Why Has Russia Failed to Diversify Exports?

It is well known that Russia depends on oil and gas for the majority of its exports. What is less acknowledged is how much the structure of Russian exports, and the dependence on extractive industries, has stayed constant over time. In particular, according to the Russian Statistical Office, about three-quarters of Russian exports both in 2004 and 2014 are raw materials.

In 2004, the four main groups of raw material exports were: oil and gas, 53 percent of total exports; ferrous and nonferrous metals, 18 percent; timber, 3.5 percent; and precious stones, 1 percent. In 2014, oil and gas accounted for 64 percent of total exports; metals, for 8 percent; timber, 2.5 percent; and precious stones, 2 percent (table 1).   

Among manufacturing products, machinery and equipment accounted for 4.6 percent of exports in 2014, down from 7 percent ten years earlier. Agri-processing and food exports were 3.3 percent in 2014, up 2 percentage points from 2004. The chemical industry maintained its export share at about 5.5 percent throughout the period. Transportation services, especially the airline industry, increased their share in the export mix—from 2 percent in 2004 to nearly 4 percent in 2014. So did information technology (IT) services, telecommunications, and software services—reaching nearly 1 percent of total exports last year.

These figures show little exports have diversified, apart from the gradual growth of agri-processing and food, transportation, and IT services. Yet the discussion on the need for diversification started more than a decade ago by then minister of economic development and trade German Gref: “At the beginning of the 1990s, high-technology products accounted for over 25 percent of total Russian exports. In a decade, by 2002, this share fell to 12 percent. In other words, we lost half of our high-technology exports.”¹ His proposed solutions: increase taxes on energy exports, provide state support for innovative technologies—for example nanotechnology and aviation—and establish credit bureaus to help new private businesses in getting access to financing. "Without decisive measures, without diversification, the economy's development trajectory will go along a path of inertia,” Gref concluded.²

Fast-forward a dozen years: Taxes on Russian energy exports remain low and have recently been further reduced to combat the fall in global demand. The import-substitution schemes introduced by the ministry of economic development and trade in 2014 to counteract the effects of Western sanctions apply primarily to low-technology industries like food processing and car assembly. And the recent spikes in commercial banks’ interest rates have crowded out small businesses from access to credit. As a result, Russia's exports portfolio have increasingly become concentrated in raw materials, reaching nearly 70 percent of total exports for the first half of 2015. In sum, the path of inertia was followed.

The phenomenon described here is not new and not specific to Russia. It is known in economics as Dutch disease, and basically is the result of policy laziness: If the government coffers are replenished with money from raw materials exports, why bother developing other industries? In other words, the biggest obstacles to diversifying Russian exports is the government’s inability to push through needed reforms—including those listed earlier.

There is reason for optimism. The weak ruble and low commodity prices are good incentives to diversify. The weak currency helps exports overall, especially those that use local labor and materials. And low commodity prices make manufacturing and services exports relatively more profitable.

But these are just positive external factors. For diversification to work, the Russian government would need to direct investments towards export-oriented companies and industries—and away from the ineffective policy of import-substitution.

Notes

1. Victoria Lavrentieva, “Gref Says It's Time to Squeeze Big Oil,” Moscow Times, February 20, 2003.

2. Anna Smolchenko, “Gref Urges Diversity to Preserve Growth,” Moscow Times, July 11, 2006.