Review: OECD Russia Economic Survey 2009

I really couldn’t wait for this publication to be released, and I’ve been checking the OECD site every day to see if they accidentally posted it before the scheduled July 15 release. The OECD’s conclusions and recommendations in such reports are important because Russia is currently moving towards membership negotiations. Thus, issues identified in the report will likely recur in negotiations. And though I haven’t had time to read it cover to cover, so far I have to say I’m a little disappointed based on how great the previous report was.

The Nov. 2006 OECD Report

The last OECD Economic Survey of the Russian Federation was released in November 2006. Back then, the OECD rightly noted that, while Russia’s economic growth was certainly impressive, it was largely a product of a few discrete factors. More important, the OECD wrote that some of these factors (e.g., the underutilized capacity from the Soviet era) were factually incapable of continuing to sustain economic growth, while others (e.g., high prices for extractive resources) were both unreliable and do not clearly yield a net benefit to Russia. The report ultimately recommended (i) improving public administration, (ii) encouraging innovation, and (iii) reforming health care.

The July 2009 OECD Report

So I was fully expecting a new report that would not only revisit Russia’s progress in the areas raised by the last report, but also amplify on how these issues exacerbated the effects of the crisis in Russia. But the new report is somewhat disappointing.

The three impacts of the crisis that the new report focuses one are (1) collapsing oil prices, (2) drying up of international sources of credit, and (3) exchange rate volatility related to the oil price fluctuations. The OECD’s proposed remedies include (1) reforming the tax structure for the energy sector to ‘enhance economic efficiency’, (2) a ‘switch to inflation targeting’ monetary policy that would complement Russia’s fiscal policy and [purportedly] ward off Dutch disease, (3) making the banking system ‘more efficient and less crisis-prone’, and (4) reduce regulation/state involvement in the economy.

I think the OECD kind of dropped the ball with this report. First, we all know that Russia is overreliant on oil, and that when prices fall it messes up their growth, exchange rate, etc. Second, Russia’s major problem over this last boom period was not specifically the failures of its banking system, but rather its overreliance on a Western banking system that collapsed without warning. What model should the Russians follow?

But the most disappointing part of this Survey is that it abandons the structural critique from the last report in favor of an IMF-like approach that is limited to fiscal, monetary, and tax policy. Russia has already expressed its desire to implement the policies that the 2006 Survey recommended, and I think the OECD is the best-suited institution for assessing and encouraging their progress. Perhaps the OECD decided to declaw its report due to the imminent negotiations with the Russians. Still, even if this is the case, it is a mistake to divert attention from the structural issues that are what most distinguish Russia from OECD member countries.

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2 Responses to Review: OECD Russia Economic Survey 2009

  1. PDR Vet says:

    I think you've got the direction of causality reversed on the banking sector. Yes, it was over reliant on foreign borrowing but the key question is "why"? When was the last serious banking reform done in Russia? Keep in mind that their last reform leader, Andrey Kozlov, was murdered and can you even name his replacement? In fact, they split up his portfolio and named a copule of nobodies who've done nothing since. Reform died with Kozlov. There are still around 1,500 banks in Russia. Why? Russian domestic capital markets are shallow and underdeveloped especially for an economy that peaked at close to $1.7 trillion. Is it the fault of Western banks that there is an absence of long-term capital in Russia? Russian corporates borrowed abroad because it wasn't possible to do it for the same volume and tenure domestically. Russia hasn't joined the WTO but in its agreements to date it would have one of the most restrictive set of rules on foreign participation in the banking sector of the WTO era. I think you also forget that three state-owned banks controlled about 40% of the sector's assets before the crisis and now probably control more than 50%. Don't you think that has something to do with the inability of private Russian banks to attract deposits? Yes, there is deposit insurance but if you're a Russian depositor why not get both an explicit and implicit guarantee by putting your money in a state bank?Some sectors of the Russian economy are dynamic, open and competitive but banking isn't one of them. The system hasn't been reformed because it serves the purposes of the statists in the Kremlin. Without state banks, how would Rosneft have been able to finance its assimilation of Yukos?

  2. Jesse says:

    Thank you for your reply. I wasn't attempting to assign blame to any particular party. Yes, the Russians are to blame for pursuing policies aimed at securing Western capital, especially when it was done to the exclusion of necessary and painful reforms. On the other hand, Putin and his advisers reasonably believed that relying on Western banks was a safer, short-term approach. Now, the banking systems of all significant countries are on their knees. Not only did the fail to make rational investments in emerging markets like Russia, they knowingly facilitated the creation of worthless investments at home! And that was my point – yes, Russia needs a banking system, but to which model should it aspire? And here we have the OECD coming in late to the party talking about a healthy banking system? Please – banking merited only a page in the OECD 2006 report, and now in 2009 they tell us that banks are important. Oh gee thanks. Lastly, my overarching point was that Russia's structural problems deserved the same if not more attention than monetary, fiscal, and tax policies.

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