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Gambling on Russian economic forecasting

The Russian economy is split in two, with a thriving middle class driving consumption, growth and structural change while those living in poverty are truly poor.

However, while the next decade could see continued economic growth for the increasingly rich few, the divisions in Russian society will continue to grow. That is the conclusion of Pekka Sutela Head of the Bank of Finland Institute for Economies in Transition in Helsinki, Finland, writing in the inaugural issue of the Inderscience publication the International Journal of Economic Policy in Emerging Economies.

Just two decades ago, the Soviet Union was almost entirely industrialized it lacked shops, restaurants, cafeterias, banks and other financial institutions, service stations, consultancies, travel bureaus, casinos and even gay bars, explains Sutela. Most of these feature heavily in a modern market economy and with the collapse of the Soviet Union, such services quickly emerged, first in Moscow and St. Petersburg, and increasingly across much of the country. The Ural and Volga regions have, adds Sutela, experienced high growth rates in retail trade and consumption, with the main demand coming from an increasingly rich middle class numbering in the hundreds of thousands.

Sutela points out that Russia in 2006 ranked eleventh in terms of the size of its economy, which is on a par with India, South Korea and Mexico. However, growth is rapid at around 4-6% each year, and although the Rouble remains an undervalued currency, he anticipates that by 2011, Russia may rank at number 8 in the economy league, close to Italy. Forecasting growth or recession after that year is, he says, more hazardous.

While investment is surging and the country is importing goods at an increasing rate, Sutela asks whether Russia will be able to increase energy production and exports. Moreover, can Russia diversify its products and services, boost exports and so maintain its current account surplus and at the same time provide jobs for a large if slowly decreasing labour force? In the final accounting can it sustain its increasingly wealthy middle class and solve the growing poverty of those at the bottom of society.

Jim Corlett | alfa
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