Five Reasons the Russian Economy Won’t Return Soon

The Russian economy is in the tank and the IMF projects the economy will shrink 3.5% this year and land somewhere between +1% and -1.5% in 2016. The Russian economy has a number of things working against it, of which current escalating showdowns with the West is only one.  Problems areas such as diversification, politics, resources, time, and world economy are likely to hinder growth beyond that which is projected by the IMF. 

Economic growth requires a number of elements to come together at once to create the right environment. Change in the Russian economy has been needed since the last drop in oil prices but little has been done to rectify the situation. Simply waiting for the oil prices to rise is not a wise strategy as new sources of energy hit the market. The Russian economy may be in this for the long haul as they are unable to make the reforms needed to change their economic structure.

Lack of Economic Diversity:  The Russian economy is excessively reliant on its natural resources in the form of gas and oil. Nearly 50% of the Russian economy relies on these exports for revenue (1).  Strong economies move away from heavy reliance on natural resources and move to diversify their income sources into other areas. With little manufacturing, other sources of industry revenue, and an entrenched economic position it is unlikely Russia will be able to whether its current problems quickly. 

Political Environment: The Russian government has significant power and stake in the private sector.  Despite moving more toward a free economy from its Soviet past nearly 50% of people still rely on the government for their livelihoods (2).  Doing business in Russia can be difficult with politics, power, and money playing a significant factor in business-government decisions. Investment and innovation are slower in controlled economies. 

Lack of Financial Resources: Russia’s 500 billion cash reserves dropped below $380 billion (3). With money running out it is doubtful the nation can spend its way out of its current financial crisis and will need to rely on investments to improve its position. The problem is that investments in the current political crisis are not likely and this will prolong the countries current position. 

Out of Time:  Time is not something the Russian’s have on their side. The oil price is already below $50 per barrel and is likely to stay that way for the near future. There isn’t time to diversify, change government, swoon investors, and redirect the gears of the Russian economy. It appears that the Russian people will need to hunker down in their homes until the current political and oil crisis pass over. 

World Economy: The world economy is also experiencing slower development and growth. As nations cut back on their imports and attempt to balance their own budgets  customers will be making less purchases putting another wet blanket on their economy. In the context of a slower global economy the Russian economic engine will be stalled due to the environment in which it exists.

Can the U.S. Be an Export Nation in a Difficult International Economy?

The IMF says the global economy will grow slower than expected this year while another recent announcement states that China superseded the U.S. in terms of purchasing power this year. Both are game changing events in what appears to be a long played out economic drama. Even though the news is not positive it does provide an opportunity for the U.S. to focus on improving its infrastructure to lower costs and retool for better managing international markets.  

Slower International Economic Growth:

International markets are expected to experience slow growth in the near future according to an October 7th report by the International Monetary Fund (IMF). The IMF initially thought the world economy may grow as high as 3.7% this year but have revised that number down to a weaker 3.3%. The slowing economy could make it more difficult for companies that are trying to export overseas to locations where the economy is lack luster.

Growth in advanced economies and emerging economies are widely different. Advanced economies should experience a 1.8% growth rate this year and a 2.3% growth rate in 2015. Emerging economies are expected to have a higher rate of 4.4% based upon their riskier investment portfolios.   Companies are attracted to the cheaper and more lucrative emerging economies for new investments.

The IMF argues that one of the difficult challenges facing economies is the ability of countries to enact reform and change to improve upon their competitive positions. Countries should select which changes are needed and beneficial and then move down the path of change to make things happen. Political capital and the ability to share objectives will naturally have an impact on the success of reform efforts. 

Chinese Wealth and Influence:

The IMF states that China’s economy is larger than the U.S. in terms of purchasing power (1). China has surpassed the U.S. on purchasing power parity (PPP) meaning that once the Gross Domestic Process (GDP) is adjusted the Chinese have significant purchasing strength in the global market making them more influential than in the past. They have become a direct competitor and market changer.

National wealth creates influence among business stakeholders. When national wealth is high countries are able to better bargain for deals, influence international stakeholders, and obtain the resources needed to adjust and be more innovative. As China rises on the international scene a new alternative takes shape which becomes viable for nations seeking the best deal between two large economic countries (U.S. and China). 

Needed Improvements:

A slower international economy and a more powerful China is not the end of the game. It provides an opportunity for the U.S. to direct its efforts toward implementing its own growth oriented strategies to draw investments and improve the overall economic functioning of the nation. When difficulties arise decision-makers are encouraged to put down petty differences and focus on solutions through collaborative problem-solving.

Economic hubs act similar to emerging markets but have the additional benefit of being within a more stable national economy. Their growth potential as a localized entity is higher than national rates but can also influence those national rates. Emerging technology and manufacturing hubs are prime examples of flush investment and growth opportunities that have not been fully explored. 

Within the U.S. there are examples of hubs that developed organically through like-minded stakeholders. Understand where these hubs are located, encouraging mutual development within these hubs, and creating awareness of investment opportunities has a long-tail impact on the national economy. As hub members become more innovative they will naturally export products and raise their income opportunities by drawing in more investment interest to feed their growth. 

The point between A and Z has many stops and twists along the path. At times we have become our own worst enemies in the sense that other considerations beyond the health of the nation regularly take precedence. We must only look at the political spectrum to see this distraction at work. Americans desire employment opportunities and this comes through building ground-based products and services that have international penetration. Government should move upwards in its development to lower costs, empower local economies (i.e. hubs and clusters), reduce debt, improve infrastructure (i.e. how hubs interact on a national level) and focus on founding fundamental principles that encourage basic human motivation. 

IMF Report

Including Investment and Labor Movement in Global Management Assessments

In today’s world, international business is a mainstay of everyday commerce and policy.  Products move across the globe and make their way into homes and lives of individuals and families at different places on the planet. Most statistics include the hard goods and services that traverse across borders but may be missing other tangible value. Dr. Predrag Bjelić discusses the inclusion of direct foreign investment and labor flow as important components of economic calculations. 

Even though 2006 IMF data indicated that 75% of international trade is measured in goods the liberalization of trade has also brought with it services, investment and human capital. The latter two being something more difficult to concretely assess but should be included in the overall assessment. Understanding the flow of information along with the intellectual capital encourages a greater conception of global commerce and the antecedents to that commerce.

Foreign Direct Investment (FDI) is an important method of pushing up the employment economy. FDI can be defined as “an investment involving a long-term relationship and reflecting a lasting interest and control by a resident entity in one economy (investor or parent enterprise) in an enterprise resident in an economy other than that of the investor (FDI enterprise or affiliate enterprise or foreign affiliate)”(UNCTAD 2007, 245). 

In the past, emerging markets grew from turning investment income into productive output sold on the global market. To be effective in this growth, human capital will also need to develop adequately to use that investment capital to its maximum growth potential. Countries that have excess labor skill inadvertently lose some of that labor skill to countries that provide employment opportunities. 

The author determines that multi-national companies have changed traditional calculations of international commerce. In many cases large firms provide direct foreign investment and emerging economies export skilled labor in a type of loose exchange. New calculations should take into account the flow of investment and the movement of labor across the borders to get a better perspective of global exchange.

UNCTAD. 2007. World Investment Report 2007:Transnational Corporations, Extractive Industries and Development. Geneva.

Bjelic, P. (2013). New approach in international trade analysis due to international factor movements. Zbornik Radova Ekonomskog Fakulteta u Istocnom Sarajevu, 7

Positive Economic Indicators Point to a Brighter 2014

The economy looks bright for much of the next year according to the Conference Board, Bloomberg’s poll of leading economists, and the International Monetary Fund. After a prolonged decade of slow down any positive market news is welcomed. However, with increases in multiple measurements one can get a better feeling for growing trends and how those trends will impact national investment opportunities. At present, the market appears to be increasing in growth and opportunity for both the U.S. as well as other nations which could encourage further growth.

The Conference Board used broad based measures that included the labor market, interest rates, factory orders, stocks price, and construction. The Conference Board’s Leading Economic Index for the U.S. rose .8% in March to 100.9 indicating a substantial increase in the U.S. economy (1). The economy has put away its winder mitts and gloves and significant improvements in the market are possible.

The Conference Board was not the only one to make optimistic predictions. Bloomberg polled 42 leading economists and came to the conclusion that an advance of .7 (estimates ranged from .3 to 1) in the leading index could be realized (2).  Six of the ten leading index estimates are higher and it is projected that there will be an economic increase of 2.7 % this year when compared with 1.9 percent in 2013.

Acceleration in the global economy is also expected. According to the IMF, global growth is expected to realize an increase of 3.7% in 2014 and 3.9% in 2015 (3). It is believed that there are still some risks due to poor economic management and shaky internal structures. Emerging economies will receive a push from demands in the advanced economies that will help with stabilization.

The outlook is bright over the next two years. Assessment of the economy requires reviewing indicators from different vantage points and perspectives. Generally, the more measurements that can be incorporated into an assessment the better the overall assessment assuming these measurements are not just “noise”. A single increase in one sector of the economy doesn’t have broad implications or validity in the same way that multiple measures across different sectors of the economy have.

The multiple indicators may also raise optimism on a number of different fronts. Optimism is important for business investment and consumer spending that support growth. When people feel that the economy will grow, and their personal financial well-being is positive, they are more likely to invest and spend the nest eggs they have been putting away. This means they believe that there will be more opportunities in the future as well as more opportunities and respond by rewarding the market with investments and purchases.