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Can the Bear Rebound?


Reliant on its abundant resources to fuel an economic resurgence, Russia has been dealt a hard blow by the global economic crisis. Characterized in the Western media as a misguided, dangerous bear, can Russia regain its former glory?



Can the Bear Rebound?

By Shu-ren Koo
From CommonWealth Magazine (vol. 426 )

"Without money, nothing goes," is how one Taiwanese investor describes the atmosphere that governed Russia over the last several years as the former command economy tried to develop into a free market economy. As a result, getting rich and cashing in on the new opportunities became a nationwide sport.

Diplomats at Taiwan's unofficial embassy in Moscow have a similar impression. It is not out of the ordinary for rents to double or triple within a short period, that leases are cancelled and tenants forced to move out to make way for better-healed clientele. A number of diplomats have been forced to pack and move repeatedly, each time farther away from the city center.

Diplomats at Taiwan's unofficial embassy in Moscow have a similar impression. It is not out of the ordinary for rents to double or triple within a short period, that leases are cancelled and tenants forced to move out to make way for better-healed clientele. A number of diplomats have been forced to pack and move repeatedly, each time farther away from the city center.

Natural Resources Flood Coffers

Rising raw material prices have sent enormous sums cascading into Russian state coffers in recent years. Virtually overnight Russia became a country not only rich in natural resources, but also awash with money. Currently, Russia boasts the world's third largest foreign reserves behind China and Japan, and counts among the four rapidly developing BRIC economies – an acronym for Brazil, Russia, India and China.

And he who has money can afford an attitude.

In Western eyes Russian politics are regressing to the old authoritarian system, but for many Russians, former President Vladimir Putin, who retains a grip on power as premier, has improved their lives. That's why more than a few believe Putin will stage a comeback as president.

Last month, Russia was handed a good opportunity to show off its might.

The first-ever summit of BRIC nations was held in Moscow, and immediately afterwards U.S. president Barack Obama made a pitch for a new start in bilateral relations during his first visit to Russia. Russia exploited these high-profile events to tell the world it is still a superpower.

'Paranoid, Mischievous and Heading in the Wrong Direction'

Militarily, Russia is without doubt still a superpower.

Its weapons exports account for one quarter of the worldwide arms trade, making Russia the second largest weapons exporter behind the United States. With an arsenal of 2,700 nuclear warheads, Russia is the world's foremost nuclear power. Obama's trip served to defrost icy bilateral ties and to formalize a treaty to reduce strategic nuclear weapons.

Yet at that time the highflying Russian economy had already begun to plunge.

When prices for oil and other raw materials plummeted last year, Russia with its high dependency on such exports was hard hit. Foreign investors withdrew, the ruble depreciated massively, and interest rates skyrocketed temporarily to almost 30 percent, which caused retail sales to contract sharply. In the first quarter of this year Russia posted economic growth of negative 9.5 percent, while its unemployment rate topped 10 percent in May.

Nowadays, only a few customers frequent the once crowded GUM state-run department store in downtown Moscow and Russia's largest market for electronic goods in the city's western district. The once record-selling distributor of Taiwanese branded handsets has not sold a single Taiwan-made mobile phone in the first quarter of this year.

A Taiwanese businessman who recently dined with several Russian bankers reveals that the finance community expects Russia to slide into a second financial crisis. They argue that banks, for the sake of their own financial stability, no longer dare to lend money to companies that need funding. As a result, many companies that grew exponentially over the past year because they were able to borrow money now face a liquidity crunch.

In early July, The Economist magazine illustrated Russia's unpredictability with a cover showing Barack Obama about to disappear into the wide-open mouth of a giant bear under the title "Welcome to Moscow." The article predicted that Russia would post negative economic growth of 5 percent this year and that the economy would grow only 2 percent next year, making Russia the laggard among the four BRIC economies.

Still Reason for Optimism

Despite these negative economic indicators, many people are still quite optimistic about Russia's future.

Economic analyses by UBS and other foreign financial institutions point out that raw material prices and the ruble exchange rate have already stabilized. Since interest rates have already halved, the Russian economy has bottomed out and is on the road to recovery, they argue. This cautious optimism is reflected in the stock market. In the first half of this year, the Russian stock market recovered 58 percent of its crisis-related losses, the second best performance among the BRIC nations behind China.

"The economy will come back one day," says Victor Lopatin, vice president of computer distributor Vobis Computer, with demonstrative confidence. Thanks to its huge population, Russia still has a large, unexploited market potential. "Take navigation devices as an example – the Russian market is even smaller than Poland," explains an optimistic Lopatin.

Many believe that Russia's biggest growth potential comes from its comparatively high ratio of high-quality talent (see related article).

When walking the streets of Moscow, riding its busy metro, or visiting the city's most famous landmark, Red Square, one cannot help but notice the large number of young intellectuals, which reflects Russia's deep and solid foundations.

Rather than calling Russia an "emerging nation," it might better to term it a "country in a state of transition" – one that is striving to transform itself from a powerful Communist state into a mighty market economy.

Translated from the Chinese by Susanne Ganz

Russia at a Glance

World's largest country: A surface area of 17 million square kilometers, twice the size of China.

Sparse population: 140 million, the smallest population among the four BRIC nations.

World's 9th largest economy: GDP US$1.6078 trillion (2008), No. 3 among the BRIC nations.

Relative Affluence: Per capita GDP (purchasing power parity) US$15,176, No. 1 among the BRIC nations.

Full state coffers: Foreign reserves of US$353.8 billion (as of May 2009), third largest in the world behind China and Japan.

High degree of urbanization: 73 percent of the population lives in cities.

Abundant natural resources: No. 1 oil producer in the world, No. 2 oil exporter, No. 1 natural gas producer and exporter.

High educational level: More than 8 million university students; more than half of all adults have received tertiary education, twice the average level of OECD member countries.

Military superpower: World's second largest arms exporter behind the United States, accounting for 25 percent of worldwide arms trade from 2003 to 2007, owns 2,700 nuclear warheads, more than any other nation (2008).

Hefty cost of living: one night at a Moscow hotel costs an average of US$370, making the Russian capital the second most expensive city in the world (as of early 2009). Housing in the city center costs more than US$20,000 per square meter, also second worldwide (as of 2008).

Heavy smokers, heavy drinkers: at more than seven cigarettes per capita per day, the Russians are the world's second heaviest smokers (as of 2008). They spend more than any other nation on alcoholic beverages (as of 2008). Every year 500,000 deaths are attributed to alcohol abuse.

Fertile soil for Taiwanese brands: the three leading notebook brands: Acer, Asus, MSI; leading computer peripheral brand: Genius (KYE Systems); leading navigation device brand: Garmin.

Sources: IMF, The Economist, CIA World Fact Book, UNESCO, Global Property Guide

Chinese Version: 俄羅斯 迷途大熊,重返榮耀?