Will Russia be the next Greece?

[Larry1]

That is the question raised in a report discussed in this blog post in The Financial Times:

Russia the next Greece? It sounds like a long shot. But Russia the next Greece as the subject of a report from an investment bank that specialises in marketing Russian assets? That sounds like a shot in the foot. But it is precisely what Ivan Tchakarov of Moscow-based Renaissance Capital published on Tuesday. And he has solid arguments to support his self-destructive thesis.

In “How Russia may turn into another Greece”, Tchakarov suggests Russia is falling – indeed has fallen – into the middle income trap and that its leadership will adopt a Greek-style borrow-and-spend solution to stay in power. Russia’s economy, he notes, is growing at just 1.6 per cent. He lists the usual suspects among cyclical causes: failure of investment to recover after last year’s elections; fading consumer spending power; the eurozone crisis and the nasty surprise in Cyprus. If those explanations are correct, he says, a relatively fast recovery should be expected as the global backdrop improves.

But Tchakarov doesn’t think those explanations are correct. He thinks something much more pernicious, much less benign, is at play: the middle income trap. Tchkarov draws on a recent study by the National Bureau of Economic Research to show that the middle income trap – the point at which emerging economies fail to keep growing – is sprung when per capita GDP reaches about $16,000. And he notes that Russia’s per capita GDP will reach $16,016 in 2013.

The NBER study suggests that countries that have gone through this experience have seen GDP growth drop by about 62% from the seven years preceding the middle-income trap to the seven years following the middle-income trap. The seven-year average annual pre-middle-income-trap growth in Russia is around 4.3%, although this average is pushed down significantly because of the significant economic contraction in 2009. We therefore use 4.5% as the baseline pre-middle-income-trap growth rate. A slowdown in GDP growth of a similar magnitude to that observed in Eichengreen et al.’s study would yield a post-middle-income-trap average growth rate of only 1.6%, i.e. exactly in line with Russia’s GDP growth in 1Q13.

The numbers, then, are ominous. And Russia, he notes, is much worse placed in this regard than its peers. For example, RenCap expects China to hit the middle-income trap only in 2020, Brazil in 2024 and India in 2038.

There is one attenuating circumstance: Russia’s demographics are so awful that per capita GDP will grow more quickly than national GDP in coming years. Nevertheless, he expects per capita GDP to average 1.9 per cent a year over the next decade – much less than the average of 5 per cent over the past decade. Which leads him to his dismal conclusion:

This may force Russia’s current leadership to rely on rising debt to sustain itself in power, much as Greece’s main political parties did in 1980-2010. With the possible threat of a step backwards in pension and other reforms, the implementation of which could lead to Russia avoiding the middle-income trap, we think there are signs that Russia may follow the Greek model.
 

http://blogs.ft.com/beyond-brics/2013/05/21/rencap-russia-the-next-greece/?#axzz2TxGrNi7c

Hat tip to Tyler Cowen: http://marginalrevolution.com/marginalrevolution/2013/05/assorted-links-798.html

[Shadow]

He does not mention of course that Russian debt is a fraction of Western debts and for Russia to land in a Gree situation they would first have to built an American size debt....

[The Natural]

He does not mention of course that Russian debt is a fraction of Western debts and for Russia to land in a Gree situation they would first have to built an American size debt....

Yes, but USA can do what they do for now because the US dollar is the world's reserve currency.
Seems to me that most countries face problems as they all print money like crazy and add debt.....