Captives of World Commodity Market

In most respects, Australia, the country where I come from, and Russia have very little in common. Australia is dry and hot, Russia is cold and wet. Australia gets in the news because of kangaroos and crocodiles, Russia gets in the news because of coups and nuclear disasters.


But, in one economic respect, Australia and Russia are very similar. We are both captives of the world commodity markets.


Neither country has very much to sell on world markets except for raw materials. About 60-70 percent of Russia's exports are bulk commodities like crude oil and oil products, natural gas, uranium, coal, gold, ferrous and non-ferrous metals. Australia does just about the same thing except that it exports a lot of wool instead of oil.


One Australian executive in Moscow put it bluntly when he said that Australia and Russia were two huge quarries located at opposite ends of the earth.


In Australia, dependence on world commodity markets has long been recognized as a serious danger. Prices on these markets are much more volatile than manufactured goods markets. A 1 or 2 percent cut in industrial production causes a surplus in commodity markets which sends prices tumbling.


The flip side is that commodity markets can rise sharply as well as fall. This is indeed what is happening now. After languishing for the last three years in response to the world economic slowdown, world commodity prices have suddenly started to boom.


Aluminum this week jumped over $2,000 a ton. A year ago it looked like it would drop below $1,000. Oil is climbing back up from last year's lows of $11 to a respectable $17 a barrel and could climb higher. Those of us who read the world nickel price indexes will know those prices are also at record highs.


In Australia, businesses are delighted. The Australian dollar just leapt to its highest for quite a while, and the economy is growing fast.


In theory, Russia should be feeling the same positive effects as Australia, but it will also face a series of difficult social and policy problems.


If Russia is to share in the world commodity upswing it will have to keep itself open to foreign trade. This means continuing liberalization of commodity exports, especially an end to the licenses and quotas on crude oil and oil products.


Policy makers will be placed in a difficult position as the price of commodities which are inputs into Russian manufacturing industry rises in line with world prices. The government already levies export taxes on most commodities. It will come under pressure to maintain or even raise them, both to increase its own revenues and to keep domestic prices below world levels.


The government will also have to make sure that the benefits of the commodity price upswing flow to the rest of the economy, not just to those firms and regions that are exporting commodities.


If Russia had a functioning tax system, this would happen naturally. The increased export earnings would raise tax collections generally and provide money for other sectors.


But as things are, the country could also be deeply split between relatively prosperous commodity-producing regions and the old smokestack and defense industry towns. Left opposition leaders are already accusing the government of destroying the manufacturing industry and turning Russia into a Third World economy.


Judging from the Australian experience, a strong commodity sector could actually hurt the rest of the economy. More hard currency earnings will keep the ruble relatively strong. This is good for consumers, but it could be bad for Russian manufacturing industry since it makes manufactured imports cheaper.





Geoff Winestock is a Moscow-based correspondent for the Journal of Commerce.