Private Finance and Capital Formation in the Russian Federation in Regional Perspective

At a recent Kennan Institute talk, Leonid Grigoriev, President, Institute for Energy and Finance, Moscow, described the enormous differences in economic development across Russia's regions, and the consequences for that diversity on Russian policy and growth.

"Corrected gross regional product (GRP) per capita can vary up to 30 times" between the most and least developed regions in Russia, Grigoriev said. He identified three main categories of regional development. The first tier includes Moscow and some of the oil producing regions, which have a GRP on a level equivalent to the Baltic nations or Poland. Mid-tier regions typically have advantageous geographical location that facilitate trade, and are similar to stagnant regions in Europe, such as Southern Italy. The lowest tier of economic development typically has poor political institutions and is heavily agrarian, and includes regions in the North Caucasus and Siberia. However, even in the upper tier regions, Grigoriev stressed, there is great inequality in economic status between individuals.

In light of this, Russia needs to be looked at as a collection of regions with varying levels of economic development. Even within regions, there are islands of prosperity and isolated areas receiving investments. Grigoriev pointed out that in 2003 the city of Moscow accounted for 21 percent of Russian gross domestic product (GDP) and 32 percent of foreign direct investment (FDI). The Volga Federal District, accounting for 14 percent of Russian GDP in 2003, attracted a strong share of capital investments (14 percent), but a much weaker share of FDI (4 percent). The oil-rich regions also vary greatly in terms of the level and method of development and investment. Tyumen Oblast', rich in established oil fields, accounted for 10 percent of Russian GDP, 16 percent of capital investment, but only 3 percent of FDI. Sakhalin Oblast' is the site of new oil and gas fields currently under development, and accounted for 1 percent of GDP, 2 percent of capital investments, but a remarkable 18 percent of total FDI into Russia.

Geography and a Soviet legacy of poorly planned industrial centers have left Russia with tremendous challenges in managing the economic diversity of its regions. Six years of uninterrupted economic growth has led to a renewed interest in Russia's regions, said Grigoriev, but there have been no real accomplishments in addressing the problems of regional inequality. According to Grigoriev, the state has traditionally taken a fiscal approach of boosting consumption in the poorer performing regions through the central budget. This has resulted in a drain of tax revenue away from the richer regions to shore up the poorer regions without actually promoting economic development in those poorer regions. Meanwhile, the richer regions are drained of resources necessary to address problems within their own regions.

Grigoriev acknowledged that there are reasons why Russia does not have a strong regional economic policy. These reasons include: the difficulty of forming such a policy; the perception that the best policy is a unified economic space; the belief that regional and industrial policies are a waste of public money; and the lack of administrative instruments to implement a regional policy. Grigoriev also emphasized the challenge presented by Russia's long border, and the five distinct regions that it includes: the European Union; Belarus/Ukraine; the South Caucasus; Central Asia; and Asia/China. Given the diversity among both Russia's border regions and the states surrounding Russia, it would be difficult to implement a single regional economic policy dealing with border regions, stated Grigoriev.

Instead, it will be important for Russia to promote the development and capabilities of political and economic institutions across Russia. Growth will still be uneven, but local leaders should be given the opportunity to formulate policies that address the challenges their regions face.