Publication 49
Tauno Tiusanen
RUSSIA IN THE GLOBAL ECONOMY
Lappeenranta University of Technology Northern Dimension Research Centre
P.O.Box 20, FIN-53851 Lappeenranta, Finland Telephone: +358-5-621 11
Telefax: +358-5-621 2644 URL: www.lut.fi/nordi
ISBN 978-952-214-572-7 (paperback) ISBN 978-952-214-573-4 (PDF)
Lappeenranta 2008
Tauno Tiusanen
Contents
1 Russia’s role in the global economy ... 4
2 Competitiveness and transition...15
2.1 Wages ...15
2.2 Prices ...20
2.3 Living standard, 2007...24
3 Conclusions...30
List of tables
Table 1. Living standard in BRIC-countries, USA, Japan and Germany, 2006 ... 4
Table 2. Export, external balance, investment, 2006... 8
Table 3. Some indicators of agriculture...10
Table 4. Mapping the global 500 corporations ...12
Table 5. Average monthly gross wages, EUR (ER)* ...16
Table 6. Average monthly gross wages, EUR (PPP)*...17
Table 7. Unit labour costs (ULC), ER adjusted 2007...18
Table 8. ULCs, PPP adjusted ...19
Table 9. Price level comparison ...21
Table 10. Current account, in % of GDP ...22
Table 11. Foreign direct investment (FDI) inflow to NMS ...23
Table 12. GDP per capita, EUR, 2007...25
Table 13. Real ERs against EUR, 2007...27
Foreword
The Northern Dimension Research Centre (NORDI) is a research institute run by Lappeenranta University of Technology (LUT). NORDI was established in the spring of 2003 in order to co-ordinate research into Russia.
NORDI publications have paid permanently attention to investment climate in transitional economies (TEs): several studies of the Research Centre deal with foreign direct investment (FDI) in post-communist societies. Western investors have strongly influenced the economic development in national economies which used to be guided by central planning.
The global economy is in a process of restructuring. Two big economies, India and China, show rapid economic growth. Russia and Brazil benefit from this growth because of their extensive resource base. Occasionally, a new term, BRIC (Brazil, Russia, India and China), is used in economic texts, because these four countries have special dynamism in their respective economies. The role of BRIC growth in the global economy is analysed here in the light of some macro-level indicators.
The second part of this report deals with tendencies of international competitiveness of transitional economies (TEs). Price competitiveness in post-communist countries is eroding.
I want to express my gratitude to Mrs. Tiina Tarhonen, who helped me to finalize the book.
Lappeenranta, May 2008
Professor, Ph.D. Tauno Tiusanen Northern Dimension Research Centre Lappeenranta University of Technology
1 Russia’s role in the global economy
In the turn of the century, oil price on the global market experienced a strong boost. Amid the oil price boom, a considerable amount of money has been transferred from the oil consuming countries to oil producing ones. National economies with extensive resource base have benefited of global economic growth.
India and China have both a population of over one billion. These two emerging markets have had rapid economic growth in the early years of the 21st century. Therefore, the weight of these two countries in the global economy has increased remarkably.
Brazil, Russia, India and China (so called BRIC-countries) are, therefore, gaining attention in global affairs. Two first ones are resourceful, while the two others are fast growing.
Table 1. Living standard in BRIC-countries, USA, Japan and Germany, 2006
A B
Population ERDI million
GNI USD, Billion
GNI at PPP
GNI per capita
GNI at PPP per
capita B/A
Russia 142 822 1.656 5.780 11.630 2,01
Brazil 189 893 1.661 4.730 8.800 1,86
India 1.110 907 4.217 820 3.800 4,63
China 1.312 2.642 10.153 2.010 7.740 3,85
USA 299 13.446 13.233 44.970 44.260 0,98
Japan 128 4.900 4.229 38.410 33.150 0,86
Germany 82 3.018 2.623 36.620 31.830 0,87
World 6.518 48.482 66.596 7.439 10.218 1,37
Source: The World Bank. World Development Report 2008. GNI = Gross National Income. GNI = Gross Domestic Product (GDP) plus net receipts of primary income from foreign sources.
The table above covers four BRIC-countries plus the three biggest economies in the world in the light of Gross National Income (GNI) figures (calculated from national currency and converted to US dollars using World Bank method). Far the biggest economy is that of the United States with about 13,5 trillion dollar GNI, followed by Japan with equivalent figure of 4,9 trillion and Germany with 3 trillion. China is not far away with a 2,6 trillion result. Russia,
Brazil and India are somewhat below the one trillion mark. Germany’s GNI is over three times higher than that of Russia, which is virtually on the same level with Brazil.
These GNI figures converted into USD via official exchange rates (ERs) give a very biased picture of the relative development stage of the 8 countries selected to Table 1. Rich countries have high wages and relatively high prices, while emerging markets have moderate wage and price levels. Official exchange rates very seldomly reflect price differentials correctly.
Currencies in emerging markets have the tendency to be undervalued, while some currencies in the rich part of the world are overvalued.
Price level differentials must be taken into consideration when realistic comparisons in international level are made on relative development stage and living standard. In order to convert nominal aggregates (GNI or GDP) into real ones, a method called purchasing power parity (PPP) adjustment must be used.
GNI at PPP converts the “original” figures into “international dollars”. At the PPP rate, one
“international dollar” has the same purchasing power over domestic GNI that the USD has over US GNI. PPP rates allow a standard comparison of real price levels between countries, just as conventional price indexes allow comparison of real values over time.
PPP calculations made by various international organisations and data banks are always based on a special “consumer basket”, which contains similar goods and services in every country involved in the measurement. Obviously, it is difficult to create exactly identical “consumer baskets” everywhere in the global economy in qualitative terms. Comparing housing costs in different national economies is especially difficult. However, it is absolutely necessary to use PPP adjusted figures, which are presently easily available, to give a realistic picture of development differentials.
GNI figures at ER and GNI at PPP ought to be identical. In that case official ER reflects correctly the local price level (it is said that ER is in parity or in equilibrium). In the above table that is the case in the USA: the deviation between the aggregates is minimal.
In India, GNI at PPP deviates grossly from the original figure. The former is over 4 times higher than the latter, which means that the price level in India is extremely moderate. GNI at PPP is over 4 trillion, which is approximately on the same level as the equivalent figure in Japan, and exceeds the German PPP adjusted figure clearly. Brazil and Russia are far behind.
Also China improves her relative position considerably after the PPP adjustment, which enhances her GNI figure almost fourfold to over 10 trillion. That is clearly more than the equivalent figures in Japan and Germany combined. Thus, in GNI calculation in real terms China is the second biggest economy in the world after the United States.
In economic studies relative figures are always more interesting than absolute ones.
Therefore, the above table covers also per capita calculations of GNI at the official ER (A figures) as well as with PPP adjustment (B figures). By dividing B figures by A figures it is possible to estimate how severely official ERs deviate from the parity rates in the seven countries involved.
In the living standard comparison (GNI per capita), the USA is far superior. Her GNI per inhabitant is about USD 45.000 in the original calculation (at official ER). Japan is relatively close behind with an equivalent figure of USD 38.400, followed by Germany with USD 36.600.
BRIC-countries are far behind the most developed three countries mentioned above. Russia’s per capita GNI figure at official ER is about USD 6.000 or one eight of the US equivalent.
Brazil is about USD 1.000 behind the Russian per capita GNI figure at official ER. China’s equivalent figure is about USD 2.000, while India with USD 820 is at the bottom of the scale.
These comparisons in the light of A-figures are grossly misleading, because official ERs contain price distortions, as mentioned above. Therefore, also the relative (per capita) figures must be PPP adjusted, in order to achieve results in “real” living standard.
In the USA GNI per capita at ER and at PPP calculations are almost identical. Exchange rate deviation index (ERDI) has a value of 0,98, which means that USD is overvalued moderately.
ERDI is in Japan 0,86 indicating that Japanese yen is 14% overvalued. Equivalent figures in Germany are 0,87 and 13%, respectively.
Therefore, living standard in these two countries is in real terms lower, than GNI data per capita in USD indicate. PPP adjusted figure (B) is 14% lower than the original figure (A) in Japan. In German case the same difference is 13%.
The highest ERDI value in the above table is in India, 4,63. Thus, living standard in India is in real terms about 4,6 times higher than the nominal figure. It is often mentioned in financial press that the Chinese currency is excessively undervalued. Especially US authorities have
paid attention to this problem. ERDI value is actually rather high in China, 3,85. This figure is, however, lower than in India. Undervaluation of currency is often called “exchange rate protectionism”. Clearly undervalued currency makes exports price competitive and imports dear. Thus, the cheap ER protects local industry.
In the light of the original figures, GNI per capita in USD, the living standard in the US is about 22 times higher in the USA than in China. This enormous difference shrinks to less than factor six with the PPP adjusted comparison.
In the BRIC-group of countries, Russia has the highest living standard in GNI per capita PPP adjusted comparison (USD 11.600). Brazil is not essentially behind (USD 8.800). China is with USD 7.700 figure clearly better off than India (USD 3.800). In America, people are just about ten times better off than in Russia, in average.
ERDI value in Russia calculated via IBRD data is about 2, which is essentially more moderate than in China and India. The undervaluation advantage of the Russian rouble (RUB) has diminished rapidly in the early years of the new century, but is still in existence (for details, see Tauno Tiusanen: Development of Rouble Exchange Rate in Russia. NORDI publication no. 45. Lappeenranta 2007). In the above table, Russian currency has a moderately higher ERDI value than Brazil.
Russia’s share of the global GNI (PPP adjusted) is about 2,5%, while the equivalent figure in the USA is about 20%. The second biggest economy in the world, China, has a 15% slice of the global “cake” calculated on the basis of PPP adjusted GNI figures.
The World Bank provides some other indicators, in light of which the 7 countries in the above table can be compared.
Table 2. Export, external balance, investment, 2006 Exports
USD billion
Manufactured exports, % of
total exports
Average annual GDP
growth (%) 2000-2006
External balance of goods and services,
% of GDP
Gross capital formation
% of GDP
Russia 305 19 6,4 13 21
Brazil 137 54 3,0 3 17
India 120 70 7,4 -3 33
China 969 92 9,8 4 41
USA 1.037 82 2,8 -5 19
Japan 647 92 1,6 2 23
Germany 1.112 83 0,9 5 17
Source: World Bank
Germany is the largest exporter in the world, not only in relative, but presently also in absolute terms with an annual export value of over 1,1 trillion dollars. USA is not far behind with an export sum also exceeding the one trillion dollar mark. China’s vigorous export boom during the current decade has brought the annual export figure close to the one trillion dollar mark. China’s absolute export performance exceeds the Japanese figure clearly, but in relative terms Japan is still the export champion of Asia.
Russia’s export value a year exceeds equivalent figures in Brazil and India very clearly.
About two thirds of Russian export is oil and gas, the prices of which have increased about six fold in the last ten years.
The four largest exporters in the world: Germany, USA, China and Japan export predominantly manufactured goods. In this respect, China and Japan are in the lead: the share of manufactured goods is in both countries no less than 92% of total exports. The core factor in the Chinese export performance is the undervaluation of her currency. In price sensitive branches China has been able to conquer continuously new markets with cheap prices.
On the other end of the scale is Russia with very low export share of manufactured goods, only 19% of the total. Within this modest share there are many semi-manufactured goods, like metallurgy products and chemicals. Thus, it can be maintained that the export branch in Russia is “resource intensive”. In Brazil, another resource-rich country, the export share of manufactured goods is over half of the total export value.
The highest annual GDP growth rates in the early years of the 21st century can be observed in China (9,8%) and in India (7,4%). These two big countries with populations over one billion
in each can still take advantage of the “extensive way of economic growth”. In India, no less than 71,5% of the population lives in the rural economy. The equivalent figure in China is clearly lower, but with 60,5% still remarkable in international comparison.
Thus, there is plenty of leeway for urbanisation and industrialisation of life in both India and China. With extension of industrial capacities it is easy to attract rural people to urban areas by offering work in labour intensive branches. Severe undervaluation of both Indian and Chinese currencies helps to carry out this structural change. Exchange rates protect import substituting industrial activities and give price competitiveness to export industries. It can be assumed that in China and India currencies will remain grossly undervalued for a relatively long period of time.
These two populous and fast growing countries, China and India, have both exceptional investment quotas (the share of investment of GDP). In the former the investment quota is no less than 41%. The equivalent figure in India is clearly lower with 33%, which in international comparison is still very high.
The secret of rapid growth in China and India is simple: both countries are amid an industrial revolution with extensive investment taking place. New industries have an easy task to attract supplementary labour force with low pay from the poverty-ridden rural economy. With ample
“labour reserve” in the countryside, high economic growth rates can be maintained for years to come by keeping investment quotas on a high level and international price competitiveness in tact.
In the two other BRIC-countries, Russia and Brazil, investment quotas are essentially more modest than in India and China. Russia’s figure is 21% and Brazil’s equivalent is 17%. Thus, it is not surprising that the latter has a modest annual growth rate of only 3% in 2000 – 2006.
Russia’s investment quota is also rather low, but her export-led boom creates yearly growth rates of over 6%.
The three mature economies in the above table: USA, Japan and Germany, have each rather modest annual growth rates in the period under review (2000 – 2006) (2,8%, 1,6% and 0,9%
respectively). Investment quota in the slowest growing economy, Germany, is only 17%.
Japan exceeds this figure clearly with 23%, while the USA is in between with 19%.
It is often maintained that emerging markets with rapid growth have the so called “current account constrain”. When an emerging economy grows fast, there is often the tendency of
imports growing faster than exports. Current account deficits must be by definition financed by capital imports. If an emerging market is growing too fast, the gap in the external economy may widen making large current account (CA) deficits difficult or impossible to finance.
Presently, several emerging markets have considerable current account surpluses, while US economy has a permanent current account deficit.
There are essential differences between countries in agricultural productivity. In both China and India more than half of the population lives in the rural economy. A big part of peasants cultivate a small plot on the basis of self-sufficiency and weak links to the monetary economy. The “surplus labour” on countryside can thus be used for further industrial expansion.
Table 3. Some indicators of agriculture Agricultural productivity
2001-2003, Value added per worker
USD (of 2000)
Agriculture as % of GDP 2006
Russia 2.226 6
Brazil 2.790 5
India 381 18
China 368 12
USA 6.216 1
Japan 33.546 2
Germany 23.475 1
Source: The World Bank, Development Report 2008
Productivity differences in agriculture are striking. American farmers are about hundred times more productive than their counterpart in China, and also in India. Agriculture creates 18% of Indian and 12% of Chinese GDP, while the equivalent figure in USA, Japan and Germany is only 1 – 2%. Farmers in Brazil are over 7 times more productive than in India. Russian farmers create per person 6 times more value added than their Chinese colleagues. In comparison between USA and Russia, the agricultural productivity gap is considerable: USA is about 16 times more productive than Russia in this branch. The share of agriculture in value added creation is clearly higher in Russia and Brazil (5 – 6%) than in the mature economies in the above table.
It is impossible to extend the solid surface of the globe. Soil erosion is advancing massively in many parts of the world. Deserts expand, while global population is still growing. Different crops are now used to produce fuel.
Thus, there is a high likelihood that prices of food products will increase remarkably in the near future. Agro-business is obviously becoming more and more profitable.
Productivity figures in Indian and Chinese agriculture are in the above comparison very low, and obviously contain certain biases, because the calculations are made by using official exchange rates in converting local values into USD. Productivity figures in the above table ought to be multiplied by ERDI figures to correct price distortions.
In India, ERDI value is almost 5 (Table 1.) and in China about 4. If the exchange rate deviation is taken into consideration, the agricultural value added per Indian worker is about USD 2.000 and in China about USD 1.600. Equivalent correction in Russian and Brazilian figures increases the results to about USD 5.000 value added per capita in agriculture.
Even in the light of the PPP-adjusted agricultural figures there is plenty of leeway to improve farming efficiency in BRIC-countries. However, it is extremely difficult to predict environmental consequences of American-like intensive farming in India and China with high population density rates in certain areas. Brazil and Russia can theoretically expand their exportable agro-produce surpluses in the next decades.
As the world population is likely to grow from the present 6,3 billion to 10 billion during this century, foodstuffs are likely to be in shorter supply per capita in the future than today. Prices are likely to increase essentially.
More intensive farming in emerging markets is obviously not without environmental risks.
Shortage of clean water is already now a global problem. Starving is not extensive, but malnourishment is. Maintaining clean air, fresh water with more foodstuffs is not a simple task.
Fortune magazine publishes every year a list of 500 biggest companies in the global economy according to revenue. American companies traditionally dominate this list.
Table 4. Mapping the global 500 corporations
1996 2006
Revenue Rank USD billion
Revenue Rank USD billion
Russia 22,6 23 176 15
Brazil 76 12 161 17
India 16 24 148 18
China 50 16 839 7
USA 3.545 1 7.338 1
Japan 3.318 2 2.407 2
Germany 1.051 3 1.837 3 Source: Fortune, no. 13. 2007
In the above table revenues are added together of those corporations, which are included in the list of 500 biggest ones. The total turnover of American companies in 2006 was over USD 7,3 trillion. The equivalent figure in 1996 was 3,5 trillion.
Japan was on the second place in this competition both in 2006 and 1996. However, the total revenue of big Japanese companies declined from 3,3 trillion in 1996 to USD 2,4 trillion in 2006.
Germany’s rank was third in both years under review. In 2006, her total big company revenue was 1,8 trillion compared with 1,1 trillion ten years earlier. Thus, Germany’s performance has increased, unlike in Japan’s case.
In the group of BRIC-countries, China is the star performer in the light of Fortune figures.
Her overall revenue figure was on a rather modest level of USD 50 billion in 1996 giving her the 16th rank in global scale. In 2006, China’s total revenue reached almost 840 billion bringing her to the seventh rank. China’s economic miracle in the turn of the century is reflected in these Fortune figures very well.
Russia’s relative position has improved considerably in the light of statistics given by Fortune. In 1996, Russia’s rank was 23rd with USD 23 billion total revenue. The equivalent figures in 2006 were 15th and 176 billion.
Brazil shows an absolute improvement in revenue from USD 76 billion to 169 billion between 1996 and 2006. However, her rank dropped from 12th to 17th place. India was able to improve her absolute and relative performance in the period under review: her revenue figure in 1996 was USD 16 billion with 24th rank, while the equivalent figures in 2006 were USD 148 billion giving her 18th rank.
Data extracted from Fortune magazine’s table counting the performance of the 500 biggest companies in the world naturally reflect the development in the global economy in an imperfect manner. In the period under review in the above table, world market prices of oil boomed strongly fuelling revenues of oil and gas companies. Mergers and acquisitions, especially in the field of financial institutions, have changed the list of big companies essentially.
In the previous decade it was customary to find oil and car companies within the top ten companies. In the first years of the 21st century, a retailer (Wal-Mart) has been on the top of the Fortune list. That was not predictable in the 1990s. Thus, some interesting structural changes take place in the corporate world.
It is very obvious that figures converted from various currencies into dollars or euros always contain distortions. It means, for example, that retailers in New York and Tokyo can charge higher prices than their competitors in Shanghai or New Delhi. Fortune figures overvalue rich country revenues and undervalue turnover results in emerging markets. Table above ought to be adjusted by PPP calculations. Nominal figures hardly ever reflect reality entirely correctly.
Mittal is the biggest steel mill in the world. It is dominated by an Indian family, but the firm is registered in Europe. Therefore, it appears in Fortune’s list of 500 giants under the flag of Netherlands. This case is mentioned in order to show that there are not only biases caused by ERs, but also distortions by locations of big company headquarters.
However, the main aim of this short report is to deal with the increasing importance of Russia in the global economy. From this point of view, Fortune’s list is of interest.
Gazprom is far the largest company in Russia with USD 81 billion revenues in 2006. In Fortune’s global ranking, it is on the 52nd place. Gazprom has a virtual monopoly in natural gas production and distribution in Russia. The company is majority owned by the Russian state.
Energy prices in Russia are still regulated. Especially household gas bills are subsidised by the state. Therefore, Gazprom is obviously not able to maximise her annual revenues and profits, because part of her deliveries are not sold on market price. However, the big bulk of Russian natural gas production is exported. Gazprom’s profits in 2006 were no less than USD 20,3 billion.
Lukoil is the biggest oil company in Russia. It is a publicly listed company with wide spread of share ownership but without any dominance of the Russian public sector. Lukoil’ revenues were USD 55 billion and profits USD 7,5 billion in 2006. Her global rank was 110th in Fortune’s list. The state levies heavy tax on oil exports. Oil pipeline (Transneft) is owned by the state. Thus, the state takes a big stake of oil income in the export business via taxes and transportation costs.
There are four Russian companies in the Fortune’s list of 500 biggest companies in the world (in the light of 2006 results). Far the largest Russian company is Gazprom with USD 81 billion revenues giving her the 52nd rank in Fortune’s table. Her profit of USD 20,3 billion gives her the 8th place in the global competition. Gazprom’s 2006 profits as a percentage of revenues was 25,1%. In this comparison her global rank was 9th.
Russian state has a majority stake in Gazprom. It is often said that Gazprom is a state within a state. It has a virtual monopoly in natural gas production. Oil companies, which by definition exploit gas as a by-product of oil extraction, participate marginally on the gas market.
Creating real competition to Gazprom in natural gas sector is hardly possible under present circumstances.
The big bulk of Gazprom’s production is exported. Amid the oil price boom in the early years of the 21st century, world market prices of gas have strongly increased. Gazprom’s profits increased between 2005 and 2006 no less than 37%. It can be expected that Gazprom will earn increasing revenues with high profitability.
Lukoil is the biggest private oil company in Russia with USD 54,5 billion revenues and USD 7,5 billion profits 2006. In the Fortune’s list her rank is 110th.
Rosneft had 2006 revenues of USD 22 billion with which she occupied the 323rd place in global competition. This state dominated company grew considerably in 2005, when it received production units from Yukos, the private oil firm eliminated by the state because of unpaid taxes. Rosneft is listed in London stock exchange, but the state has got a clearly dominant share (87%) of it.
Surgutneftegas is the fourth Russian company mentioned in Fortune’s list with USD 18 billion revenues and USD 2,8 billion profits 2006. This oil company is 45% owned by the Russian state. A big part of the shares belongs to managers of the company.
2 Competitiveness and transition
2.1 Wages
In the early period of transition, labour costs were very advantageous in post-communist countries in international comparison. Therefore, plenty of foreign money in FDI form flowed from the West to the East in labour intensive manufacturing branches.
Thus, foreign direct investment (FDI) in the former Eastern Bloc had mainly a sourcing function. Investors produced components and ready made goods in TE-region, which were mainly exported. This strategy took place in massive scale, for example, in car manufacturing.
With the development of transitional economies, the region has become more and more attractive for market-seeking investors, e.g., for big international retailers. In this branch, FDI flow into TE-region has been very strong in the early years of the 21st century. Multinational companies active in this field pay obviously primary attention to development of local purchasing power. The richer the environment, the more attractive it is for market-seeking investors.
Business climate can be measured via several methods in different countries. There are plenty of quantitative and qualitative, as well as composite indeces available in this sphere (for details, see Tiusanen: Business Climate in Transitional Economies. NORDI publication no.
48. Lappeenranta, 2008.). In this chapter only some quantitative indicators linked with investment climate in TE-region are dealt with.
The competitiveness analyses below covers eleven TEs, ten of which are members of EU. The eleventh country included is Russia. Data used here originates from WIIW (Vienna Institute for International Economic Studies). The period under review is 2000 – 2007, because the aim here is to provide the latest available figures with a trend covering the early years of the new century. Figures are mainly given in euros to make international comparisons easy.
Average gross monthly wage in EUR is an important indicator for every foreign investor with activities abroad. Gross wage is the sum of money an employer pays monthly to local labour force.
Table 5. Average monthly gross wages, EUR (ER)*
Year Growth 2000 - 2007
2000 2007 (%)
Czech. R. 382 789 106,5 Hungary 337 739 119,3 Poland 472 711 50,6 Slovakia 268 597 122,8 Slovenia 935 1.280 36,9 Bulgaria 115 212 84,3 Romania 142 422 197,2 Estonia 314 697 122,0 Latvia 267 555 107,9 Lithuania 262 521 98,9 Russia 85 386 354,1 Source: WIIW * ER = according to official exchange rate
As the table above shows, wage differentials in the region under review are remarkably severe. The highest gross wage of the table is paid in Slovenia, almost 1.300 EUR a month.
The equivalent figure in Finland is circa 2.500 EUR. The lowest figure in the table is in Bulgaria, 212 EUR a month. Thus, Slovenians earn about six times more than Bulgarians in average. The average figure in the table is about 650 EUR.
Romania is alongside with Bulgaria a latecomer in EU, but has about twice as high monthly earnings as Bulgaria, which is rather amazing. The wage level in Slovakia, which is a part of former Czechoslovakia, is essentially below the figure in the Czech Republic. Latvia and Lithuania are within EU also countries with rather modest earnings.
Russian average monthly gross wage was 2007 below 400 EUR. However, Russia shows the most rapid growth between 2000 and 2007. Average pay increased no less 4,5 times. The most important background factor of this huge increase is the oil price boom, which has essentially improved the overall living standard.
Romania has the second best growth performance in the table. Average pay enhanced about three fold in 2000 – 2007.
Slovenia, the absolutely best-off country of the table, has the most modest increase in her wage level, only 37% (2000 – 2007). Also Poland, the biggest new member of EU, has had a rather modest wage hike of over 50% in the given period of time. In other countries of the table, pay figures have roughly doubled in the early period of the 21st century.
The average monthly gross wages converted into euros are misleading for market-seeking investors, because these figures underestimate the local purchasing power. Official exchange rates in TEs do not reflect correctly local price levels in the countries under review.
Therefore, the monthly pay tickets must be adjusted by purchasing power parity (PPP), in order to create a picture of “real” wage level.
Table 6. Average monthly gross wages, EUR (PPP)*
Year Growth 2000 - 2007
2000 2007 (%)
Czech. R. 833 1.283 54,0 Hungary 706 1.157 63,9 Poland 894 1.194 33,6 Slovakia 628 984 56,7 Slovenia 1.308 1.728 32,1 Bulgaria 362 533 47,2 Romania 390 781 100,3 Estonia 599 1.068 78,3 Latvia 522 915 75,3 Lithuania 556 943 69,6 Russia 295 716 142,7 Source: WIIW * Purchasing power parity adjusted
The gross average wage figures in the above table are higher than the equivalent figures in the previous one. The above table gives wages in “real terms”, while the former one gave the pay figures in “nominal terms”. All currencies in TEs are undervalued which means that official exchange rates underestimate the real purchasing power in TEs, in which price levels are relatively low. The degree of undervaluation of TE currencies varies. The basic rule is that the less developed a TE is, the more undervalued is her currency (see below).
Slovenia is the best-off TE also in the PPP adjusted accounting with gross monthly pay of over 1.700 EUR. Bulgaria is at the bottom of that, but in the above table the difference is
“only” about factor three in comparison to Slovenia. It means that price level in Bulgaria is especially low.
Czech Republic, Hungary, Poland and Estonia have all gross wages exceeding the mark of 1000 EUR. Slovakia, Latvia and Lithuania are not far away from this limit, when monthly gross wage package is considered with PPP adjustment. In Russia the equivalent figure is over 700 EUR.
Russia has far the highest growth rate in the above table counting the improvement of PPP adjusted pay between 2000 and 2007. The growth is no less than 140%. In Romania the equivalent figure is about 100%. In the Baltic states rather good results with 70 – 80% growth rates have been achieved. In Slovenia and Poland the equivalent increases are rather modest, of some 32 – 34%.
It is often maintained in economics that wages and productivity ought to increase hand in hand. In this context it is assumed that the division of income between wages and profits is stable. If wages increase faster than productivity, it is said that the result is “wage inflation”.
Therefore, it is useful to pay attention to unit labour costs when international competitiveness is measured. If in a country unit labour costs increase faster than in the rest of the world, the country has deteriorating price competitiveness.
Table 7. Unit labour costs (ULC), ER adjusted 2007 Index: 2000 = 100
Czech. R. 157,6
Hungary 166,9
Poland 120,2
Slovakia 165,3
Slovenia 111,2
Bulgaria 147,9
Romania 178,8
Estonia 139,8
Latvia 132,1
Lithuania 128,3
Russia 313,4
Source: WIIW
The above table contains index numbers covering the period under review (2000 – 2007). The higher the index figure (2007) is, the more the country is losing competitiveness in the sphere of labour costs. Competitiveness is obviously affecting exports, but also imports substituting industries.
Slovenia has clearly the most modest increase in ULC, only some 11% between 2000 and 2007. Poland is on the second place with an equivalent figure of some 20%. The Baltic States show growth in the range of about 30 – 40%. The highest increase in ULC table within new EU-members can be observed in Romania, where the equivalent figure is close to 80%.
The Russian ULC figure in the above table deviates very clearly from all the others. The index grew by over factor three in the period under review, which means that in the early years of the 21st century Russia has lost competitiveness very rapidly (for details, see Tauno Tiusanen: Development of Rouble Exchange Rate in Russia. NORDI publication no. 45.
Lappeenranta, 2007.).
Russian export sector is relying heavily on material intensive products. Two thirds of her export is oil and natural gas. Products of metallurgy and chemical industry have a considerable share of exports. Therefore, Russian exportable are not as price-sensitive as manufactured goods with high value added.
However, also in Russian case competitiveness is of importance, especially in the branch of import substituting production. Locally produced products, for example in car manufacturing, have a limited quality advantage, and thus, price competitiveness is an important tool in sales.
With the rapidly deteriorating price competitiveness imported goods are continuously gaining ground in the Russian market. This is obviously hampering the restructuring of the local industry, which ought to improve it productivity in order to keep ULCs under control.
The Vienna Institute (WIIW) provides annual ULC index figures, in which Austria is marked with 100. With the help of this index it is possible to compare ULC development in Western Europe (EU 15) and TE region. Austria is taken as a proxy of EU 15.
Table 8. ULCs, PPP adjusted
Austria = 100 Year Growth 2000 - 2007
2000 2007 (%)
Czech. R. 31,2 44,6 43,0 Hungary 28,3 42,8 51,2 Poland 45,0 49,1 9,1 Slovakia 25,3 37,9 49,8 Slovenia 65,2 65,8 0,9 Bulgaria 17,1 23,0 34,5 Romania 31,2 50,7 62,5 Estonia 36,5 46,3 26,9 Latvia 35,4 42,5 20,1 Lithuania 32,3 37,7 16,7 Russia 13,2 37,6 184,8 Source: WIIW
The lowest index figure (2007) is in Bulgaria (23%) indicating the best competitiveness in terms of ULC in TE region. With the price of one Austrian more than four Bulgarians can be
hired. Romania’s ULC index is more than twice higher than that in Bulgaria. This is rather surprising because these two countries with relatively low development stage are supposed to offer the cheapest possible ULCs within EU. Romania shows the most rapid ULC growth (2000 – 2007) in the above table within NMSs. Thus, Romania is losing wage competitiveness rather fast.
Far the highest index figure in the above table (2007) is in Slovenia, where ULC level is only one third below the Austrian equivalent. Slovenia’s growth rate (2000 – 2007) is minimal, only about 1%. It means that in the first years of the current decade Slovenia’s competitiveness in ULC terms has hardly deteriorated. The equivalent growth rate in Poland is rather modest, only about 9%. However, Polish index figure 2007 was relatively high with 49% indicating modest ULC competitiveness. Czech Republic, Hungary and especially Slovakia in Poland’s neighbourhood have all lower index markings than Poland. Also all three Baltic States have cheaper ULCs than Poland.
Russia’s ULC growth (2000 – 2007) is extraordinarily high with 185%, or about three times higher than the equivalent figure in Romania. Russian rapid growth figure in the relative ULC development indicates that the country’s wage competitiveness erodes fast. However, in the light of index figures (2007), Russian ULC level is the second lowest in the above table. Only Bulgaria is cheaper in unit costs of labour.
2.2 Prices
Price increases in post-communist countries were rampant after the systemic change. In the communist system prices were fixed administratively and did not reflect the market situation.
As supplies were permanently lower than demand, the phenomenon called “monetary overhang” came into being. People were forced to save part of their income, because they were not able to find suitable consumer goods. An extensive and dynamic black market emerged.
One of the key elements of the early transition was the liberalisation of prices. At the same time, the extremely protectionistic system of state monopoly of foreign trade was dismantled.
The established freedom of importing improved supplies in every sphere of the economy.
The second decade of post-communism has brought about relative price stability. Obviously, NMSs (New Member States of EU) have profited from pan-European competition, which is via free trade putting pressure on prices. This integration effect in not present in Russia, which is covered here alongside 10 NMSs.
The price levels in all TEs were very low in the 1990s in international comparison. In the second decade of transition, TEs have started to catch up with the price level in Western Europe. However, living costs are still more moderate in the Eastern than in the Western part of the Old Continent.
Table 9. Price level comparison
EU 27 = 100 2000 2007 Growth 2000 – 2007
%
Czech. R. 46 62 34,8
Hungary 48 64 33,3
Poland 53 60 13,2
Slovakia 43 61 41,9
Slovenia 71 74 4,2
Bulgaria 32 40 25,0
Romania 36 54 50,0
Estonia 52 65 25,0
Latvia 51 61 19,6
Lithuania 47 55 17,0
Russia 29 54 86,2
Source: WIIW
In the above table EU 27 price level is the anchor of the index (= 100). Thus, ten TEs included in the table (all except Russia) affect the average figure (EU 27 = 100).
In the first year of the comparison (2000), Slovenia’s price level was 29% below the EU average. In Poland the equivalent figure was 47%, in Estonia 48% and in Latvia 49%. In all other countries under review, the price level was less than half of the EU average. The lowest marking can be found in Russia with 29% indicating that prices were less than one third of the EU level.
All figures in the above table are higher 2007 than 2000, which means in actual fact that prices in TEs are catching up with the EU average. Therefore, price competitiveness in TE region deteriorates. Growth rates in the table indicate the speed of this deterioration.
Far the highest growth rate (2000 – 2007) can be observed in Russia, where the relative figure increased in the period under review by no less than 86%. Romania has the highest equivalent figure (50%) within NMS-region. On the other side of the scale, Slovenia has a moderate growth rate of only 4,2%. Poland (13,2%) and Lithuania (17%) are both catching up with the EU average price level rather slowly.
Overall, countries under review here had 2000 a price level, which was 46% of the EU average, while the equivalent figure 2007 was already 59%. The growth between these two figures is no less than 13%.
Every country must take care of her balance of payments on current account. Import bill can not exceed permanently and severely export earnings in any country. Deficits in the current accounts (CA) must be financed by capital import. A country with current account deficit must either take credits from the outside world, or attract risk capital (foreign direct investment or portfolio equity investment) into her territory. A combination of credits and risk capital import is obviously possible.
Deteriorating price competitiveness is likely to affect current account negatively. If inflation in one country is higher than in the rest of the world, export activity is suffering and imports become more attractive than local products in terms of prices. This is likely to endanger equilibrium in current account sooner or later.
Current account is normally measured in relative terms. Deficits and surpluses in current account figures are given as a percentage of local GDP (gross domestic product). If current account is in deep deficit, it is said that the economy is “overheated”. Overall demand is too high and attracts too many importables, while exports are hampered by high inflation rates.
An overheated economy must pay attention to stability.
Table 10. Current account, in % of GDP
2000 2007
Czech. R. -3,1 -3,2
Hungary -6,5 -4,6
Poland -3,2 -4,0
Slovakia -7,0 -4,7
Slovenia -2,8 -4,8
Bulgaria -15,7 -21,6
Romania -10,4 -14,3
Estonia -15,5 -16,2
Latvia -22,3 -23,4
Lithuania -10,8 -12,3
Russia 9,8 5,9
Source: WIIW
Current account balances show a remarkable diversity in TEs under review in 2006 – 2007.
NMS-region has current account deficits, while Russia has a remarkable surplus 2006 of almost 10% of GDP and about 6% 2007.
Deficits are relatively well under control in the five first countries of the above table 2007 (Central Eastern Europe). There is no current account deficit exceeding the 5% mark.
The same is not true in the Baltic States and in the EU-newcomers (Bulgaria, Romania). In both cases deficits show an increasing tendency 2006 – 2007. Two countries, Bulgaria and Latvia have deficits in external bookkeeping, which exceed 20% of local GDP. Current account deficits in this magnitude are obviously not sustainable.
Table 11. Foreign direct investment (FDI) inflow to NMS FDI net,
% of current account deficit
2006 2007
Czech. R. 104 117
Hungary 47 18
Poland 92 109
Slovakia 97 85
Slovenia -24 -6
NMS-5 78 84
Bulgaria 107 89
Romania 86 41
Estonia 23 20
Latvia 33 30
Lithuania 48 38
NMS-10 75 61
Source: WIIW Note: FDI net is defined as inflow minus outflow.
A convenient way of financing current account deficit is importing risk capital. If heavy deficits are continuously financed by new credits, there is the obvious danger that the debt burden of the deficit country becomes unmanageable. In case of excessive debt service payments the country may become credit unworthy. In that context a scheme to heal the economy becomes necessary, normally involving the devaluation of the local currency.
Foreign direct investment (FDI) inflows have been dynamic in TEs, as described in several NORDI publications. This part of international capital movement is still crucial for TE- region, especially for countries with heavy current account deficits.
The above table shows that Czech Republic has been able to overcompensate her current account deficits with FDI inflow in two years under review. In Poland FDI inflow covered nicely her current account deficit in 2007 after a rather good result one year earlier. In Bulgaria it was vica verca: 2006 FDI inflow exceeded current account deficit, but one year
later a somewhat more meagre result was achieved, but still almost 90% of current account deficit was financed by FDI inflow.
In Romania, the equivalent result was rather good with 86% FDI cover of current account shortfall 2006, but one year later only 41%. Latvia has the highest relative current account deficits of the group with over 20% of GDP in both years, but can cover only one third, or less, of them with FDI inflow. Figures in the above table are somewhat better in Lithuania and worse in Estonia in comparison to Latvia.
Slovenia’s figures deviate clearly from other countries in the above table. In both years (2006- 2007), Slovenia’s net FDI inflow is negative, that is, the country’s FDI outflow exceeds direct investment inflow. This wealthiest TE with high wage level and small population (2 million) is a net exporter of risk capital. Her current account deficit is relatively well under control.
The Baltic States, especially Latvia and Estonia, must pay attention to their respective current account problems with increasing relative deficits and declining FDI share of financing them.
If high current account deficits will permanently be financed by external credits, the burden of foreign debt will increase rapidly.
Russian figures for the above table are not available. Russia is the only country under review with current account surpluses in both years 2006 and 2007. In the latter year, current account surplus declined relatively clearly, but was with about 6% of GDP still rather high 2007.
2.3 Living standard, 2007
Relative development stages in the global economy are normally measured by using Gross Domestic Product (GDP) figures calculated per head of population. Obviously, these figures must be converted into one single currency, normally into USD, or EUR, in order to be able to make international comparisons. The Vienna Institute (WIIW) provides GDP figures on countries under review converted into EUR.
Unfortunately, there is no guarantee that official exchange rates convert various currencies into EUR correctly. As pointed out above, price levels within enlarged EU vary from country to country. EUR 100 buys more goods and services in a poor country than in a rich one. If that is the case, it is said that the currency in the poor country is undervalued at the current exchange rate. Therefore, GDP calculations per capita are made more accurate if TE currencies are converted into EUR on a purchasing power parity (PPP) basis. That means that exchange rates need to be adjusted such than an identical “consumer basket” costs the same in
one country as another. Vienna Institute has a long tradition in calculating PPP adjusted GDP figures concerning TEs.
Table 12. GDP per capita, EUR, 2007 A
(at official EX)
B (PPP adj.)
ERDI (B/A)
Bulgaria 3.740 9.390 2,51
Czech R. 12.349 20.080 1,63
Hungary 10.130 15.870 1,57
Poland 8.026 13.470 1,68
Romania 5.486 10.140 1,85
Slovakia 10.147 16.740 1,65
Slovenia 16.542 22.330 1,35
Estonia 11.539 17.680 1,53
Latvia 8.816 14.540 1,65
Lithuania 8.296 15.000 1,81
Russia 6.642 12.320 1,85
EU (15) 27.738
Source: WIIW
In the above table, A figures represent the “raw” data of GDP in countries under review plus EU (15), which is Western Europe. These figures indicate that there is a considerable gap in living standard between Western Europe and post-communist countries.
Column B contains GDP figures per capita PPP adjusted. B-figures in TEs are clearly higher than A-figures, which means that PPP adjusted reduces the living standard gap between East and West considerably by taking relatively cheap price levels in TEs into consideration. It can also be stated that A-figures count the nominal and B-figures the “real” living standard in countries concerned.
Actually, A and B figures ought to be identical. In that case all official exchange rates would correctly reflect price levels in countries involved. One to one relationship is equilibrium ER.
It is also said that ER is in parity when A equals B.
As B figures deviate from A figures in the above table, in different manner, it is useful to measure what are degrees of this deviation in different TEs. Exchange rate deviation index (ERDI) can be established by dividing B figures by A figures. If ERDI value is over one it indicates that the currency in question is undervalued. ERDI value below one tells us that the country has an overvalued currency.
In the above table Bulgaria has the highest ERDI value, about 2,5. It means that if somebody buys an average consumer basket in euro-area for 100 EUR, he/she can get 2,5 similar
“baskets” in Bulgaria with the same banknote (100 EUR). Prices in Bulgaria are essentially lower than in EU in average, as pointed out above.
Occasionally, undervaluation of a currency is called “exchange rate protectionism”. It makes exportables cheap and importables dear. Therefore, countries with a relatively low development stage need protection provided via undervalued currency.
Even if Bulgarian currency is grossly undervalued (high ERDI figure), she has very high current account deficit. Therefore, it can be assumed that Bulgaria needs undervaluation of her currency for several years to come.
Generally speaking, undervaluation advantage has eroded over time in many TEs. With improvement of export quality, price competitiveness becomes less important. Export quality and import substitution normally improve via FDI inflow. Many foreign-owned companies in TEs are strongly export-oriented and produce goods locally substituting imports, and thus, help to keep the local current account in relative equilibrium.
The erosion of undervaluation advantage can be measured by index figures covering the development of real ERs. There is a difference between nominal and real exchange rates. The latter is more important than the former.
A country’s international competitiveness depends on relative prices. For example, if prices in Estonia increase by 4% and 2% in euro-area, Estonia’s price competitiveness falls by 2% in this two-country model. In a theoretical case of perfect market with floating ERs, Estonian currency would depreciate by 2% re-establishing the original competitiveness of Estonia.
However, in real life Estonia has a fixed ER regime (fixed against euro). If Estonia has higher inflation rates than euro-area, her currency appreciates against euro hurting her competitiveness. In that case Estonian undervaluation advantage erodes, which is hampering current account balancing act.
Measures of overall competitiveness are known as “relative prices expressed in a common currency”, or simply real exchange rates. Vienna Institute serves index numbers concerning development of real ERs in TE-region.
Table 13. Real ERs against EUR, 2007
2000 = 100 CPI-based* PPI-based*
Czech. R. 130,1 129,6
Hungary 133,2 108,6
Poland 108,3 108,4
Slovakia 154,6 153,1
Slovenia 101,0 102,2
Bulgaria 129,8 127,5
Romania 133,2 166,0
Estonia 113,8 107,6
Latvia 97,6 109,1
Lithuania 105,3 117,6
Russia 153,3 189,0
Source: WIIW * CPI = Consumer Price Index
* PPI = Producer Price Index
Very often consumer price index is taken as a proxy of overall inflation measurements. The above table contains two real ER trends, one based on consumer price index, and the other on producer price index. In both cases, there is an increasing trend visible.
In the CPI-based calculation, there is one exception of the rule. In Latvia, real ER decreased somewhat between 2000 and 2007. In the PPI-based column, there was an increase of over 9%. Thus, it can be maintained that ER in Latvia has been in general terms rather stable during the current decade in real terms. However, Latvia has the highest relative deficit of current account 2006 - 2007 in the countries under review.
Latvia with relatively low living standard has maintained the degree of her currency’s undervaluation during the first years of the 21st century. This undervaluation is not deep enough to secure a relative equilibrium in her current account. In order to reduce her current account deficit, which is extremely high, she ought to have a clear depreciation of the real value of her currency. As shown in the above table, this is not taking place. A balancing act in current account presupposes a clear depreciation of real ER in Latvia.
Slovenia’s index figures in the above table hint on relative stability of her real ER in the period under review. Slovenia’s current account had a higher deficit 2007 than 2006. In 2007 Slovenia joined the euro-zone, which means that she can not use the devaluation tool in the conventional way any more. Slovenia’s current account deficit is rather modest, less than 5%
of GDP. In Latvia the equivalent figure is almost 5 times higher.
On the other end of the scale, Slovakia has the highest index figure in the first column of the above table (the CPI-based calculation). It means that her real ER has appreciated faster (2000
- 2007) than in any other TE under review. The figure in the second column (based on input price index) is rather high with 153. However, Slovakia’s current account deficit went down from 7% 2006 to 4,7% (of GDP) 2007.
In the first years of this century, Slovakia has received plenty of FDIs, especially in the branch of car manufacturing. Foreign companies are strongly export-oriented in Slovakian case. Therefore, her export performance has improved considerably in resent years, which is visible in her current account balancing act. In sum, Slovakia has been able to manage her current account rather well in spite of the clear appreciation of her real ER.
As pointed out above, Russia is a special case among the selected countries. Her current account surplus is determined by external factors (high prices of oil, gas, metals), not by her ER.
In the above index, it is visible that Russian ER has appreciated by more than 53% in the CPI- based and almost 90% in the PPI-based calculation (2000 – 2007). This strengthening of the RUB value hurts obviously import substituting branches. Especially those local production branches, which are dealing with input goods (construction materials, machines, commercial vehicles, etc) are losing price competitiveness rather rapidly. Also in the sphere of consumer goods local offers are getting more expensive than the imported ones.
Bulgaria and Romania are the least developed NMSs in the above table, and thus, need price competitiveness very badly. In both cases, real ER has appreciated clearly hurting competitiveness. In Romania, PPI-based index figure has strongly increased between 2000 and 2007, no less than 66%. This is no good news from Romania’s current account point of view. Romania’s current account deficits (2006, 2007) are critical, but not as critical as in Bulgaria.
In the Baltic region, Estonia and Lithuania show less dramatic current account deficits than Latvia. However, both countries have double digit current account deficits with increasing tendency. Thus, in both cases ERs ought to depreciate and not appreciate.
CPI-based real ER appreciation in Estonia was about 14% (2000 – 2007) and the equivalent PPI-based figure was about 8%. In Lithuania the corresponding increases were about 5% and 18%, respectively.
In the above table, Estonian and Lithuanian results are comparatively good. Also in Poland, real ER appreciation is rather modest in the period under review.
The higher the figures in two columns of the above table are, the more is the “undervaluation advantage” in the region eroding. The only decline in the above table can be observed in Latvian consumer price index based real ER 2000 – 2007. All other figures show growth indicating real appreciation of ERs, and thus, deteriorating price competitiveness.
In Central Eastern Europe (Czech Republic, Hungary, Poland, Slovakia, Slovenia) national economies have been able to digest the tendency of appreciating real ER relatively well. No country in this region shows a higher than 5% (of GDP) deficit in current account. This is not the case in Bulgaria, Romania and the Baltic States. All five countries have double digit current account deficits, which are not sustainable on the long run. Russia with her current account surplus is a special case.
Real appreciation of a local currency ER affects potentially FDI inflow. Especially export- oriented investors are obviously avoiding locations with strongly appreciating currencies.
It is worth noticing in this context that not only the speed of appreciation of an individual currency, but also the original level of its undervaluation affects the scene. It was pointed out above, that Bulgaria has the most severe undervaluation advantage in the region under review.
Therefore, she can offer the cheapest cost level in the region, even if her currency appreciates for a while. Romania is roughly on the same development stage with Bulgaria with higher cost level and more rapid appreciation of real ER. Thus, Bulgaria is gaining cost competitiveness vis-à-vis Romania.
3 Conclusions
In the early years of the 21st century, Russia has experienced a strong economic boom with rapidly increasing export prices. Thus, her importance in the global economy has increased.
Brazil is, alongside with Russia, an economy with extensive resource base. However, Brazil is not a major exporter of oil. In the near future, Brazil’s position is likely to change, because a huge oil well has been found in her territory.
There are two countries in the world with a population of one billion, China and India, both of which have had extremely rapid economic growth in recent years. In economic language a new term, BRIC, has appeared, meaning Russia, Brazil, India and China. The weight of this group of countries in the global economy is increasing rapidly.
World Bank’s “World Development Report 2008” provides Gross National Income (GNI) figures of almost all countries of the world. This data is available in US dollars calculated according to official ERs, as well as purchasing power parity adjusted. GNI figures at PPP give a realistic picture of economic activity in different national economies.
Russia’s share of the overall economic “cake” of the globe is 2,5 %, which is just the same as Brazil’s equivalent figure. Brazil has almost 50 million people more, than Russia. China produced 2006 about 15 % of global GNI, while America’s equivalent slide is about 20 %.
Germany, the biggest EU-country, makes about 4 % of the global output.
In per capita terms, America’s GNI at PPP is about four times higher than that in Russia. In the same measurement Germany is about three times better off than Russia, which is richer than China and Brazil.
World Bank’s figures show that the share of manufactured goods in Russia is only 19 % of total exports. The equivalent figure in the other resource-rich country, Brazil, is 54 %. In Chinese export statistics manufactured goods have a dominant 92 % share, which is the same in Japanese case.
Thus, the economy of Russia is clearly “resource based”, while the Chinese economic miracle is built on manufacturing. In the latter case, investment quota is over 40 %, which is about twice as high as in the former. Both countries earn current account surpluses.
Fortune magazine publishes every year a list of 500 biggest companies in the world. The biggest Russian company, the gas giant Gazprom, is on the 52nd place in this list 2006. All Russian companies involved in this list of international giants are active in oil and gas sector.
In the second part of the report some comparisons are brought up between Russia and ten new EU members. In the light of Vienna Institute (WIIW) figures, Russia’s living standard, GDP per capita at PPP in Euro, is lower than in the three Baltic states, which were members of the former Soviet Union. Russia is better off than Romania and Bulgaria, the post-communist countries with delayed EU-membership.
Russia’s currency is still clearly undervalued. However, her undervaluation advantage is gradually melting away. Rouble appreciates against euro in real terms.
Russian average gross wages have increased very rapidly in the first years of the new century.
Alongside with strong nominal wage increase also purchasing power has grown fast. Unit labor costs have expanded enormously, which indicates that Russia’s international competitiveness deteriorates. This trend has a rather limited effect on exports, which are mainly resource-based (oil, natural gas, metals). Declining price competitiveness is undoubtedly hurting import substituting activities. Imports have increased by almost 30 % a year in the last three years. However, Russia’s current account still had a 6 % (of GDP) surplus in 2007.
Therefore, it can be concluded that Russia’s economy can afford to have a rather high inflation of somewhat under 10 % annually, without entering a phase of “overheating”.
Several TEs in Europe have very serious current account problems.
Russia has benefited from global energy price hikes in the period under review, while other TEs have suffered in the relative energy crisis. Oil and gas markets are not necessarily cooling down via economic slowdown in some mature economies.
