The Russian Nonfuel Sector: Signs of the Dutch Disease? Evidence from EU-25 Import Competition

It is evident that the Russian economy is largely based on the energy sector. This fact has caused concern in academic circles as to whether Russia is to some degree affected by the Dutch disease, i.e. whether a sharp rise of commodity prices might result in an appreciation of the real exchange rate, which would undermine the competitiveness of manufacturing and could lead to the deindustrialization of the economy. We focus on this possible final outcome, which has not been studied much in the literature so far: We compare Russian industrial import growth (based on figures of the volume of EU-25 exports to Russia) with domestic industrial production growth (disaggregated by industries) in the period from 2002 to 2006. In all manufacturing sectors except electrical, electronic and optical equipment and strongly protected foodstuffs, Russian imports are found to be expanding faster than domestic output. In some sectors, imports have even exceeded domestic production. Import competition is therefore strong and rising. We conclude that Russia may be facing incipient deindustrialization at least in some parts of the manufacturing sector. This could indicate that the Russian economy has contracted the Dutch disease, although it should be noted that other factors could also have driven sectoral changes. While it is beyond the scope of our study to examine whether the other chain links of the Dutch disease hold as well, the study does provide evidence of some movements in the direction of deindustrialization, which is in line with the Dutch disease theory.