GDP change and its structure

The Russian economy grew a little less than the global one for the period from 2000 to 2017. This is an acceptable growth rate, slightly lower than the world average. However, the picture changes if we divide this time into 2 periods - from 2000 to 2008 and from 2008 to 2017. If in the first period Russia grew much stronger than the world economy, in the last decade the Russian economy is one of the outsiders, the GDP growth of 0.7% per year indicates a long-term stagnation.

Accumulated GDP growth in US dollars according to purchasing power parity

 

The structure of Russia's GDP is very similar to that of developed countries - more than half is taken by household consumption, the gross fixed capital formation is at the level of 20%. While the GDP of actively developing China looks quite different - almost half is accounted for gross accumulation and less than 40% for consumption.

GDP structure of different countries by expenditure, 2017

 

A similar picture can be observed in the comparative dynamics of growth in real GDP and real disposable income of the population. If in China the incomes of the population as a whole grew at the same rate as GDP, in Russia the income growth significantly exceeded the increase in the economy in 2000-2009. As a result, the level of wage content in Russia exceeded that of the European Union. After 2009, the income of the Russian population came in line with the rate of change in GDP, but at that time, the economy was barely growing.

Wage content (wage to GDP)

 

Dynamics of real disposable personal incomes and real GDP, Russia

Dynamics of real disposable personal incomes of the population and real GDP, China

 

Artificially Lowered Ruble

РRussia has managed to avoid the so-called “Dutch disease”, when due to the growth of prices for exported resources, the exchange rate of the national currency is greatly strengthened, which leads to a decrease in the competitiveness of other sectors of the economy. The Central Bank of the Russian Federation bought most of the currency entering the country and left it in reserve funds.

As a result, the nominal effective exchange rate of the ruble (which is calculated as a weighted index of all rates of foreign trade partners) was quite stable until 2014. At the same time, the real effective exchange rate (additionally adjusted for inflation in Russia and foreign trade partners) has more than doubled. It is worth noting that the “real” effective exchange rate reflects the theoretical currency index (what it would be if the exchange rate was exactly adjusted for inflation) and its growth faster than the nominal one indicates a deterrence of the national currency strengthening.

Dynamics of nominal and real currency ruble exchange rate

Thanks to the undervalued exchange rate, balancing the Russian budget was managed. If the ruble exchange rate to the dollar were at the level of purchasing power parity, the budget would have been consistently deficient since 2008. The low ruble exchange rate also affected the intensity of capital outflows, for 2000-2017, the net exports amounted to almost $ 600 billion, and with a strong exchange rate, this amount would be even higher.

Theoretically, the weak exchange rate of the national currency should stimulate exports, but it only works in non-primary industries

Federal budget deficit, real and at for the exchange rate of ruble at purchasing power parity, % of GDP

that are not limited by the resource base. Moreover, in order to develop the export of industrial goods with high benefit, equipment is needed, from which Russia is highly dependent on imports¹ . And in this case, the weak ruble exchange rate plays in the negative direction, overstating the cost of imports.

As a result, Russia's dependence on imports of industrial goods is only increasing, having increased over the past 17 years from 60 to 80%. In addition, the share of exports of industrial goods remains at the same level, slightly above 20%.

Let’s review the weaknesses of the Russian economy and compare with other countries.

Low Efficiency

The year 2008 was in many ways a turning point for the Russian economy. As already mentioned above, GDP has practically not grown over the past ten years, and many key indicators of economic efficiency have stopped at the same place around the same time. The labor productivity of Russian workers has increased from 2008 by only 2.6%, two and a half times weaker than the average for OECD countries. The energy intensity of the economy, which had been successfully declining before, stood at 8.4 megajoules per dollar of GDP. During this time, developed countries have optimized their energy efficiency by more than 10%, China - by almost a quarter.

Labor productivity, GDP per work hour, in US dollars (constant prices of 2011 in PPP)

Energy intensity (megajoules per dollar of GDP (constant prices of 2011 in PPP))

An inadequate investment is closely associated with the low efficiency of the economy. After the financial crisis, the capital is steadily leaking out of Russia. If in 2000-2007 about $ 80 billion came to Russia in general (due to capital inflows in the last pre-crisis years), over $ 670 billion were exported in 2008–2017. Investments in fixed assets are also falling - from 21% of GDP in 2008 to 17% of GDP in 2017.

 

Net outflow of capital from Russia (outflow (-), inflow (+))

Investments in fixed assets, % of GDP

 

Technological lag

In the sphere of high technologies, Russia is much inferior to the developed countries, while China is already close to them. $ 46 of high-tech exports per person per year is the level of Brazil, a country that in terms of economy is in many ways similar to Russia, but without its accumulated scientific and technical potential. Moreover, according to the degree of automation of production, even Indonesia overtakes Russia; the gap to the world average is almost 25 times.

High-tech exports, $ per capita, 2016

The number of industrial robots per 10 thousand workers in production, 2016

 

Excessive militarization

. The development of the Russian economy is negatively affected by a high level of militarization, compared to developed countries. Almost 2% of the working-age population is employed in such an unproductive area as service in the army, which is more than twice that of the United States.

Army size (% of working-age population), 2016

The expenditures of the Russian budget for defense as a percentage of GDP after 2014 surpass even the figure of the United States, which has taken the role of world gendarme. Moreover, Russia spends much less on science than developed countries. Moreover, there is no upward trend in this most important area for development, while China for twenty years has increased spending from 0.5% to 2% of GD, overtaking Russia back in the early 2000s.

Budget expenditures on defense, % of GDP

Budget expenditures on R & D, % of GDP

 

The economic history of Russia in the 21st century can be divided into two periods, which differ sharply between themselves - until 2008 and after. Until 2008, the domestic economy developed quite successfully but too much of the funds were directed to current consumption and not to long-term investments. The financial crisis of 2008, aggravated later by a long-term fall in oil prices and opposition to the West, effectively halted the development of the Russian economy. The movement of capital particularly eloquently speaks of this - the country received $ 80 billion in 2000-2007, over $ 670 billion were exported in 2008-2017.

The current model of the economy no longer provides acceptable growth rates, deep reforms are needed, otherwise Russia risks falling hopelessly behind not only developed but also many developing countries.