Market Overview

OECD Says Russia Must Reform Itself

Russia must undertake widespread reforms in order to meet its long-term development goals, according to two reports released by the Organisation for Economic Co-operation and Development (OECD) on Monday.

One of the OECD reports criticized Russia for not reaching the full economic potential of a country that possesses the enviable combination of abundant natural resources and a highly skilled workforce. The reports stated that Russia needs to implement structural reforms so that its prosperity will be less dependent on commodity prices.

OECD Secretary General Angel Gurría said that "Russia is not yet fully exploiting the growth opportunities offered by its rich endowment of natural resources and the high skill level of its population. Modernisation will reduce the public budget's dependency on oil revenues and stimulate diversification of the economy."

The fact that the Russian government's budget depends so heavily on income from its energy sector has long been a concern voiced by critics of Russian economic policy. However, OECD criticism of Russian economic policy is noteworthy because the advice is being given to Russia as the country hopes to become a member of the Organisation for Economic Co-operation and Development.

Russia is one of the five countries that the OECD invited in May of 2007 to begin discussions on joining the group. Chile, Estonia, Israel and Slovenia already became members of the OECD last year and Russia hopes to join them in the future. While Russian leaders are free to lash out at most critics, they will be less likely to do so against the OECD if they hope to become a member.

The OECD also said that one of the biggest drags on the Russian economy was the country's business environment itself. The OECD said that Russia must make more of an effort to cut red tape, increase privatization of government owned assets and boost foreign trade and investment.

Fighting corruption and improving the rule of law could also go a long way in promoting long term economic growth in Russia. The OECD said that Russia needs to do more to cut down on widespread corruption and to create a legal system that is more conducive to a healthy business environment.

The OECD also called on Russia to fight poverty and income inequality with programs designed to aid the working class. Specifically, the OECD said that Russia should improve support systems for job seekers, while enforcing employment standards and improving workers' ability to bargain collectively with their employers.

One of the Russian reforms that the OECD called for is one that is already being implemented or considered throughout much of the European Union and the United States. The OECD said that the future economic health of working age citizens and children would be improved by pension reforms. Improving the long-term financial sustainability of Russia's pension system by increasing minimum retirement ages is a crucial step in improving the financial outlook of young Russians.

If Russia implements most of the reforms that the OECD is asking for, it could become one of the world's biggest economies.

ACTION ITEMS:

Bullish:
Traders who believe that the OECD reports will prove to be a wake up call for Russia's leaders might want to consider the following trades:

  • Russian stocks like Mobile TeleSystems (NYSE: MBT) and Mechel OAO (NYSE: MTL) could climb higher if the Russian business environment improves.
  • Investors who would prefer to hold a basket of Russian stocks could buy the Market Vectors Russia ETF (NYSE: RSX).

Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

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