Publication: Monitor Volume: 7 Issue: 222

Although many of the smaller CIS countries have reported very respectable growth rates since the mid-1990s, until 1999 none of the larger economies reported appreciable gains in output. This year and last have been entirely different. Over the course of these last few years, the turnaround in these three large economies has been spectacular. GDP rose 8.3 percent in Russia last year and 9.6 percent in Kazakhstan. First-half numbers show the trend continues. Although first-half growth has slowed slightly in Russia this year to 5.9 percent, Kazakhstan and Ukraine are reporting the fastest growth of any medium-sized economies in the world. Kazakhstan enjoyed 14.0 percent growth in GDP in the first half. Ukraine, which after a decade of decline, finally reported an upturn in GDP in 2000 as aggregate output rose 5.8 percent, registered growth of 10.8 percent in the first six months of this year. (CIS Statistical Bulletin #18, September 2001.) By the end of 2001, the Russian, Ukrainian and Kazakh economies will have increased output by 20.3, 14.6 and 25.6 percent, respectively, over the last three years. Kazakh government officials are even starting to compare their performance to that of Hungary’s, the current economic leader in Central Europe.

What is going on in these economies? Kazakhstan and to a lesser extent Russia have benefited from higher world market prices for oil. Both countries are also enjoying higher oil output as well, though only in Russia’s case is higher output unambiguously tied to the effects of higher oil prices. In Kazakhstan, investment decisions made in earlier years have led to increased output this year.

Nonetheless, higher oil prices are only part of the story. Ukraine, where growth has been more rapid than in Russia and almost as dynamic as Kazakhstan’s, is a net energy and oil importer. Terms-of-trade losses from higher oil prices have been appreciable in 2000 and 2001. On a macroeconomic level, growth in all three countries has been fostered by a combination of competitive exchange rates and declining inflation, which has been made possible by sensible monetary policies and prudent budget management. All three countries are currently registering surpluses on their central government budgets. Any latent financing needs are primarily being met through privatization revenues.

Sharp declines in real effective exchange rates after the Russian financial crisis in August 1998 have definitely contributed to growth. Between 1997 and 1999, the real effective exchange rate fell 44.3 percent in Russia against the dollar and 44.4 percent in Ukraine. In all three countries, the decline in the real effective exchange rate contributed to a substantial boost in the competitiveness of commodity exports, especially steel, non-ferrous metals and chemicals. However, enterprises had to respond to these market signals. The big surprise in these countries has been that large, formerly state-owned enterprises have been able to take advantage of the depreciation of the exchange rates to boost exports, output and profits.