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Sunday, December 2, 2007

Inflation in Russia Part II, Too Much Money Chasing Too Few People?

by Edward Hugh: Barcelona

This is the second part of an extended analysis of the Russian economy which begins here.

Productivity Driven Growth?

What follows next is largely based on the results of an analysis for a forthcoming World Bank study entitled “Unleashing Prosperity: Productivity Growth in Eastern Europe and the former Soviet Union”, which is summarised in the latest WB report on the Russian Federation (see references below).

Total factor productivity growth in Russia has been strong in recent years (averaging 5.8 percent over the 1999 - 2005 period according to World Bank calculations), and TFP growth has been the principal driving force behind average GDP growth. In part this surge in Russian productivity can be explained by increasing utilization of excess capacity, but this is only one part of the story, and the strong performance isalso attributable to major structural shifts in the economy with the reallocation of labor and capital from less to more productive sectors.

The World Bank calculates that efficiency gains within firms accounted for 30 percent of total manufacturing productivity growth over the period 2001-2004, while a more efficient allocation of resources across firms accounted for a further 24 percent. Firm turnover (entry of new firms and exit of obsolete ones) accounted for 46 percent of manufacturing productivity growth. The main contribution to manufacturing productivity growth came from the exit of obsolete firms, releasing resources that could be used more effectively by new or existing firms.

So even allowing for capacity utilization issues, the World Bank found that out of the overall GDP growth of 6.5 percent achieved in Russia over the 1999-2005 period, productivity gains from employed resources accounted for 4.15 percentage points (or approximately two thirds).

So Russia's economic transformation has been accompanied by a dramatic shift of resources (both capital and labour) into previously underdeveloped services areas and sectors. At the sectoral level, the shift of labor into services has spurred higher productivity in agriculture, as result of labor shedding (but note below how a rural inflation problem can arise if the labour outflow is not accompanied by a capital inflow in a supply-side constrained economy like Russia), as well as in manufacturing. Over the 1999-2003 period labor in-particular transited away from low-productive sectors (agriculture) towards more productive sectors (services).

The Russian economy also continues to experience an investment boom - although levels of investment still remain comparatively low (for a developing economy) as a share of GDP, and investment is overly concentrated in a few sectors. Aggregate fixed capital investment grew by 21.2 percent in the first nine months of 2007 as compared with the 11.8 percent growth reported for the same period in 2006. While capital investments decelerated in September 2007 they still posted double-digit growth rates (16.1 percent, relative September 2006). Most manufacturing sectors of the economy, and especially those with higher value added, still receive a relatively low share of investment. For example, machine building received only 1.1 percent of the total fixed capital investment in the first half of 2007, while transport, communication and real estate operations accounted for over 35 percent of the total. This is a picture that anyone following in detail the evolution of the EU10 economies (or Ukraine for that matter) should now be pretty much familiar with.

Foreign investment surged during the first half of 2007, reaching 5 percent of GDP. The Russian central bank has estimated that inward FDI reached almost 28 billion USD during the first half of 2007 (5 percent ofGDP), 10 billion more than a year earlier.

Preliminary estimates show FDI inflows at USD 37 billion for the first three quarters of 2007 in the non-banking sector alone. However, FDI remains concentrated in resource extraction industries and non-tradable sectors, playing only a marginal role in manufacturing. Mineral resource extraction, metals and non-tradables sectors (particularly trade) remain the favorite directions of foreign investments. Mineral resource extraction industries received USD 11.2 billion in FDI during the first half of this year (of which USD 10.7 bln. from Netherlands. To get some idea of the scale of involvement in Russia from Dutch energy companies such as, Gas Terra, Essent and Nederlandse Gasunie see this summary of the proposal for developing the Yamal peninsula and the Kara Sea that Royal Dutch Shell's Chief Executive Officer Jeroen van der Veer was recently pitching to Vladimir Putin). These resource extraction inflows amounted to 71 percent of the total FDI inflows, compared to only 33 percent in 2006. Manufacturing industries, on the other hand, received only USD 1.8 billion, or 11.1 percent of total FDI inflows in the first half of 2007, compared to 19 percent in 2006 and over 45 percent in 2005.

Unlike oil revenues, capital inflows have a different impact on the Russian economy for the simple reason that they are not absorbed by the Stabilization Fund (and thus effectively sterilised). Consequently they serve to drive additional money expansion and exert upward pressure on the ruble. Given the limited monetary instruments available to the Russian authorities for sterilization (the bond market, eg, is very underdeveloped) and the current stance of monetary policy (which attempts to limit the pace of nominal exchange appreciation), reducing inflationary pressures is becoming an exceedingly difficult task.

And if we look for a moment at the components in Russia inflation (see charts below) we will find two old friends out there in the forefront - food and construction. In fact in the first 10 months of 2007 the rate of increase in construction costs was some 15% (as compared to only 9% during the equivalent period of 2006). Food price increases are evidently a global phenomenon, but the structural basis for these increases is nonetheless important. Global growth at the present time is being driven by very rapid increases in living standards in the newly developing economies (and especially in the so-called BRICs). Now one of the stylized characteristics of these economies is that the population in general tends to be comparatively poor, and as a result food consumption tends to constitute a largish share in the consumption basket (see chart for Russian CPI weightings below, in China and Turkey, and by way of comparison, food related products constitute around 25% of the CPI basket).

Now to some extent Russia's manpower shortages mean that supply in the agriculture sector is somewhat constrained, while, if investment totals are anything to go by, technological innovation is not notably accelerating. Investment in transport and communication, for example, constituted 23.31% of total investment in the first half of 2007, and in real estate it was 12%, while investment in agriculture only achieved some 4.7% of the total. And FDI in agriculture only constituted 0.7% of the total during the same period.

Labour productivity in Russian agriculture only grew by 4.4% per annum over the 1999 - 2004 period (the lowest for any sector, World Bank calculations), and thus starved of its workforce, and lacking the necessary capital investment to compensate, Russian agriculture is bound to struggle to meet the needs of an ever more affluent and hungry urban population. Basically this means either continuing inflation or growing food imports, but since global food prices are themselves rising this would need to be accompanied by sustained rouble appreciation if it were to contribute to reducing the internal price pressure, and all of this would, of course, mean that Russia's ability to generate a current account surplus was called increasingly into question.

Russia's Current Account

Turning now to the current account, the Russia's surplus has has been in a process of steady and continuous structural decline on account of the rapid acceleration of imports and the weak (non energy and extraction) export performance. Thus the current account surplus has declined during the first 9 months of 2007 to an estimated USD 57.1 billion (down from USD 79.1 billion in the same period of last year). Imports grew by 37.3 percent in the first three quarters of 2007 (to USD 154.6 billion) when compared to the corresponding period of 2006, while exports only grew at a modest 11 percent during the same period. As a result the trade balances shrunk by USD 17 billion to an estimated USD 94.1 billion

Of course this weakening in Russia’s current account position in 2007 has been more than compensated for by a strengthening on the capital account side . According to preliminary estimates from the Russian National Bank, the capital account showed a net surplus of USD 59.5 billion in the first three quarters of 2007, compared to a deficit of USD 5.1 billion in the same period of 2006.

The surge in capital inflows pushed the balance of payments surplus to record highs and exerted new upward pressures on the rouble. The pace of reserve accumulation has increased further in 2007. Gross foreign reserves of the Central Bank reached USD 447 billion by the end of October 2007 (35.9 percent of GDP). Capital inflows are becoming and important source of foreign reserve accumulation, exerting upward pressures on the rouble and driving money expansion.

These large capital inflows reflect acceleration in foreign borrowing by state corporations and the banking sector (with these latter funds then being passed on in the form of domestic consumer credit to finance real estate expansion, etc). Net capital inflows to the private sector amounted to 56.8 billion in the first nine months of this year, compared to USD 26.3 billion in the same period of 2006. The banking sector has been the main recipient of these inflows (USD 37.6 billion net) most of which came during the second quarter of 2007. In a development which mirrors what we have been seeing across the whole of Central and Eastern Europe Russian commercial banks have been borrowing substantial funds abroad to finance domestic credit operations. Net capital inflows to the non-banking sector have also increased substantially during the first three quarters, amounting to USD 19.2 billion. According to the latest BoP estimates, the liabilities of the corporate and banking sector increased by almost USD 150 billion during the first nine months of 2007, out of which USD 55 billion represented short-term foreign borrowing.

The substantial external funding of the banking sector is driving up Russia’s external debt. In June 2007 external debt reached USD 385 billion. Latest estimates suggest that in October 2007 Russia experienced a net inflow of capital of about USD 10 billion. As a result, foreign reserves increased by over USD 21.6 billion reaching USD 447 billion by end October.

In the context of such large capital inflows and with limited monetary instruments to sterilize them inflation is thus becoming a huge headache. As I said above, this year's strong growth in balance of payment inflows has not essentially been a by-product of higher oil prices but rather of an acceleration in inward capital inflows, and these, as I have already indicated, are not absorbed by the Stabilization Fund. The sterilization of capital inflows through general policy measures is difficult, due to the small size of the Russian bond market and limited scope for further increases in bank reserve requirements or interest rates in a liquidity-constrained financial sector.

According to the World Bank the Stabilization Fund continues to act as an effective automatic stabilizer of large inflows stemming from oil revenues, but remains ineffective in the face of the capital inflows which have become an increasingly important source of reserve accumulation and money supply expansion in 2007.

One obvious policy response would be to allow a more rapid nominal appreciation of the rouble, but such an appreciation presents potential risks, and especially in the context of Russia's very tightly constrained labour supply situation, since expectations of rapid nominal appreciation could potentially attract even more capital inflows.

Another potential policy tool is the fiscal one, running ever larger fiscal surpluses in an attempt to drain domestic demand from the system, however recent revisions to the 2007 federal budget envisage not tightening but rather additional fiscal relaxation. The government submitted to the Duma earlier this year a draft amendment to the 2007 Budget Law that substantially expands public expenditures for the remainder of the year. The proposed amendments envisage an increase in non-interest expenditure of 1068 billion rubles and a rise in total expenditures to 20.35 percent of GDP, compared to the 17.5 previously approved. This development would bring the 2007 budgetary surplus down to 2.8% of GDP from a previously projected 4.8%. In an economy that is growing at close to potential, and which is driven by booming private domestic demand, additional fiscal stimulus is only going to either increase pressures for nominal appreciation (and import dependence) or produced upward pressure on the inflation level.

Coping With An Ageing and Declining Workforce

As we have seen above, rapid productivity gains were fairly easy to achieve in the first years following the crisis of the late 1990s, but the future is never an exact repeat of the past, and sustaining these rates of productivity growth will obviously now become ever more challenging. The World Bank estimates that Russian firms have now largely exhausted the post-crisis productivity gains that could be derived from bring idle capacity on-line and from labor shedding. For several years, firms were able to raise productivity quickly with little substantive investment, by drawing on the existing underemployed stock of capital and labor. However, capacity utilization rates have now risen from the 42 percent low of 1999 to almost 70 percent in 2005 (the last year included in the World Bank study). Productivity gains which far outstripped wage growth in the first years of economic recovery, are now themselves being outstripped by the rapid wage rises of the last 18 months. The real effective exchange rate has gradually returned to its pre-1990s-crisis level, and Russian firms operating in non-energy sectors are increasingly having to cope with the impact of foreign competition.

The small role of capital stock accumulation and employment growth in Russia’s growth performance (see below) contrasts with the experience of other fast-growing economies in East Asia where factor accumulation has been the main driver of output growth. In Russia, output per capita grew by 6 percent over the period 1999 to 2004 driven largely by labor productivity growth, which accounts for two-thirds of output per capita growth (4 percentage points). The low level of additional growth attributable to increased labour inputs is, of course, a by-product of Russian demographics, and this is a problem with no easy solution. But to the decline in absolute numbers and the aging of the labor force, must be added the deficiencies which are to be found in the Russian higher education system, which only serve to worsen skill mismatches, and the rigidities in labour market regulations, which make it difficult for firms to hire workers and serve to slow the pace of worker reallocation.

As mentioned above, as well as being in absolute decline Russia’s labor force is also aging rapidly. Russia’s working-age population is shifting from the younger age groups (15-39 years) to the older ones (40-64 years). Of the looming 11 million decline in Russia's working-age population, over 95 percent of the decrease will come from a decline in the 15-39 age group while less than 5 percent will come from a reduction in 40-64 age group. Of particular importance is the fact that the 25 to 49 age group has now finally peaked, since this age group is of special importance for economic growth for a whole series of reasons.

This ageing workforce component is likely to have a further negative effect on both labour supply and labour productivity. Normally policies to address population "greying" focus on increasing participation rates increase for workers in the latter stages of the conventional “working age”, and on raising the retirement age upwards towards the 70 mark. But in the Russian context such policies face particular difficulties. In the first place participation rates are already high in Russia by international comparisons (see chart below), and, of course, with male life expectancy in Russia still hovering around the 60 mark (see chart at the start of the post) it is hard to see how much juice there is to be actually squeezed from the 60-70 age group part of this particular lemon.

An aging labour force is also particularly challenging in Russia because wages do not follow the normal pattern of rising with age, and this would suggest that the skill and human capital composition of the older cohorts of workers is not particularly high (and remember it is this group which is now about to shoulder a growing part of the burden of carrying the Russian economy). The following chart - prepared by the World Bank - shows the marginal effects of age on the wages of male workers, controlling for other wage determinants.

Typically, wages tend to increase with age until the late stages of working life, and in the chart above it can be seen that Turkey's profile here is much nearer to the conventional one, quite simply because Turkey's demographic and development profile is also much nearer to the conventional one (for an examination of why we should expect this see this exhaustive post on Turkey) . In the interests of making a rather fuller comparison I think it is worth just glancing at the standard age-wage chart for Japan, where we can observe, interestingly enough, that these earning profiles not, in fact, changed changed significantly even while the Japanese population has aged, which again should constitute a productivity warning signal for Russia, in the sense that we ought not to assume any large scale productivity improvement among the older age groups.

Indeed numerous studies have established and confirmed these hump shaped age-earnings profiles, attributed primarily to the long-term worker-firm relationships and/or premiums paid to those with more experience. The fact that such a pattern is not to be found in Russia (and it seems in other countries in the old Soviet Bloc), should be sending us all sorts of early warning signals which need to be acted on.

In this context I cannot help finding the tone of the World Bank analysis, with its "worry not, all will be well if you only manage to increase participation" - quoted a length below - unduly complacent under the circumstances. Participation is - as we have seen - already high, and given these participation rates it is not clear how employing more very low human capital workers is going to drive the kind of productivity revolution which going to be is needed sustain GDP growth in the face of the dramatic decline in the Russian workforce. The numbers just don't add up. The circle doesn't square.

Improving labor force participation, particularly of older cohorts. Given the already high labor force participation rates, Russia has limited scope to increase labor force participation to compensate for a declining working-age population. Nonetheless, achieving higher labor force participation for older workers could contribute to offset the expected decline of the labor force. Gradually increasing labor force participation of workers aged 60 to 64, so that the rate is 10 percent higher in 2020 than in 2005 would reduce the projected decline the labor force from the 11 million to 5 million (See Figure 8).3 Increasing labor force participation rates would imply retaining older workers and reintegrating those who have left the labor market by: (i) raising the comparatively low retirement age (60 for men; 55 for women) to the OECD standard 65 for both sexes; (ii) providing life-long learning opportunities to keep skills up-to-date and retrain older workers laid off during enterprise restructuring; (iii) enabling greater flexibility in permitting part-time work; (iv) increasing educational opportunities and encourage higher education for younger Russian to improve labor force participation among the 50-64 cohort in future generations (those with higher education are 2-3 times more likely to stay in the workforce).
World Bank

As we are noting Russia's labour supply is bound to be negatively affected by its demographic trends: Russia’s working-age population will decline by 10 percent (about 11 million people) over the next two decades. This decline in working-age population is compounded by aging within the working-age population. The working age population (15 to 64 years) as share of total population is projected to decline by 3 percentage points (from 71% to 68%) by 2020. This represents a decline of 10 percent in the working age population, or about 11 million people. The projected decline in working-age population represents a source of concern, given that labor supply is a key determinant of economic growth.

But it isn't only Russia's labour supply which constitutes a difficulty, its distribution is also problematic, since Russia's labor resources tend to be highly concentrated in the centre of the country, and this is creating a serious nationwide imbalance. The outflow of labor is worst in Siberia and Russia's Far East: In January-September 2006 - according to data from the Social Development Ministry - more than 371,800 people (75 percent of them within the 15 to 65 working age range) left these regions. This "people flight" out of the far east is now a really serious problem since according to Brookings Fiona Hill - in this excellent piece of analysis - Siberia holds nearly 80 percent of Russia's total oil resources, about 85 percent of its natural gas, 80 percent of its coal, and similar quantities of precious metals and diamonds, as well as a little over 40 percent of the nation's timber resources. According to studies by geographer Michael Bradshaw and economist Peter Westin, with the exception of the city of Moscow and the industrial region of Samara in the Urals, the major contributors to the Russian economy in terms of per capita gross regional product (GRP) are all natural-resource regions, primarily Siberia and the Russian Far East. The oil-producing region of Tyumen in West Siberia tops the list; then Chukotka, also a major energy producer; Sakha (Yakutia), the site of Russia's world-class diamond industry; Magadan, a major mining region; Sakhalin, the island repository off the Pacific coast of one of Russia's richest new finds of oil and gas; and Krasnoyarsk, a vast coal mining, mineral, and precious metal producing region. So the issue of who is actually going to work in these areas in the future is in fact no mean one.

And almost 40 percent of the labor which is available in the Primorye Territory is concentrated in the city of Vladivostok, while the rural and remote areas are facing a population-blight type crisis. The Far East constitutes 30 percent of Russia's total territory, but has less than 5 percent of its population. It has substantial natural resources which could stimulate economic activity and employment, but investors are becoming increasingly reluctant to commit themselves since there is almost no one left to employ there.

The situation in the Russia's Southern Federal District, meanwhile, couldn't be more different. Here labor supply greatly exceeds demand; approximately 20 percent of the working-age population is unemployed. According to the Independent Institute of Socio-Political Studies, for example, only 36,000 people are employed in the Republic of Ingushetia (17 percent of the working-age population, as compared to the Russian average of 74 percent employment rate). Chronic unemployment continues to dog Dagestan, Ingushetia, Kabardino-Balkaria, and Karachayevo-Cherkessiya, where the share of long-term unemployed job-seekers exceeds 65 percent. In Ingushetia, unemployment amongst young people is stuck somewhere around 93 percent mark.

Of course inward migration could certainly help mitigate Russia’s projected labor shortage. Russia is already experiencing large migrant inflows, mostly from lower income CIS countries, whose working age population is still growing rapidly (such as the Central Asian countries). Migrants are also arriving from China to help ease the labour supply problem in the far East.

According to data from Russia’s Federal Border Guard Service approxiamtely 750,000 Chinese national have been legally entering and leaving Russia each year since 2002, about 80 percent of them entering through checkpoints of the Far Eastern Border District. The majority of these workers enter and leave each year, but there are an unknown number who remain behind, especially among those who did not enter the country legally.

As Yuri Andrienko and Sergei Guriev convincingly argue in their recent paper "Understanding Migration in Russia", Russia's present migration policy is extremely counterproductive as it both restricts much-needed migration and creates a constant flow of illegal immigrants. Evidently the pressure of its demographic problems mean that Russia will soon have to reconsider its present policy and it is more than likely that it will have to introduce some sort of amnesty for those currently working illegaly in the counrty in the not to distant future. The overall situation is not helped at all by the Russian government's ability to volte face and contradict itself (in the face of xenophobic pressure) on a seemingly regular basis. While attracting immigrants with the one hand, it denies them the opportunity to work with the other. The announcement by Prime Minister Mikhail Fradkov in November 2006 that as of 1 January 2007 the government would be restricting the employment of immigrants in the retail trade sector to 40% of the total was certainly not a constructive move.

However, getting hard numbers on migrant workers in Russia is not easy, and it is important to distinguish between temporary and permanent migrants. As I have already mentioned maybe 750,000 Chinese go to work in Russia on a temporary basis every year, and we know from the Russian migration service that they have just completed an agreement to allow 500,000 or so workers from Uzbekistan to go to work legally in Russia every year. The same sources accept that there are a roughly equivalent number from Tajikstan, and slightly more from both Kazakstan and Ukraine. But as Andrienko and Guriev emphasise, what Russia really needs to compensate for the demographic decline are not temporary migrants, but permanent settlers. In order to adequately compensate for this drop, there needs to be an annual inflow of about 1 million working age migrants the authors estimate, and this is three times the average net rate of inflow which occured in the years between the Censuses of 1989 and 2002. And during this earlier period, of course, we were talking about ethnic Russians returning from the old outposts of the former Soviet Union. Tjiks and Uzbeks may indeed be seen in a rather different light, as already seems to be the case on many a Moscow street.

Conclusions, Is Fertility a Dirty Word?

As we have seen througout this extensive post developments in Russsia pose acute and quite specific problems for contemporary macroeconomic theory. A declining and ageing workforce, with low accumlated levels of human capital, accompanied by rapid "catch up" growth, large external fund inflows and pressures for currency appreciation all marry together to make for an extremely combustible mixture.

The standard World-Bank-type solution (and it has to be said here that the best analysis and coverage on what is happening in Russia comes consistently from the World Bank economists, despite the shortcomings) to increase labour force participation rates among the 55 to 60 and especially the 60 to 65 age groups seems to fall far short of what is needed. Unless what we are talking about is a pythagorian-type celestial participation of communing souls it is hard to see what exactly they have in mind here, given that the physical "earthly" presence of the Russian male over 60 is rather limited at this point in time (well the Russian religion is very mystical, so maybe rather than Vladimir Putin what they need in Russia is a modern Andrei Rublev, with Andrei Tarkovsky perhaps returning from the grave to "participate" in the scenification).

As a matter of urgent priority Russia obviously needs to have a coherent immigration policy (with some strategic thinking about what exactly to do with all the Chinese nationals who are rapidly accumulating out East for example) and it also urgently needs to address the life expectancy/health problem. Longer term the whole situation though is absolutely unsustainable unless something is done to redress the fertility deficiency, but strangely all the economic reports remain silent on this topic. Why is this, I ask myself?

Of course, in order to do all these things Russia also needs to address its political problems.

Conceptually we could think of Russia being about to have a very large version of the "Baltic problem". All you need to do is make a mental switch and replace capital inflows from oil lying under the ground to those which have their origin in migrants working out of the country (remittances) in the Baltic (or Bulgarian, or Romanian, or Polish, or Ukranian) case. Both mechanisms produce a large inflows of funds, which go to work in domestic sales and construction. Since we are short of people in each case, then this surge in demand naturally squeezes up wages and then rapidly makes exports non-competitive. As a consequence the country involved becomes more and more dependent on imports.

Call this the Baltic syndrome if you will, and plagiarizing an old adage, we might say that once the Baltics sneeze it will be the global economy which ultimately catches the cold.

Amazingly, we are brought to the conclusion that Russia could eventually have a trade deficit, even with all the natural resources she has in play, and at the rate we are going this point may not be too far away. What we need to bear in mind is that while global oil prices may drop back slightly (depending on whether and to what extent there is a slowdown in global growth in 2008), they are unlikely to continue to rise at the same pace as they have been (imagine a US consumer facing oil at $200 a barrel) and so since Russian oil capacity is, at best, more-or-less constant (due to depletion issues), Russia cannot continue to rely so heavily on oil exports for continuing growth (and as living standards rise oil revenues will gradually and inevitably come to consitute a declining share of GDP). And this will become doubly the case if the rouble is allowed to rise (as it must be at some point) since the rouble value all that oil revenue will then become accordingly less.

Demographic Supplement

Following a precedent established in my recent Croatia post, I am including the substantive demographic data on Russia as an appendix, in a way which means that it "informs" the economic analysis (in the sense that it is ever present, and should be ever present in our minds) without occupying the centre stage. The demographic backdrop forms the context within which day-to-day policy needs to operate.

Here, then, is a collection of population data, which illustrate how the structure of the Russian population is in the process of undergoing profound change in the years between 1990 and 2020.

Firstly we have the median age data.

Claus and I tend to use median age data for a convenient proxy for a variety of economic phenomenon, such as saving and consumption patterns, construction activity, gross fixed capital formation, export dependence, productivity of the workforce as a collective etc. This is still all rather controversial, but one of the purposes of this blog is to test out these connections in real time as the global economy unfolds. As we can see the median age is steadily rising, and is currently in the process of crossing what Claus and I consider to be the critical 40 threshold. This means that, ceteris paribus, the structural characteristics of the Russian economy will almost certainly change in the coming years, with a decline in construction and an ever more pronounced export dependence, something which is going to be difficult to realise given the relative currency and output prices which are emerging, and remember, as GDP and living standards grow the energy sector share in the total economy will naturally decline.

Turning now to total population, Russia’s population is expected to shrink by 12 percent (over 17 million people) between 2000 and 2025, according to UN Population projections. This is the largest drop in the Europe and Central Asia region in absolute terms and the six largest in relative terms.

There are basically three drivers of median age and population ageing - fertility, life expectancy and migration. Here we can see how Russia's fertility problem is a very long term one. Essentially fertility went below replacement level during the 1970s, rebounded briefly early and mid 1980's, only to drop back again and acheive the lowest-low fertility rate which currently prevails in 1994. Whether or not fertility is able to make a comeback from such a point is a question demographer Wolfgang Lutz has been asking himself for some time now. Will Russia ever re-attain near replacement fertility, or is it now caught in a more or less permanent low fertility trap?

Obviously, the combination of high deaths rates and low birth rates makes for the sort of population decline we are now seeing in Russia, and - as can be seen in the next chart - the crossover in Russia's case occured around 1992.

As we saw at the start of this post, Russian life male expectancy is low, and has been falling. Here is a chart which gives a detailed close up of the evolution of Russian life male expectancy since the start of this century.

Finally, I present three population pyramids for Russia, which give some quick impression of the evolving structural shifts in the age groups. The first pyramid, which comes from 1991, has a structure which is not at all unfavourable to rapid economic growth of the kind Russia is now having. Russia's misfortune is that it is trying to have this growth now, and not back then, when, as can be seen in the second (2007) pyramid the population is already begining to eneter a seriously unstable dynamic. The final pyramid which is an estimate based on the UN median estimate of population development gives some idea, possibly a rather optimistic one, of what Russia's population will could like come 2020, everything here depends on the evolution of fertility, life expectancy and migration. Basically I have no hestitation in saying that I find it very hard to see how a population with such an structure distribution is going to achieve any economic growth at all.


World Bank Russian Federation Economic Reports, especially the latest report (number 15, November 2007, pdf file and power point presentation).

World Bank and World Health Organization Raise The Alarm On Noncommunicable Diseases And Injuries In CIS Countries, details of a high-level international conference, held in Moscow, Russian Federation on 30–31 October 2007.

World Bank, Dying Too Young in the Russian Federation, December 2005.

World Bank, From Red to Grey, The "third Transition" of Aging Populations in Eastern Europe and the Former Soviet Union. June 2007.

IMF, Russian Federation: 2007 Article IV Consultation - Staff Report; Staff Statement; and Public Information Notice on the Executive Board Discussion

IMF, Russian Federation: Selected Issues, October 23, 2007.

Four Surprises in Global Demography, By Nicholas Eberstadt, US Foreign Policy Research Institute, July 2004.

Siberia: Russia's Economic Heartland and Daunting Dilemma by Fiona Hill. Brookins Insutitute, 2004.

Understanding Migration in Russia, A policy note by Yuri Andrienko and Sergei Guriev
Center for Economic and Financial Research at New Economic School. 2006.

Demographic development of Russia and Ukraine: fifteen years of independence
by Sergei Pirozhkov and Gaiane Safarova. Working Paper.