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Russia may be expected to deliver an economic growth of 10 or 12 percent a year judging by current oil prices, Viktor Makushin, head of MAIR Industrial Group, said at a Russian economic forum in London. Meanwhile, in 2005 the GDP only managed to climb as little as 6.4 percent reaching $5,300 per capita, and a little more than $10,000 in terms of purchasing power parity. Makushin believes that the shortfall is underpinned by the inability of Russia's manufacturers to meet the domestic demand driven up by excess oil revenue. Specialists tend to agree that the speedy growth of raw materials sectors, which have long since outdistanced other industries, has stripped the latter of virtually the only possible competitive advantage for them, a cheap labor force.

In terms of GDP per capita, Russia is still lagging far behind industrialized nations. The Economic Development and Trade Ministry said that in early 2006 the GDP growth decelerated considerably, from a monthly average of 0.6 percent in the fourth quarter of 2005 to 0.3 percent in the first quarter of 2006. This can largely be attributed to insufficient diversification of the Russian economy, when the fuel and energy and retail sectors have reached their development peak. Further growth requires considerable investment and has been deemed impossible given the looming investment activity slowdown. In the meantime, Russia's industries producing consumer and investment goods cannot be described as continually developing.

According to Makushin, two thirds of the increase in Russia's demand are met through higher imports, as long as domestic manufacturers are still not good enough to face up to the competition. A Megatrustoil analyst added that Russian consumers found imports all the more attractive as the Russian government was pursuing a policy for a stronger real effective ruble rate. Yet, should the government resort to supporting domestic producers by stemming the ruble rate growth, this would strike a severe blow to Russia's consumers. In this case, Russia's WTO accession would cause even more difficulties for Russian companies.

Makushin noted that even industries that were performing well not long ago, let alone those with high value-added products, were facing the imports growth trend. Makushin fears that even the growth of simple goods production cannot be taken for granted in Russia. Even if they manage to maintain or increase output, Russian manufacturers are being gradually ousted to low value-added sectors and are ceasing to create new product groups, and relative competitiveness of some non-raw materials industries is sinking.

However, Makushin believes that even very large investment cannot relieve Russia of its growing reliance on raw materials. Cheap raw materials is the sole real competitive advantage of the Russian economy, and therefore investment is only likely to flow into raw materials or related industries, while investment in non-raw materials sectors can only be efficient by saving money on, for instance, transportation expenses. Car assembly may be economically expedient in Russia, but construction of cars and production of labor-intensive components are not, as Russia is not a source of cheap highly qualified labor any more. The Economic Development and Trade Ministry says the lack of specialists and highly qualified workers is buoyed by disproportionate labor remuneration. Since in the mining, fuel and financial sectors salaries are almost three times as high as Russia's average level, these industries enjoy the greatest influx of the labor force.

Makushin considers that to improve the economy state administration reforms and social changes are required. Yet, the reforms have stuck, and the effect of taxation changes is widely referred to as tax terrorism. Makushin attributes this to inefficient management underpinned by the lack of civilized competitiveness in both society and the public administration. He claims that there exist no measures to reveal the best ideas and managerial solutions and no feedback between the society and officials. A nation cannot be made competitive unless competitive people are engaged to rule it. And in business, competitiveness is a something you cannot survive without.

Analytical department of RIA RosBusinessConsulting