Studies Eastern European Markets
Eastern European Markets
January 2007

Hannu Hernesniemi
Northern Dimension Research Centre
Publication 36. Lappeenranta 2006

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Russia is far the biggest country in the world endowed with vast natural resources, the relative importance of which have increased in the early years of the 21st century. Especially high prices of energy bearing materials in the global economy have benefited the development of transitional Russia. In the post-Soviet era, Russia is moving toward post-industrial service society, in which the relative importance of industrial activity is in clear decline. However, in Russian external economy the big bulk of export income comes from tangible trade, mainly via products of extractive industry. Balance of trade shows considerable surpluses, while balance of services is in deficit. Thus, tangible production is the core of increasing wealth of the post-Soviet Russia.

Industrial development has advanced in uneven waves in Russia. The era of Soviet central planning is often called the time of forced industrialisation, during which extensive investments were made in basic industries with the aim of complete self-sufficiency with disregard of proper cost-benefit calculations. Neglected consumer goods production caused consternation, and finally, the decay of the Soviet system. Transition from Marx to the market has made fundamental restructuring via a severe economic slump necessary.

An attempt is made here to understand this transition process in post-Soviet Russia by limiting the topic geographically and functionally. The area selected is the Northwest of the country, while clusters chosen cover three basic activities: energy, metal, and forest industries.

As results of the study show, Northwestern part of Russia is a marginal producer of energy bearing materials, and thus, has not been able to profit directly of the oil price boom in recent years. The region under review produces less than 5% of Russian oil output. The equivalent figure in natural gas branch is less than 1% which means that gas reserves of the region are almost completely exhausted.

In the transitional period, Northwest has become a major transit route of oil export because of constraction of two terminals on Gulf of Finland. Tapping the new offshore gas deposit in the Barents Sea (Stockmann) will obviously benefit the region under review in the near future. This extremely rich deposit is probably going to play a major role in European energy supply.

Coal production in the region has decreased from about 30 million tons annually to 15 million tons, a drop of 50%. The Northwest region’s share of Russian overall coal mining is a mere 5%. The equivalent figure in electricity generation is about 10%, which is about the same figure as the share of Northwest’s population of the Federal population.

The metallurgy branch suffered a very severe blow by the systemic change because of the revolutionary restructuring of the military-industrial complex. Steel output went down from about 90 million tons in 1990 to 44 million tons in 1998. Local consumption of aluminium dropped catastrophically from 2,5 million tons in the end of Soviet era to a mere 0,4 million tons in 1998.

Our research results show clearly that in both categories, in ferrous and non-ferrous metallurgy, very positive results have been achieved in radical restructuring process. Metal industry has been able to find export markets to compensate for sluggish internal demand.

Production figures are recovering and efficiency is improving. Cheap local energy prices and local availability of raw materials together with improving price competitiveness due to rouble devaluation in 1998 are important background factors in this remarkable turnaround.

Improving profitability of the branch has enabled internationalization of the sector. Several Russian metal companies are now international players in metal business. The Northwestern region has benefited from this positive development enormously.

It is self-evident that forest industry has excellent preconditions in the region under review with an extensive raw material base, internal and external waterways, and feasible local energy supplies. However, this list of positive aspects did not save the branch from a shock in the immediate post-Soviet period.

Sawn timber production decreased from 75 million cubic meters in 1990 to a mere 19 million in 1999 in the Russian Federation. The equivalent figures in Northwest were 14 million and 5 million, respectively. Pulp production suffered in the same period of time a drop from 7,5 million tons to 4,2 million in Russian scale, while the regional decline in Northwest was from 4,3 million to 2,7 million tons. The trend in paper-making was similar: decline from 5,2 million to 3 million tons on federal and from 3 million to 1,7 million tons on the regional level.

The research results above show that in forest industry a turnaround has started taking place in the new century. However, production level of 1990 has not yet been reached in the major categories of wood processing (sawn timber, pulp and paper). In plywood output the result of 1990 was clearly exceeded in 2004. In Northwest the growth in this sub-category is even over 100% in the same period of time. Carton board production shows a clearly dynamic trend in 1990–2004, even though the growth rate in Northwest is more moderate than in plywood production.

Undoubtedly, the financial crisis of 1998 with rouble depreciation has helped forest industry to recover via increasing export demand. Local factors obviously create dynamism on plywood and packaging material demand.

Forest industry shows similar features as metallurgy. However, the former has not extended its activities abroad in the same manner as the latter. Both clusters have had a very positive impact on the local economic development in the region under review. The metropolitan area of St. Petersburg (St. Petersburg and the Leningrad region) is obviously the engine of recovery in Northwest region. This metropolis attracts plenty of tourists and generates increasing income from modern services, like IT software branch. Furthermore, this densely populated part of the region has been able to attract plenty of foreign direct investment in food processing industry (including beverages and tobacco). The metropolitan area is on the crossroads of logistics activities linked with rapidly increasing foreign trade of Russia. Economic prospects of the region are thus extremely positive.

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