In recent years, “the good ole US of A” is being praised (and/or criticized) as a global economic leader. Analysts are trying to persuade their readers of whether this position is beneficial for the USA itself, as well as for the rest of the world. A lot of arguments have been put forward within specific theories and case studies. In this article, I would like to analyze how the US role in the world economy strengthens and/or weakens the economy of Russia. 

Firstly, I will give some comments on the Russian economy and the American influence on it. Then I will take on case studies in the Russian – US economic relations, namely Capital Flows and Positions; the Position of the US dollar; and finally, Immigration and Outsourcing. 

The Russian economy, as a very young (16-year-old) economy, has seen many ups and downs since its inception in 1991. In the very beginning, new Russian leaders, lured by the American prosperity and variety, and impressed with the US position as a global economic leader, proclaimed the American economic model as an example to follow and an ultimate goal for the emerging Russian economy.

This seems to make sense, bearing in mind that Russia did spend a part of its oil revenues on modernizing its arm forces. According to the RadioFreeEurope, the Russian government came up with the plan, under which about 45 percent of Russia’s current stock of military hardware will be renewed by 2015. “The aim of the program is to restore strategic parity with the West”[2]. It looks like Russia can’t help but be bothered by the US dominant position in the world, and hence, it is likely to repeat its own old mistake – spend enormous resources on the military complex, forbearing the opportunity costs of developing a well-balanced economy.

US dominance as a superpower not only provides stimulus for the Russian authorities to pull together the Russian economy and be strong again. It also provides Russian economic players/actors with tools and standards, set by the US for the rest of the world. Subsidiaries of many American companies that are present in Moscow bring the practice of GAAP tax reporting, which are gradually adopted by their Russian counterparts. New corporate laws are largely inspired by those Americans as well. All this is happening because of the perception of the US as a “role model”, secured by its role in the world economy. In my opinion, this is a good influence on the Russian economy. It is supportive of increased interaction with investors, in contrast to the period when Russia’s failure to deal with contracts in the same manner as in the US retarded investment.

On the other hand, the significant difference in size of the two economies still does not permit US and Russia to be equal partners. Russian GDP is roughly only one-tenth of that if the US.[3] It is not surprising, then, that on a larger economic scale the two countries don’t act like partners, and sometimes can be the opposite. I am referring to the to the fact that on the world economic market double standards still exist for the US and Russia. The situation around the Kyoto protocol, arms export (where US proposes to impose sanctions on Russia for exporting the arms to some countries in the Middle East[4], while the US itself exports its arms to other countries in the Middle East) and some others clearly show that Russian economy has a long way to go before it will be regarded a equally important player on the World arena.

 

Now let’s take a look at the specific examples.

 

 

US’s important global capital position means an important American – Russian partnership in terms of capital flows. Obviously, this partnership is a two-way street.

            USA is an essential source of foreign investment in Russia, which allows Russian economy to get necessary funding for restoration and expansion. In the first nine months of 2005 USA provided $1.167 bln only in direct investment in Russia[5]. The significant amount of dollars were exported to Russia by the USA within portfolio and “other” investment categories, as well as a big part of the $ 200 M of the World Bank financial assistance to Russia in 2005.[6] (USA being the biggest WB donor, until very recently[7]). 

Private equity, a relatively new phenomenon for the Russian economy, also is largely possible due to capital contributions from the USA. US private equity giants, such as Carlyle Group, TPG (formerly Texas Pacific Group), Templeton, Russia Partners and others are major players on the lucrative Russian market, which in 2006 equaled $3.272 bl[8]. Their profits are truly astonishing; for example, “the Russia's Perekryostok retail chain investment had given Templeton a 5.2 times return on the original investment”[9]. No wonder that American PE firms are trying to bring more money to Russia. “Currently Russia Partners is raising a new fund between $700 mln and $1 bln, and Templeton is in a road show for a new fund that will be over $500 mln focused up to 35% on Russia[10]”. This cannot help but benefit the Russian economy, because the emphasis of private equity investment is on the industries that indeed are in need of funding, such as retail, construction, information technology, auto parts, infrastructure, packaging, media, logistics, pharmaceuticals and some others. Moreover, taking into consideration the disproportionate development of the Russian economy, where Moscow receive a lion’s share of financing, private equity investments play a vital role in regional development in Russia, investing in companies to help them accelerate regional expansion or investing directly into companies located in the Russian regions. The disappointing fact here lies in the matter of returns that are being enjoyed by American companies and not the Russian government and hence citizens, unless the foreign investors decide to invest all their profits back into Russia.

 

However, Russia is not only the recipient of the US capital, but a desired sponsor. This statement can be easily proved by the importance that was given by the White

House to the recent (in June 2007) trip to Moscow of the U.S. Deputy Treasury Secretary Robert M. Kimmitt. It is of no secret that America’s economic power is partly based on “potentially volatile dependence on foreign capital”[11]. One of the sources of the US economy funding is the Stabilization Fund of the Russian Federation, established by the Putin Administration a few years ago, as of June 1,2007 has accumulated 3,027 trillion rubles ($117 billion). Part of it is already invested in the US Treasury bonds. Discussions that Mr. Kimmitt had with the Russian authorities, centered on the U.S. Treasury Department's desire to see more of the Stabilization Fund of the Russian Federation invested in America. In his statements, Mr. Kimmitt expressed the idea that the US economy is a good target for Russian investments. "As they look to make decisions about investment opportunities abroad, we want to make sure that they understand that we are open to investment," he said[12].

On the other hand, there is one type of potential Russian investment that preoccupies American establishment. And that is – “chunks of corporate America” that “could be bought by the Kremlin”. This could happen if the Russian government decided they want a better return on their savings than they can get from Treasury bills, so they would to invest in companies. (The discussions on this possibility already take place in the Russian government. “At a recent panel discussion of the Budget Committee of the Federation Council, Senator Andrey Vavilov proposed to invest the money of the Stabilization Fund in foreign companies’ shares through special funds. Many support this idea”.[14])

S. Mallaby presents an interesting perspective on this matter. “Given the Chinese and Russian tendency to treat corporations as tools of government policy, you don't have to be paranoid to ask whether these would be purely commercial holdings”[15]. Taking into consideration “the advent in the United States of something approaching shareholder democracy”, where “chief executives increasingly live in fear of activist shareholders”, even the least threatening form of investment - the purchase of publicly traded equities by the Russian Sovereign Fund – can seem potentially dangerous from a US perspective.

All that said, for the Russian economy that of United States is regarded as an important hedge against global oil price volatility and inflation. Choosing to invest part of the national wealth in the US economy (after very long and hot debates though), Russia acknowledge US’s unique position in the World Economy.

Nonetheless, American economy is also a reason of the depreciation of the Russian Stabilization Fund. Indeed, “since July 2006, when a certain part of the Russia’s Stabilization Fund was converted into dollars (45% of the Fund), the setback of the US currency devalued the fund at about four billion dollars”[16] the Japanese yen and even the formally inconvertible Chinese yuan. Taking into consideration the recent precedent - the decision of the Iranian authorities to stop trade oil in dollars[17] - the Russian government may opt for converting their dollar component of the Stabilization Fund into some other currency. Another interesting possibility, in line with the Iranian decision, was expressed by Gazprom's Vice President Alexander Medvedev. "We consider the idea of selling our resources for rubbles to be quite possible,[18]" he said at a recent conference in New York. This makes even more sense, than the Iranian decision, because natural gas, unlike oil, is a resource of regional, not global, character. Its prices are established in the range of a certain distribution network and payments are made in any currency available in that particular regional market. . Clearly, in Russia the debate on whether to remain with dollars or to switch to some other currency is in a full swing. Proponents of the dollar appeal to the facts that a) American economy is still “the leading economy on the global market” and b) the incredibly high proportion of the US goods and services in the world GDP. Hence, even the high rate of dollar depreciation (it has lost almost 1/3 of its value since the absolute maximum few years ago) should be tolerated. Their opponents argue fervently, suggesting alternative currencies such as

On the other hand, while Iran got blamed for rejecting dollar for political reasons, Russian intentions look purely economic. Russia, as some other countries, seems to be losing faith that has been backing up American currency. In this respect I would like to quote French President Nicolas Sarkozy, a devoted fan of the US, who nevertheless warned in a speech to Congress during his recent visit, that a weak dollar "cannot remain solely the problem of others" and "monetary disarray could, indeed, morph into economic war.[19]" 

 

I am putting these two phenomena – Immigration and Outsourcing – in one category, because in my opinion they go hand in hand when we look at the US – Russian relations. The reason being that besides the majority of Russian immigrants, who have come to the US on fiancée visas or as part of the global Jewish community (which really has to do more with demographics that economy), the other substantial group has been Russian work force, who get sponsored by American corporations and come to the USA to work. This has been especially true for scientists of all kinds, engineers and doctors. They do largely fall behind Indian counterparts (with the exception of science field) due to obvious English language problem, but their number is still substantial. In regards to economic consequences, I would like to draw a special attention to the following:  

1) Since people who left Russia to work in the US are usually the brightest, Russia obviously has been bearing the biggest “brain drain” effect, and that is after substantial government spending on the free higher education

2) American companies have been getting competitive advantage, hiring cheaper labor than that provided by US nationals. This is especially true in the case of software specialists. Because things change so fast, and it's easy to learn new things, so companies are not looking for any specific knowledge. According to Bill Gates, “You've got to have an excitement about software, a certain intelligence . . . It's not the specific knowledge that counts.”[20] “The true situation has little to do with "talent," and has a lot to do with employers' desires to hire cheap, compliant labor. Foreign nationals are quite happy to accept lower salaries in exchange for green cards”[21]. So American companies sort of “outsource from within”, hiring cheaper foreign labor to work in the USA.

However, the tendency of the recent years is the “regular outsourcing” in Russia itself. Here, the US economy suggests a nice way of diversification of the heavy resources-based Russian economy. Even President Putin pays specific attention to the matter, declaring “We simply mustn't waste this chance”[22] in a realization that Russia's natural resources can't last forever, and high tech is something, that the Kremlin has all the resources to develop. Indeed, Russia offers as many science and technology graduates per year as India - 200,000 (although Russia is 80 percent smaller by population), as well as the low cost of rent, services and salaries - roughly one-fifth of Western prices[23]. So the industry is growing – not only the giants like Intel, Microsoft, Hewlett-Packard and Schlumberger have their offices in a Russian “Silicon Forest” Akademgorodok, but more and more Russian companies get work from the US-based smaller companies. Harpo Productions, Oprah Winfrey's media company, who hired Siberia-based Axmor to build a Web portal, is case in point. "We didn't really know who Oprah was," says Andrey Kanonirov, Axmor's project manager. "But we know who she is now."[24]

All in all, the conclusion that can be drawn from the above-developed case studies, is that the US influence on the Russian economy is mostly beneficial. It stimulates the Russian economy in general, being its stronger competitor. It stimulates certain industries within the Russian economy, providing investment in the industries that need funding. It stimulates the inception of the new and development of the young industries (as in the case of “Silicon Forest”). It provides the example of tools of operation for those industries (ideas, standards, laws). And it provides an accessible and profitable market for Russian sovereign fund’s investment.

 Meanwhile, the most sensitive thing for Russia to watch is the position of the US dollar. But here, Russia is not alone, as the rest of the world is in the same shoes, anticipating the direction in which the US dollar would go.

 

---