Russia’s economy, like the world economy as a whole, fell off a cliff during the first half of 2009, with GDP down roughly 10 percent. It’s a movie the country has seen before: GDP fell more than 40 percent following the Soviet Union’s collapse, in 1991, and in 1998 Russia defaulted on its debt, the ruble plummeted, and economy-wide capacity utilization fell below 50 percent.
Last time around, Russia experienced a dramatic economic turnaround: GDP grew at an average annual rate of 7 percent between 1998 and 2007, vaulting the country to 53rd (from 72nd) in the world rankings of wealth. Wages increased strongly as well, with disposable income rising 26 percent a year in nominal terms.
Pulling off a similar rebound will be more challenging now. Even before the global downturn, capacity utilization was approaching 80 percent, and the days of relatively easy expansion through better use of the existing capital stock were drawing to a close. An increase in the size of Russia’s workforce, which accounted for almost one-third of the growth in real per capita GDP over the past decade, was going into reverse. In fact, Russia’s labor force could shrink by as many as ten million people by 2020. The financial crisis has made raising capital for investments more difficult and has battered commodity prices—including those of oil, metal ores, and coal. Commodities collectively represented around 20 percent of Russia’s GDP in recent years. Now Russia must grow by making better use of labor and capital resources—in short, higher productivity. The McKinsey Global Institute (MGI) has twice studied Russian labor productivity: first in 1999 and now in 2009. During the intervening years, economy-wide labor productivity increased to 31 percent of US levels, from 22 percent.