A closer examination of Russia’s economy reveals glaring weakness that will hamper growth in the future. Of particular concern is the nation’s astounding inefficiency in labor productivity. The average productivity in most major sectors is a mere 26% of what the United States produces. Inefficient business processes and obsolete capacity and production methods are the main culprits of this issue that plagues the Russian economy, much of this stemming from under investment in Soviet times. As a comparison, it takes on average 704 day to obtain a building permit in Russia, as compared to 40 days in the United States. Two types of innovation can improve the inefficiency of Russia economy. Firstly, technological innovation will allow the nation’s industrial sectors to be more productive by using innovative machinery to produce goods at a faster rate while getting the most out of an employee during a standard workday. Secondly, Russia has a need for managerial innovation that will introduce new business processes and increase efficiency in the office place.
One of the primary reasons that Russian companies have not felt a need to increase their productivity is because of the rate of economic growth over the past ten years. This has encouraged companies to focus on expansion rather than efficiency in production. As we saw in America during the 2008 financial crisis, when economic growth fails the first course of action is to determine how to make the enterprise operate more efficiently. This begs the questions of why should Russia care; growth continues to be steady because of the high price of oil and natural gas and there is seemingly no end in sight.
Such concerns are certainly valid. On March 22, 2013 Rosneft signed a deal to increa its oil supplies to China, effectively tightening relations between
the two nations. This seems like a perfect match considering Russia is the
world’s largest energy producer and China is the world’s largest consumer. Furthermore,
China extended a $25 billion credit to Rosneft and the Russian pipeline
operators OAO Transneft and Chain National Petroleum Corporation will partner
with the Russian corporation to exploit resources on the Artic shelf. This is
an alarming development – though not unforeseen – that will further intertwine these
two nations both economically and politically. Considering the interests of
these two powerhouse nations are not always aligned with the interests of the
United States perhaps it is time to reconsider how we evaluate the situation in
Russia.
It
is common to hear concerns from America that Russia’s inefficiency, corruption
and seemingly authoritarian rule will cripple the country’s economic development
in the years to come. Yet, as the title of this article suggests, you cannot
apply the factors that affect one countries will have the same result in
another country. Put otherwise, you cannot assume that the same factors that
typically indicate growth and prosperity in America will have the same results
in Russia and China. What is interesting in the Rosneft deal with China is that
on the same day the deal finalized, British Petroleum (BP) sold its 50% stake
in TNK-BP to OAO Rosneft. It seems to be evident that Russia is shifting, its
reliance on western companies to fuel its growth and focusing on China to
provide it with the capital it needs. This is a clear sign to western countries
and to assume that the same factors that drive growth in America apply to Russia
would be unwise.
BP Launches $8 Billion Share
Buyback After TNK-BP Sale
McKinsey
Global Institute, “Learn Russia sustaining economic growth through improved productivity”
April 2010.
Rosneft Signs Deal to Increase Oil
Supplies to China http://online.wsj.com/article/SB10001424127887324103504578376613572618662.html
World
Bank: Russia's Economy Loses Momentum, Needs Structural Reform
http://www.worldbank.org/content/dam/Worldbank/document/rer-27-march2012-eng.pdf
Путь «Роснефти»: от распада Союза до покупки ТНК-BP -
http://www.forbes.ru/sobytiya-photogallery/biznes/236077-put-rosnefti-ot-raspada-soyuza-do-pokupki-tnk-bp/photo/1
Good post and agree with your major point that analysts should not measure everything by their own set of rules. There are, however, some pretty solid indicators of long-term growth-at least in the business/economic realm. Russia and China are both challenged with modernizing their economic and business models while maintaining political stability. Both countries appear to be successful for the short-mid term, I’m not so sure about their long-term prospects.
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