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March 22, 2013

Russia Re-Industrializes as Energy Boom Fades

by James Brooke

For the last decade, Russia has been the world’s largest energy exporter, sometimes called “the Saudi Arabia of the snows.” Now, many economists say that oil and gas revenues are dropping and that Russia is starting to re-industrialize.

Post Soviet Russia is widely seen as an industrial rust belt. But here, in a new car making hub outside St. Petersburg, American car maker GM is investing to triple its production capacity.

Romuald Rytwinski, GM’s Manufacturing Manager for Russia, says the quality is world class.
 
“I was working 10 years as a plant manager in Western Europe,” said Rytwinski, a native of Poland. “And when I look at the cars we are making here, I’m very proud.  The quality of products, it’s as good as the best plants in Western Europe.”
 
With these new cars, Russia this year is to finally top the peak car production level of the Soviet Union - 2.2 million in 1985.
 
The rebirth of car making in Russia may signal the slow start of Russia’s re-industrialization.

Seeing the end of an oil boom
 
Anders Aslund, a Swedish economist, says that energy revenues are dictating new directions for Europe’s most populous nation.
 
“The oil price now seems to be leveling out, and you would expect it to go down a bit rather soon,” Aslund said on a visit to Moscow from Washington where he works for the Peterson Institute of International Economics. “And then the crowding out of other sectors by energy would diminish and at that time we will see a substantial revival of Russian manufacturing. “

Gazprom, Russia’s state gas exporting monopoly, is now offering European customers price discounts. With gas and oil production increasing around the world, Russia’s energy boom is slowing.
 
According to new report by the European Bank for Reconstruction & Development, Russia’s known oil reserves only allow for production to continue at current levels for 20 years. The comparable figure for Saudi Arabia is 70 years.
 
For now, Russia is highly vulnerable to energy prices. Oil and gas exports account for almost 70 percent of Russia’s export earnings and cover half of the federal budget.
 
With the end of this easy money in sight, foreign investors predict that Russia will be forced to embark on a new era of industrialization. During the Soviet era, the economy was closed and virtually all products were made at home.

Manufacturing a growth industry
 
Aslund, who has over 25 years of experience with Russia, links energy prices and local manufacturing: “The excessively high price level will decline and we'll see more economic reforms coming. And then lots of manufacturing will make sense.”
 
And while Europe is in recession, Russia is growing - by a forecasted 3 percent this year. Unemployment is only 5.8 percent - far below the levels of southern Europe.  A lead driver of growth is consumer demand, people making up for decades of Soviet deprivation by buying good quality cars, clothes, furniture, and housing.
 
Bernie Sucher is an American entrepreneur with 20 years experience in Russia. He sees continued growth for Russia: “This place, for whatever reasons, is still growing, and it is likely to continue to grow and at a pace that is obviously higher than the European Union, probably higher than the United States, and better than what we’re seeing in Brazil, to pick another big emerging economy where people seem to think that everything is wonderful.”
 
With lower energy revenues on the horizon, the word from the Kremlin to local authorities is to encourage manufacturing investment.

Last month, Russian Prime Minister Dmitry Medvedev set an ambitious goal in a policy speech:  “We must support the export of high-tech products and services. By 2018 we must increase our non-energy exports by more than 50% as compared to 2012.”

At the GM plant outside St. Petersburg, Rytwinski, the Manufacturing Manager, says he feels a new reality taking hold.

“Before I came to Russia people were telling me it’s unpredictable, you know, permissions,” he said. “In two years, we had no plant disruptions, we have a very good material flow, we haven’t had any dispute with local authorities, we received all permissions on time.”