KEY TERM AND WHY I AM INTERESTED IN IT While studying Russia for the GBCA, it has become increasingly obvious that everyone generally feels that Russia’s main (and some may say only) contribution to global trade is in raw materials (Lally, 2012). I am curious to learn more about raw materials and what makes Russia such a heavy player in this arena.
EXPLANATION OF THE KEY TERM Raw materials are “inventory items that are used in the manufacturer’s conversion process to produce components, subassemblies, or finished products” (Satterlee, 2009). These inventory items are “unfinished goods” such as “a steelmaker uses iron ore and other metals in producing steel” (Raw material, 2006).
When determining whether to conduct business in a particular region, the availability and relative proximity to raw materials should be a determining factor in the decision making process. While it can be beneficial for emerging businesses when the cost of raw materials is low in a particular region, it can become financially problematic when the vast majority of a nation’s economic system is wrapped up in the production and cost of raw materials.
MAJOR ARTICLE SUMMARY This article is a general overview of the Russian economy as of December 2008 that reflects on the causes for a “slowdown” the preceding October. Even though there was a “slowdown” in the economy, growth was still taking place as evidenced in the GDP. For October of that year, GDP growth was 5.9% relative to the 7.7% seen in January-September. The price of oil and raw materials fell during that period which accounted for a greater decline in exports. Retail sales and agricultural output seemed to be carrying the weight of the economy during the last quarter of 2008. Industrial outputs and manufacturing took a dive and the overall outlook from the business sector showed a considerable lack of confidence and access to credit. Real wages were up but so was unemployment. “At 6.1%, the unemployment rate remains relatively low, but the speed at which the labour market is deteriorating will hit consumer confidence over the coming months” (Russia Economy, 2008). Inflation appeared to have stabilized and the central bank forecasted a drop in inflation even further from the current 14.2% to 13% by the end of the year. Even though overall inflation numbers appeared to be headed downward, the value of their currency fell with it. “With the rouble 11% weaker against the US dollar at the end of November than three months earlier and likely to weaken further, the resulting inflationary pressure will at least partly offset the benign impact of falling commodity prices” (Russia Economy, 2008). The prices for both raw materials as well as oil continued to drop which, while negatively impacting a large portion of the Russian economy, did account for a “decline in industrial producer prices [that was] seen in September was even more pronounced in October, with prices falling 6.6% month on month, on top of a 5% decline in September” (Russia Economy, 2008). Even though industrial prices for production dropped considerably during this period, manufacturing prices didn’t share the same benefit, seeing only a 2.1% change in October while still showing a 23% increase from the previous year.
DISCUSSION
DISCUSSION 1: As stated in the text, “companies planning expansion overseas must conduct substantial research on the availability of the raw materials in that location” (Satterlee, 2009). If the availability and low transport costs of raw materials were the deciding factor in doing business in Russia, the preponderance of these materials would make the decision relatively easy. Due to this abundance, it’s easy to keep transport costs low and maintain close proximity to the resources.
Unfortunately for Russia, and as several of its leaders have referenced, an economy so dependent on raw material production is relatively unstable. Because raw materials tend to be a “natural resource” in Russia, the refinement and distribution of these materials are a domestic industry. As we learned in our text, “firms involved in the refinement or distribution of raw materials are especially at-risk” (Satterlee, 2009). As President Medvedev stated in 2009, as oil and gas prices start to take a dive, their raw materials-based economy begins to face challenges “plunging” them into crisis (Asia News Monitor, 2009). Putin shared similar concerns in 2011 when he stated, "export of unprocessed raw materials can't be an engine of growth any more” (Xinhua News Agency, 2011).
DISCUSSION 2: In the main article of my discussion, it became evident that Russia was feeling the same economic slump as the rest of the world. Unemployment was on the rise, their currency wasn’t performing well competitively, and their manufacturing costs were seeing astronomical growth year over year attributed to the decrease in raw material cost. A year later Russia was still trying to find its role in the “changing energy world” with the prediction from the founder of a former Russian oil giant, Mikhail Khodorkovsky, that, should it continue such a reliance on raw materials, Russia “could wind up like Namibia” (Petroleum Intelligence Weekly, 2009). Khodorkovsky stated how important it would be for Russia to find new sales markets and improve their political relationships in Western Europe as the world is moving toward a system that reduces dependence on one supplier. By 2011 it did not appear as though Russia had done much to curb their dependence. Current President Vladimir Putin stated emphatically in May of that year that they can’t depend on raw materials production to help them grow as in the past. He made it clear that a “raw-material economy” not only keeps them under the rest of the world in terms of division of labor but also keeps them from moving into the arena of human capital. (Xinhua News Agency, 2011). In June of 2011, J. Sapir did an analysis of Russia’s raw material prices for Studies on Russian Economic Development where he called for a correlation between domestic and export prices. Sapir claims that a simple fix of uniform prices or unified tariffs can fix the inherent structural problems. Russia has had a history of pricing mismatches even on areas where they provide tariffs and subsidies. One example Sapir mentioned was the disparity between the export of lumber from Russia and the subsequent import of furniture made from that lumber. Sapir makes note that due to Russia’s population size, it is impossible for them to establish long-term growth dependent so heavily on raw material processing. Sapir called for a “more diversified structure of exports (raw materials plus products received from processing these raw materials)” to help “reduce the volatility of export income and enhance [their] economic stability” (Sapir, 2011). Ultimately Sapir makes it clear that the Russian “problem of domestic prices…cannot be solved in isolation (without a global approach to economic development)” (Sapir, 2011). Even upon Russia’s accession to the WTO, it was still abundantly clear that the primary thing Russia brought to the table was its raw materials. Russia didn’t feel that joining the WTO would be a short-term solution to their export problems, “because aside from raw materials, Russia manufactures little that is in demand globally” (Lally, 2012). As was stated in the previous articles and reiterated here, Russia’s success in the future will be dependent upon their ability to transition from raw material-dependent economy to one that maximizes their economic balance and establishes industries that are in demand globally.

References:
Lally, K. (2012, Jul 11). Russian lawmakers vote to join the wto. Pittsburgh Post - Gazette. Retrieved from http://www.liberty.edu:2048/login?url=http://search.proquest.com.ezproxy.liberty.edu:2048/docview/1024347719
Putin slams russia's raw-material economy. (2011, May 26). Xinhua News Agency - CEIS. Retrieved from http://www.liberty.edu:2048/login?url=http://search.proquest.com.ezproxy.liberty.edu:2048/docview/868770818
Raw material. (2006). In Dictionary of Finance and Investment Terms. Retrieved from http://www.liberty.edu:2048/login?url=http://www.credoreference.com/entry/barronsfin/raw_material
Russia. (2009, November 30). Petroleum Intelligence Weekly, 48(48), 7. Retrieved from http://www.liberty.edu:2048/login?url=http://go.galegroup.com.ezproxy.liberty.edu:2048/ps/i.do?action=interpret&id=GALE%7CA214121445&v=2.1&u=vic_liberty&it=r&p=ITOF&sw=w&authCount=1
Russia economy: October slowdown. (2008). New York, United States, New York: The Economist Intelligence Unit. Retrieved from http://www.liberty.edu:2048/login?url=http://search.proquest.com.ezproxy.liberty.edu:2048/docview/366316894
Russia: Medvedev displeased with russia's economic structure. (2009, Jun 05). Asia News Monitor. Retrieved from http://www.liberty.edu:2048/login?url=http://search.proquest.com.ezproxy.liberty.edu:2048/docview/1018257014
Sapir, J. (2011). Harmonization of domestic and world prices for raw-material products in russia's strategy of economic development. Studies on Russian Economic Development, 22(6), 587-596. Retrieved from http://www.liberty.edu:2048/login?url=http://search.proquest.com.ezproxy.liberty.edu:2048/docview/905009477
Satterlee, B. (2009). Cross Border Commerce. Roanoke: Synergistics. Print.