Gas Terra, Essent and Nederlandse Gasunie see this summary of the proposal for developing the Yamal peninsula and the Kara Sea that Royal Dutch Shell's Chief Executive Officer Jeroen van der Veer was recently pitching to Vladimir Putin). These resource extraction inflows amounted to 71 percent of the total FDI inflows, compared to only 33 percent in 2006. Manufacturing industries, on the other hand, received only USD 1.8 billion, or 11.1 percent of total FDI inflows in the first half of 2007, compared to 19 percent in 2006 and over 45 percent in 2005.

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