Chapter 2: How diversified is Russia?
11. Introduction
Russia emerged from the Soviet Union with a very particular economic configuration. Thus, in 1990 industry accounted for around 50% of GDP, while services contributed only 35%. Not surprisingly, the major changes in the structure of GDP over the subsequent 20 years have involved the
expansion of services and the parallel contraction of both industry and agriculture. Currently, the broad shares of 1990 have been reversed. Services now make up nearly two thirds of GDP, while manufacturing, in particular, now accounts for no more than 16% of GDP (see Figure1).
Figure 1 Russian GDP by main sectors, 1990-2009 (Source: WDI 2011, World Bank)
In the past decade, the Russian economy has experienced a very substantial increase in external revenues due to the rise in international hydrocarbon prices. An improvement in the terms of trade, along with an increase in domestic demand, has been accompanied by appreciation of the currency and the relative rise in the price of non-tradables. As such, the process of de-industrialisation that had already started in the early 1990s has been accentuated by the shift in relative prices induced by soaring oil and gas prices and government revenues.
1 Prepared by Natalya Volchkova 0%
20%
40%
60%
80%
100%
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
GDP structure
Agriculture Industry Manufacturing (data n/a before 2002) Services
Figure 2 GDP by sectors, 2011 (Source: RosStat)
The consequences of the natural resources boom since 2000 are no more clearly expressed than in the concentration of Russian exports. By 2009, mineral fuels contributed nearly two thirds of Russia’s exports in nominal terms - a very significant increase from a level of over 40% in the mid- 1990s (see Figure 3). Most of this increase can, however, be attributed to higher hydrocarbon prices.
Calculated in constant 2000 prices, the share of mineral products in exports actually remained the same over this period. In other words, in real terms there was almost no reallocation across commodity groups so that the concentration of exports has remained broadly stable since 20002. Looking at the trade profile of Russia, it emerges there has been a shift in the weight of trading partners, with higher levels of mineral fuels trade with the European Union, while within-CIS trade has declined. Manufactured good exports, however, have mostly been oriented towards other CIS countries. Much of this, however, may be attributable to historical relationships.
2 The largest contributors to exports have been crude oil with 43% of mineral product exports and 28% of overall exports, petrochemicals (22% and 14% respectively) and natural gas (14% and 9% respectively). The next largest commodity group has been metals whose share fell in both nominal and real terms from 16% to 12% between 2000 and 2009. Note that metals exports are also highly concentrated with ferrous metals accounting for 44%.
Agriculture, forestry and fishing Mining and quarrying
Manufacturing Electricity, gas and water
Construction Wholesale and retail trade
Accomodation and food services Transportation and communication
Finance Real estate
Public administration and defence, social security Education Human health and social services Other services
GDP by sectors, 2010
Figure 3 Export structure by commodity groups (1996, 2010) (Source: COMTRADE)
2. Russia’s comparative advantage
Russia’s external trading profile has remained dominated by natural resources. Given that the focus of this report is on diversification, it is obviously central to look at Russia’s comparative advantage and hence at its possibilities for diversification. A method developed and applied by Ricardo Hausmann and his colleagues uses detailed trade data to calculate the income level associated with each product and then to measure the income associated with a country’s export basket as a whole.
Further, the product composition of the export basket can be seen as reflecting the proximity of products, or their reliance on similar sets of inputs. The reasoning behind this is that every product involves inputs - such as physical assets, knowledge and infrastructure, among others – that are specific to that activity. Established industries will generally have sorted out their required supply of inputs and other requirements, so that in a dynamic perspective, the costs of introducing and producing proximate products will be correspondingly lower. With this framework in mind, it is possible to calculate the distance using pairs of products to arrive at the probability that a country exports both. The assumption is that these pairs will rely on similar sets of inputs with a higher
43.11%
64.36%
1996 2010
Food and live animals Beverages and tobacco
Crude materials, inedible, except fuels Mineral fuels, lubricants and related materials Animal and vegetable oils and fats Chemicals
Manufact. goods class. chiefly by material Machinery and transport equipment Miscellaneous manufactured articles Comm. & trans. not classified accord. to kind
G r ap hs b y Ye ar
EXPORT (in current prices)
probability of a country having comparative advantage in both goods. These calculations of distance between provide can thus provide a mapping of the product space3.
The starting point is Russia’s product space in 1996. At that point in time, Russia had comparative advantage in only 156 out of 1242 product lines when using a 4-digit SITC
classification. For comparison, China had comparative advantage in 479 product lines in the same year. Second, most of the products in which Russia had comparative advantage were natural resources. These products are poorly connected to the rest of the product space and are certainly less proximate to many manufactured goods. Not surprisingly, the average distance between the Russian export basket and the space of potential exports in 1996 was around 9.3 as against only 2.9 for China. Moving to the present, the latest data for 2010 show that increased concentration in natural resource exports and the overall contraction of manufacturing has led to a further narrowing of Russia’s comparative advantage with further distancing of the potential export product space. The number of Russian product lines with comparative advantage has fallen to 103 – in contrast, the number for China increased to 513 in 2010 – while the average distance between the Russian export basket and the space for potential exports increased to 14.2 while dropping in China to 2.6. These figures emphasise the fact that, despite the policy rhetoric, the Russian export basket has become even more concentrated since the mid-1990s. Further, the ability to shift into proximate products and diversify appears highly constrained.
The analysis so far has used data aggregated at country level. When looking at the regional dimension, the picture becomes more varied. Regions clearly differ in terms of initial conditions and their dynamics. Some - such as Ingush Republic, Kaliningrad – have become more concentrated – others – such as Ivanovo and Kamchatskii krai – have become more diversified. There is also a substantial variation in the level of export concentration and its dynamics across regions. Indeed, the interaction between the natural resource sectors, industry and agriculture at regional level has been very diverse, generating many different patterns. Moreover, relating the extent of product diversity at regional level to a variety of possible explanatory factors, such as innovation, foreign investment, supply of human capital, infrastructure and financial market development, the only systematic positive effect on diversification was found to come from foreign investment4. This is a finding that
3 See Hausmann and Klinger (2007) for more detail and an application to transition countries.
4 As reported in Volchkova (2011)
has been replicated in some other transition countries and is very relevant in the context of future policy aimed at diversification; issues that we return to in Chapters 6 and 7 below.
In short, the evidence indicates that Russia’s structure of exports has narrowed and given the composition, it will not be easy to diversify. The dominance of natural resources is associated with a specialized and narrow set of inputs and capabilities that cannot be readily redeployed to other activity.
3. The universe of exporters
While the evidence presented above relies mainly on detailed product specific trade data, it is also possible to use company level information merged with data from the Russian Customs detailing all individual cross-border transactions to get a better picture of the exporting profile of the country.
The main finding is that Russia has a far smaller share of export –oriented firms than other countries, such as France or the USA. By 2008/9 Russian exporting firms were around 3%
compared with between 15-17% for these comparators. Not only are there relatively few exporters, but those that export have higher premia than in the other countries5. Russia tends to have more small exporters, while more productive exporters sell to more destinations. Further, an increase in foreign market penetration by Russian exporters is mainly associated with an increase in the number of exporters, rather than in the intensity of exports per firm. However, the extensive margins of trade – namely the number of firms selling a particular destination - are less pronounced in Russia than in a country such as France. These findings are consistent with a higher fixed cost of becoming an exporter in Russia. Indeed, applying a more general model used on other countries’ data, it has been found that the ratio of the fixed costs of production to the fixed costs of exporting in Russia is relatively low, when compared, for example, with a country like Chile6.
Evidence from cross-country analysis suggests that higher trade costs and domestic market entry barriers tend to be associated with a less diversified basket of exports7. Using data from surveys of administrative barriers on small business carried out between 2001 and 2006 in 20 Russian regions, it is possible to see whether there is any association between changes in the regulatory burden of entry, licensing and inspections on changes in the export structure of the
5 See Eaton (2004, 2008) and Volchkova (2011)
6 Volchkova (2011)
7 See Allen and Shepherd (2007)
region. Evidence is found that the severity of the perceived tax burden is inversely associated with the extent of export diversification. In other words, exporting activity is materially affected by tax policy and implementation with the principal channel likely to have been the discretion that the tax authorities have with respect to VAT refunds. Indeed, the generally low rankings of Russia with regard to international trade suggest that regulatory limitations and costs continue to play an important role in limiting the growth of exporters, as well as affecting the composition of exports.
4. Conclusion
The analysis shows that the changes in output and export structure that Russia experienced since the early 1990s have not been associated with greater diversification of the economy. Instead the
evidence demonstrates a higher export concentration in current-day Russia compared to 15 years previously. Part of this change can be attributed to the increase in natural resource prices
internationally. However both firm-level data and regional variation in the mix of exports indicate that regulatory impediments and an unfavorable business climate also play a role. Underdeveloped domestic market institutions suppress the extensive margins of trade and limit foreign investment.
The obvious conclusion is that the policy designed to achieve greater export and production diversity in Russia should be based upon two pillars: business climate improvement and export promotion. The important measures should deal with:
- continuing deregulation to facilitate new firms’ entry and decline in administrative burden on existing firms
- further physical infrastructure development and restructuring of natural monopolies to ensure easier access to infrastructure for all firms
- corruption prevention
- redesign of state export promoting activities and appointment of the corresponding federal agency
- streamlining tax refund procedure and implementing tax benefits for exporters - facilitation of customs reform, etc.
These measures will help to achieve the increase in foreign investments and export diversification.
References
Dennis, Allen, and Ben Shepherd (2007) “Trade Costs, Barriers to Entry, and Export Diversification in Developing Countries” WB Policy Research Working Paper 4368
Eaton, Jonathan, Samuel Kortum, and Francis Kramarz (2004), “Dissecting Trade: Firms,
Industries, and Export Destinations,” American Economic Review Papers and Proceedings, 94, pp. 150-154.
Eaton, Jonathan, Samuel Kortum, and Francis Kramarz (2008), “An Anatomy of International Trade: Evidence from French Firms,” NBER Working Paper, 14610.
Hausmann, R., and Klinger, B., (2007), “The Structure of the Product Space and the Evolution of Comparative Advantage”, CID Working Paper No. 146
Volchkova, Natalya (2011), “Russian Regions and Russian Firms: Output and Export Diversification“, CEFIR Working Paper
