Report - UNDP Russia

Figure 1.6Urals price and real trade-weighted exchangerate of the Russian ruble (1994-2007)2000 = 10020018016014012010080604020019941995199619971998199920002001200220032004200520062007Real trade-weighted ruble exchange rateUrals price (right scale)Source: World Bank (World Development Indicators OnlineDatabase), US Department of Energy(http://www.eia.doe.gov/emeu/international/oilprice.html)The Central Bank may then intervene, slowing thenominal appreciation by currency interventions,but increase of money supply will stoke inflationand this negative effect could also, in turn,strengthen the real exchange rate.The resource reallocation effect arisesfrom transfer of labor force and capital fromprocessing industries and agriculture to the rawmaterials exporting segment and other sectorsof the national economy, which do not directlycompete with imports, i.e. the so-called ‘nontradable’sector, including construction, retailtrade, transportation and communications.These effects do not directly reduceeconomic growth but they lead to structuraldisproportions, as a result of which the economycan become more exposed to external priceshocks related to a specific group of commodities(energy commodities). There is also a long-termthreat of economic slowdown if the fuel & energysector fails to update its technology andbecomes immune to innovation.Natural resource rent can also have theeffect of suppressing economic growth. If therent is high, rent-seeking behavior becomesprevalent and a large share of resources may beused for redistributive instead of productiveactivities. The fact of a resource rent, which is80706050403020100USD/barreldistributed in accordance with specific rules, canworsen and distort incentives for government,business and the general public. This factor isparticularly dangerous when the country lacksthe well-established institutions of a marketeconomy.Structural disproportions together withprevalent rent-seeking economic behavior canhave impact, through a number of channels, onparameters of the key factor for economicgrowth, namely human potential 4 , becausemeans of stimulating and implementinginvestments in human potential are reduced.Reasons for low investments in humanpotential include wealth inequality, DutchDisease, and improper redistribution policy bythe state. Inequality caused by unevendevelopment of various sectors and regions or byconcentration of geographically localized naturalresources in the hands of a small group of peopleundermines both vertical mobility (e.g. throughimpairment of access to education among poorersocial groups), and incentives for a significantpart of the population. Dutch Disease leads todiminishing demand for skilled labor because theprocessing industry shrinks while the capitalintensiveresource segment may only need alimited number of highly-skilled employees. Thegovernment may try to redistribute revenues, butthis can also undermine incentives, since peoplelook to the paternalistic state instead ofdeveloping their own strengths, educationalpotential and careers. The state may provide itscitizens with free education, but will people seethe sense of developing their own human capitalwhen there are insufficient highly qualified jobsin any case? This sort of scenario leads toincreasing social and material stratification and,consequently, to more social tension.Possibility of this scenario poses a gravethreat to sustainable development in Russia. Inorder to avoid it the state needs to pursue severalpriorities. A wise industrial policy should beaimed at diversification of the economy,4The issue of negative structural disproportions in Russia’s economy is studied in more detail in a work by V.Danilov-Danilyan: EnergyEfficiency as the Key Direction for Russia’s Economic Development//Vestnik Ekologicheskogo Obrazovaniya, 2001, No.19.20 National Human Development Report in the Russian Federation 2009