For the first time in many years, the world’s largest economies are growing simultaneously. This will create favorable conditions for Russia to increase its exports and use export revenues to expand its domestic market.

Alexander Koksharov

Russia is currently witnessing what are perhaps some of the best international economic conditions in the last 10 to 15 years. The world economy has shaken off the stagnation of 2000-2001 to some extent, and last year the global GDP grew by 3.6 percent (compared to only 3 percent in 2000). Many are predicting the world economy will grow by 4.2 percent in 2004. In addition, both Europe and Japan will see renewed growth. For the first time in many years, the world’s main economies have started to grow at the same time.
The upswing in the world economy and higher demand, in particular from the increasingly natural resource-intensive economies of China, India and other Asian countries, have created a unique situation for Russia as an exporter of raw materials. Russia now has the opportunity to expand its exports significantly while prices are high and often continue to grow. For example, oil, which provides 28 percent of Russia’s export earnings, cost $28.60 per barrel of Brent oil on the average (compared to only $24.50 in 2001 and $14.30 in 1998). At the same time, Russia’s actual oil production increased by 11 percent last year.

New Engines for Growth

China, with its rapid economic growth, is literally tearing the existing world economic system to pieces, the system headed for the last fifty years by the so-called “triad” of the United States, Western Europe and Japan. The economic dynamics of these countries formerly set the pace for global growth and determined trade configurations and prices for natural resources. However, in the early 1990s, the situation began to change. The economic cycles of the triad countries got out of synch, and the United States became the key factor in determining the growth of the world economy. While the U.S. economy grew rapidly in the late 1990s, the world economy grew rapidly, too, despite financial crises in Asia, Russia and Brazil from 1997 to 1999. However, the moment problems arose in the U.S. economy, global growth also slowed. In the last two years, the U.S. economy saw rapid growth, which immediately had its effect on global growth.
In reality, though, the United States' role as primary growth generator for the world economy in the last 10 years has been slightly exaggerated. According to the widely held view, the United States created two-thirds of the global economic growth on average over the last 10 years. The role of the U.S. economy is great, but this figure is misleading, as it is based on calculations of the GDP at current exchange rates. The Canadian research company, Bank Credit Analyst, gives an alternative estimate, in which the contribution of various countries to global GDP growth is calculated according to purchasing power parity. These calculations show that the U.S. contribution in worldwide growth from 1995 to 2002 was significantly more modest, only 20 percent, while China contributed 25 percent. Growth in other developing Asian countries (from South Korea to Japan) gave another 18 percent to global growth. These figures turn China and its neighboring countries, increasingly linked to China economically, into one of the key economic engines behind global growth.
This is particularly apparent in the processing sector. As China’s GDP grew in 2003 by 8.6 percent according to preliminary estimates, manufacturing increased by 17.8 percent. Figures for the United States for the same period were 3.6 percent and 1.9 percent, as the U.S. economy grew due to increased productivity in the service sector. Many economists believe that growth rates in China could actually be far higher, as much as 11 to 12 percent.
In contrast to developed economies in search of new points of growth and new technologies, China does not need to come up with anything supernatural to ensure dramatic growth, but is merely expanding traditional forms of industrial technology. While the United States, Japan and Western Europe pray for innovations in electronics, programming and bioengineering in hopes of a technological breakthrough, China can get by with extensive development of industries considered mundane for the 21st century: smelting steel and aluminum, assembling cars and televisions, and sewing clothes and shoes. This has turned China into the world’s assembly line. It’s not for nothing that Guangdong, one of the most highly developed industrial regions in the world, has been called the “Chinese Manchester” by many in the West.

Resources to Grow On

China’s industrial expansion requires a huge amount of natural resources. In 2003, imports to the P.R.C increased by a phenomenal 40 percent (while imports into the United States increased by only 2 percent). In 2003, China became the second largest oil importer, overtaking Japan. At present, China imports around two million barrels of oil every day, and by 2010 this figure will double. Steel production in China grew by 20 percent in 2003 to a record-breaking 200 million tons a year. China has become No. 1 in the world, producing 22.5 percent of the world’s steel (and importing another 50 million tons). Like Britain in the second half of the 19^th century or Japan in the 1950s to the 1970s, China has become a global magnet attracting the world’s trade.
As Chinese producers buy up natural resources at an astounding rate, they are pushing prices on world markets ever higher.According to forecasts by the International Energy Agency, China will create one-third of the growth in demand on the oil market in the next two years. The situation is similar in other markets, from liquefied natural gas and copper to lumber and cellulose. This makes the future extremely bright for exporters of raw materials around the world, and particularly those neighboring China.
In the coming years, it is estimated that China will maintain its high rates of growth — 8.4 percent in 2004 and 7.5 percent in 2005, according to the Economist Intelligence Unit. Industrial production will increase by 15 percent a year, stimulating demand for raw materials and providing the growing world economy with cheap goods. Prices for Chinese manufactured goods are not on the rise and are even falling in some cases, despite increased prices for raw inputs. This is due first of all to an increase in productivity and stable low labor costs, and secondly to the positive effects of a weak dollar (and the yuan pegged to it). The price index for raw versus manufactured goods is again starting to grow after a long hiatus.
China will not be the only economy spurring demand for raw materials. Its Asian neighbors will also play an important role. In 2003, India’s GDP grew by 6.1 percent, Thailand’s by 6.5 percent, Malaysia’s by 5 percent, Taiwan’s by 4.2 percent and Hong Kong’s by 4 percent. In 2004, economists are predicting increased rates of growth for the countries of this region, as well as for the developed economies of the United States, Japan and Europe. They remain the key importers of many types of natural resources ranging from oil to aluminum. For this reason, despite competition from China, their increased economic growth will also keep prices high.

A New Model for Raw Materials

Another significant factor is the revival of the role of trade cartels and alliances between developing countries trying to bargain with developed nations for more favorable conditions. For example, OPEC, practically idle during the mid-1990s, suddenly revived after the price collapse in 1998-99 and managed to regain control over oil prices. Since the beginning of 1999, the price per barrel of oil doubled, benefiting not only the members of the oil cartel (which produce 40 percent of the oil that makes it to the world market), but also independent producers like Russia, Mexico, Norway and Kazakhstan. 
The other natural resource cartels that existed in the 1970s and 1980s were not able to regain their positions on the market. However, the September WTO summit in Cancun demonstrated that the time for new alliances has come. During tariff and trade negotiations, developing countries banded together in temporary alliances and lobbied for more favorable trade conditions and lower import tariffs for goods (predominantly raw materials and agricultural products) from the third world into developed markets. Though the Cancun summit did not yield any concrete results, analysts took note of the emerging trend. The developed countries have demonstrated their willingness to grant certain concessions to developing countries. For example, they are willing to buy raw materials at higher prices as a kind of compensation for globalization.
A combination of economic and political factors has significantly increased the attractiveness of exporting natural resources. Many economists have started talking about how upward trends in raw materials can be expected to continue for the next decade. In the last century, natural-resource markets experienced five cycles of high prices, and on average each cycle lasted seven to 10 years. These predictions seem fairly credible. The AIG-Dow Jones Commodity Index rose from 113 to 136 points in 2003 (an increase of 20 percent), reaching its highest point in the last 18 years.
The majority of analysts are predicting somewhat lower oil prices for 2004, $24 to $25 per barrel as opposed to the current $29 to $30. Similar predictions last year proved false, and not only due to events in Iraq. Prices for the majority of metals are predicted to continue rising, and demand will outpace supply for the next several years.
The situation that is emerging is exclusively favorable to Russia. Increased demand for raw materials in developing countries will give Russia the opportunity to dramatically expand its economy following the model once used by Australia, Canada and Norway. It is based on using money earned from natural-resource export to develop the domestic market and financial system. In the 1950s and 1960s, Australia provided rapidly industrializing Japan with various types of raw materials. Now it has a strong and dynamic economy. Today, Russia’s economic catalyst could come from the booming economies of Asia, first and foremost China, eager to buy everything from metal and lumber to oil and natural gas.

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