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The Russian Economy

Monday, 31st March 2008

Ambrose Evans-Pritchard:

About 80pc of Russia's exports come from energy and metals, distorting the economy through what is known as the "resources curse".

Moscow has become the most expensive city in the world for many goods. The manufacturing sector is also facing a serious cost squeeze, shifting plant out of the country.

Some might wonder how "plant gets shifted out of the country". Do they package the factory up and send it off DHL?

Well, no, it doesn't quite work like that. It's more about if and when a factory expands, or when a new one is mooted: where shall we place that factory? If the costs of a particular place are higher than one other, then that first location ain't going to get the upgrade, extension or the new factory.

I offer you an example from my own day job. For just over a decade we've been exporting a particular alloy from Russia to customers around the world. Two years ago we were paying around 45 per kilo for this material.

Now we've been hit with three different problems. The first is the inflation rate within Russia, driving prices up. At the same time, the oil price has meant a strong (over 30%) rise in the value of the rouble, driving up prices again. Finally, the specific magic fairy dust which is used to make this alloy has been rising in price as a shortage looms. We're shipping a load of this material this month and costs are €70 per kilo: or $110.

That final fact, the shortage, means that we (in common with our competitors) are looking for new primary production somewhere. Russia would be thought to be the best place, they've certainly got a technological lead with this particular mineral. There's also a number of different places there which it can be extracted from. However, those first two problems, the inflation rate and the currency rise (along with the well known difficulties about property rights and the like) mean that Russia is a very unfavourable place to build the new capacity.

The specific technology we intend to use can be installed in Surinam, Jamaica, Greece, Ireland, the US, a multitude of places. What is almost certain is that it won't be in Russia.

And that's how the resources curse works: it's not that the factories themselves migrate so much as that the new ones built to replace those that wear out are built elsewhere.