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The Development of the Russian Economy and its Impact on Eastern Europe

In this guest weblog, Visiting International Fellow, Dr. Marek Wroblewski writes: Russia is the largest country in the world as far as the occupied land is concerned, with a great natural resource potential, and a strong political and military position in the international arena. These attributes for a long time predestined Russia to imperialism and global power. Imperial collapse, however dramatic and painful for the country, only temporarily undermined its role of a hegemonic leader. Russia’s marginalization and exclusion of did not deprive the former superpower of effective instruments to influence decision-making processes taking place in the region and in the world. How does Russia use its economy to influence its immediate external environment?

The economic interest of Russia in the Commonwealth of Independent States (CIS) and Eastern Europe is minor, although its activity in the region is characterized by political concerns and fluctuating economic intensity. Russia’s main economic interests are in the countries of the EU. During downturn in the economy and internal crisis, Russia did not have sufficient means to impose significant and permanent pressure on the situation in its region, as it defines it. However, when the prosperous economy was reflected by a visible improvement of public finance, this enabled it to operate actively both in the region and in the international sphere. Therefore, given this link between economic performance and Russian political ambitions, it is worth paying attention to economic evolution in Russia during last two decades and the economic results achieved.

Russia, during the system transformation away from central planning introduced many changes in its economic environment in ways that superficially looked similar to many other countries of Middle and Eastern Europe. Russia started constructing the framework of a market system. However deep-seated cultural characteristics and historical background meant that a more moderate model of transformation emerged in Russia when compared, for example, to Poland. Planned economic reforms concerned large state, economic units which during last decades of central planning almost completely implemented socialist economic guidelines. The first policy actions were accompanied by the severe and deep crisis that was essentially the outcome from the previous and ineffective model of economy. This crisis was observed in all sectors of the Russian economy, the general result of which was a dramatic decrease of the generated GDP or GDP per capita. Significant decreases of industrial production, investment and private consumption took place and strong inflationary pressures as well as rise in unemployment were felt. Despite this “economic shock”, the first stage of implementation of system transformation of the economy was continued largely through the support of international organizations. Internal prices were partly liberalized, gradually widening the scope of market forces; privatization of public enterprises was initiated as well as creation of the basics of the capital market. Russia became more open to the external influences and trade. Foreign trade became subject to limited liberalization and conditions were created for the inflow of the foreign capital. Reorientation in international cooperation was visible. The EU became significant in the supply of capital and of goods. The results of the above actions were a gradual macro-economic stability and the initiation of a slow process of economic growth.

However, those positive trends drastically stopped in the middle of 1998 when a severe currency crash took place in the Russian economy. The profound financial crisis uncovered the weaknesses of transformation process. This crisis resulted mainly from faulty methods applied for reform and for the construction of market mechanisms. Lack of the right institutional arrangements for an effective federal state was of key significance. Public finances went into deficit. System changes, as it turned out, were of an ostensible nature which in reality implied escalation of former malpractice. The appropriation of elements of national economy by the newly-born oligarchic groups was one of the most significant abuses. Strong national control (direct and indirect) in many branches of industry, trade and services reduced the chances of realizing the advantages of market-oriented production. What followed was low competitiveness in the main sectors of the Russian economy. With low prices for the energy exports, problems persisted with respect to maintaining the internal and external balance in the economy.

Visible improvement of the economic situation, observed systematically from 1999, came with increasing export prices of oil and underground gas, a gradual inflow of foreign investments and partial order of internal economic affairs. Taken together, these events created conditions for the restoration of economic growth. Special attention should be paid to terms of trade which were beneficial at that time and enabled Russia to improve economically. Significant increase in GDP and GDP per capita was noticed as well as the abrupt increase of foreign exchange revenues. Over 1996-2007, GDP of Russia increased by 65%; foreign investments amounted to USD 76 billions and the surplus in the current account and central budget appeared.

Russia’s economic growth led to greater pro-activity in the region. Russia mostly undertook efforts towards reintegration by proposing and initiating many integration-focused initiatives. Currently, within the borders of the CIS, there are formally few integration groups most of which Russia is party to, and the main entity. Moreover, along with integration groups there are multiple bilateral preferential economic agreements, which connect Russia in many configurations with many countries of the region. Most significant examples of such economic integration in the region are the Common Economic Space (CES) or Eurasian Economic Community (EAEC). As a result in the area of the CIS there is a complicated network of economic connections, which are not yet transparent. Integration projects undertaken by Russia strengthen its impact on various countries of the CIS and secure the role of the regional hegemonic leader, particularly in Central Asia. The current expansion of Russia, Georgia notwithstanding, is not of military but financial or economic in nature. In particular, energy-related pressure imposed on many countries of that region sets the example. Integration groups being created, despite of the premises of the complete partnership and mutual economic priorities, in reality are a specific tool of Russian politics.

Russia acts to impose pressure not only on the countries located in its direct sphere of influence but also wider afield. Different types of economic pressure, such as the manipulation of the power to control the flow of natural gas, but still with political references are also visible in reference to Central Europe and indirectly in reference to the EU members as a whole. Therefore, there is a great need of an open dialogue and establishing relations based on partnership between the EU as a whole and Russia, which might be beneficial for both parties, and help protect countries such as Poland. Competition in this respect, which sometimes reminds of the Cold War confrontation, is not an appropriate strategy in the modern globalized world. The relationship is one in which the Russian economy needs markets for its oil and gas if it is to experience further economic development and Western Europe needs Russian imports. It seems that Russia with the support of the EU should concentrate more on continuation of the real system transformation, including further economic modernization and diversification of economy and constructive use of its own potential.