How Russia’s GDP should be increased?

Please refer to the previously-issued articles entitled “What is Russia’s economic growth strategy (Part I)?“, “What is Russia’s economic growth strategy (Part II)?“.

Key factors for Russian economy growth by 5-6%:

• social unity;
• availability of long-term development strategy (for 25-50 years);
• decentralized collaboration institutions;
• availability of investments (equity financing via stock markets).

How Russia’s GDP should be increased?

In his Address to the Federal Assembly on 29.02.2024, the President set the goal for Russia to become one of the world’s four largest economic powers.

Gross Domestic Product (GDP) is one of the principle economic indicators. GDP is the macroeconomic indicator reflecting the market value of all goods and services (i.e., those intended for direct consumption, use or application) yearly produced in all sectors of the economy in the territory of a particular state for consumption, export or accumulation, regardless of the national belonging of the applied production factors.

General global business conditions and geopolitical tension.

By the end of 2023, Russian economy has been ranked 5th in terms of GDP, per Purchasing Power Parity (in bln USD). Comparison of Purchasing Power Parity (PPP) is used to make allowance for the difference between the cost of living in various countries.

1. China $33.694
2. USA $23.666
3. India $16.873
4. Japan $5.820
5. Russia $5.733
6. Indonesia $5.101
7. Germany $5.016
8. Brazil $4.472
9. Turkey $3.814
10. Mexico $3.642

Russia ranks 8^th in terms of GDP in 2023

1. USA $23.462
2. China $17.963
3. Japan $4.231
4. Germany $4.072
5. India $3.385
6. United Kingdom $3.070
7. France $2.782
8. Russia $2.240
9. Canada $2.139
10. Italy $2.010

In 2023, global economic growth continued to slow down, making just 3%, compared with 3.5% in 2022 and 6.3% in 2021. Moreover, in 2024, the figure may be even lower – about 2.9%. That is the conclusion of International Monetary Fund (IMF) experts.

The top ten economies in terms of GDP growth rate are as follows:

1. India +6.5%
2. China +5.2%
3. Russia +2.2%
4. USA +2.1%
5. Japan +2.0%
6. Germany +1.9%
7. Canada +1.3%
8. France +1.0%
9. Italy +0.7%.
10. United Kingdom +0.5%

GDP growth dynamics of major economies since 1971 shows a rapid upsurge of developing countries (China, India, Brazil) – 6-7%, and a slower pace of the Western countries (USA, Canada, Great Britain, France, Germany, Italy and Japan). In the 1990s, Russia had economic recession (negative growth (decline) of economy), and in the 2000s – a rapid increase of 8%. Russia has advantageous geographical location and great natural resource stocks allowing it to exploit its huge energy resources market to supply goods to developing economies – China and India.

The global geopolitical tension is currently increasing. In his “Clash of Civilizations” – an essay published in 1993-1996 – an American sociologist and political scientist describes the geopolitical history as follows:

– the world consists of Western, Latin American, African, Islamic, Chinese (Confucian), Hindu, Orthodox, Buddhist, Japanese) cultural civilizations.

– the cultural code connecting civilizations is a concept much more ancient and fundamental than ideology (Western liberalism, communism, socialism, fascism, corporatism, etc.). The entire ideology of the 20^th century is a part of Western culture.

– there were no contacts between civilizations before 1500, 1500-1920 was the time of Western civilization dominance caused by its military and technological superiority, and from 1920 we saw modernization of other civilizations, especially China, which led to their growth and rise.

– Russia, Mexico and Turkey are the “torn countries” whose elites had attempted to incorporate the Western culture into their societies and, likewise, to incorporate their societies into the Western culture (in Russia it happened during the reign of Peter the Great). “However, the actual history of those countries became the archetype of strength, resilience and toughness of local cultures, their ability to rejuvenate and resist the Western infusion, restricting it and assimilating it at the same time. If non-Western countries have to undergo a modernization, they should strike out a path of their own rather than use the Western ways, and, following the pattern of Japan, count on everything they can utilize, including their national traditions, institutions and values.”

– The intrinsic civilizational confrontation of political ideas generated by the West is now replaced by the clash of cultures and religions.

– to avoid global conflict, we should embrace multipolar world order and non-interference in the domestic affairs of other civilizations.

GDP dynamics of major economies from 0 to 2017 clearly illustrates the Western expansion (colonization) of other civilizations, and, further on, modernization of China, India and Japan, which contributed to their economic growth.

What should Russia do in order to boost its economic growth pace?

The Russian economy is definitely influenced by a huge number of macroeconomic and geopolitical factors. The perspectives put forward by Huntington represent only one of the numerous versions of the global historic development.

In any case, Russia, following Japan and China, should pursue its own path, applying all the knowledge and technologies it has acquired, but relying on its unique traditions, institutions and values.

GDP must be increased. Economists have different opinions, but most agree that:

– the Russian economy, not to lag behind the developing countries, should grow at a rate higher than global average (above 3% per annum);

– the optimal growth rate which would allow to increase Russia’s nominal GDP fourfold by 2050 (within 25 years) is 5-6%;

– GDP target increase rate of 5% was set in the President’s Address to the Federal Assembly on 12.12.2012.

– the country must develop its technological sovereignty, processing industries, non-resource exports, resolve its logistical problems, and develop its energy sector.

The principal mechanisms the state applies to develop its economy are described in articles “What is Russia’s economic strategy?” posted on our website:

• in 2000-2010 – the establishment of major state corporations in strategic industries (Rosneft, Russian Technologies State Corporation (Rostec), State Atomic Energy Corporation “Rosatom”, United Aircraft Corporation, United Shipbuilding Corporation, etc.).
• since 2006, various national projects have been launched aimed at the growth of economy and well-being of citizens.
• to promote the non-government sector, several development institutions associated within VEB.RF have been established since 2020. A support roadmap for businesses has been generated, with focus on secured loans in industrial sector (loans with subsidized rates (5-7%) for the construction or purchase of industrial real estate), loans from Industry Development Fund (1-3%) to purchase of equipment, R&D subsidies, provision of “1 hectare for 1 ruble” land plots for industrial construction purposes.

Economists’ opinions regarding the possible pace of Russia’s GDP growth vary. While some of them argue that the growth rate (referring to Solow’s economic growth model) cannot exceed 3%, others believe that the pace of 5-6% or higher is quite possible.

1. Social unity

Alexander Auzan (Doctor of Economics, Dean of the Faculty of Economics of Lomonosov Moscow State University) made the following basic on the possibilities of the Russian economy growth in his interview with blogger Alexander Sokolovsky (YouTube).

Alexander Auzan refers to the work of Yann Algan and Pierre Cahuc, French economists, where the key factor of a state’s successful development is not only the trust between the government and citizens, but the level of trust between people.

The study contains a calculation of how much GDP per capita would increase in various countries if they would have built a trust level equal to Sweden’s. The projected GDP growth in Russia, for instance, would than make 64%.

There is indeed a certain inconsistency in the Russian society, and Alexander Auzan explains it by using the term “torn countries”, according to E. Huntington’s definition.

The “lack of unity” in the Russian society, also described in detail in S. Huntington’s “Clash of Civilizations”, directly affects the nation’s well-being level. The “lack of unity” manifests itself in the fact that a part of the country’s elite is committed to Western values, while the rest adhere to Eastern values.

That is how Alexander Auzan describes these values:

The Western values are more individualistic, people tend to amalgamate with the Western culture, where an individual has no need for any approval to act; and

The Eastern values are more sacrificial, symbiotical, people want to preserve their cultural code and civilizational identity, with individuals seek other people’s approval for action.

Also, all economists and political scientists basically support the thesis that COVID-19 has greatly changed the world order, whereby digital electronic platforms have become very important. Also, with block-chain technology development, global finance decentralization became possible, and governments are no longer the only money emitters. Since 1990s, the Russian society has been strongly influenced by the Western culture in terms of striving for financial success and freedom of entrepreneurship. Coaching, personal development and psychology have become widely popular in the Russian society of late.

The current Russian society can be described as predominantly aware of its cultural code, civilizational identity and striving for financial success, freedom of entrepreneurship and income earning. 

This society does not put its civilizational identity in contrast with income earning opportunities, as was a common contraposition in the Soviet Union and the pre-revolutionary Russia.

2. Availability of long-term development strategy for the upcoming 25-50 years;

We need to develop a culture of long-term planning for at least 25 years ahead. Availability of long-term strategies contributes to severalfold increase of the company’s capitalization (as far as future financial flows become predictable, which directly effects capitalization).

Some experts say that long-term planning is impossible in Russia, but these views have already been proven inconsistent, since the most successful Russian companies established in the 2000s continued to operate after the 2008, 2014 and 2022 crises. Economic crises tend to occur in all countries of the world, and the United States were the source of the 2008 global financial crisis.

3. Decentralized collaboration institutions.

Such digital companies as Wildberries or Yandex Taxi offer easier opportunities to become an entrepreneur.

For economic growth, it is necessary to develop private decentralized collaboration institutions based on digital platforms that would make it easier for the Russian people to start businesses and make money.

Business development institutions already exist and make a huge contribution to the development of private sector (the Industrial Development Fund, secured loans in the industrial sector, etc.).

4. Availability of investments (equity financing via stock markets).

There is a problem of attracting investments in fixed assets in Russia (construction of new production facilities, purchase of equipment, etc.).

Even if you have global plans to build production facilities, you need the following investments for their construction: (1) bank loans, (2) government financing, (3) equity financing.

Money is loaned by banks only at a high interest rate, and to those who have already started their business operations.

“Banks can only lend to those borrowers and those projects that are capable to produce in-demand goods and services, and generate cash revenue and profits now and immediately.” The Bank of Russia, 28.11.2022.

Venture capital financing market in Russia is underdeveloped. Government support measures exist and are improving, but in order to obtain tangible financing, you need to have at least 20% of your own capital share, as well as the provision of a full security of the subsidized loan.

It appears that investments can be predominantly obtained from equity financing only, which is confirmed by the statistics.

Sources of corporate capital investments.

• Corporate equity share in capital investments – 5%.
• Share of bank loans in corporate capital investments of companies of any form of ownership – 8%.
• Of them, foreign banks – 9% (before sanctions have been imposed).
• Share of foreign investments – 4%.
• Share of budget investments – 8%.
• Borrowed funds from other organizations – 6%.
• Miscellaneous – 6%.

Stock market provides good opportunity for broad and structured access to equity financing.

A public company with listed stock must be established in order to attract equity financing into fixed assets, as well as to make investments at project preparation stage.

Key factors for the Russian economy growth by 5-6%:

• social unity;
• availability of long-term development strategy (25-50 years);
• decentralized collaboration institutions;
• availability of investments (equity financing via stock markets).