by Derrick John Workman

Although a leader in oil and gas exports, Russia may be on the verge of a trade bust.

In the summer of 1998 nervous analysts spoke of a world trade meltdown when a sharp devaluation of the ruble and heavy debt pushed Russia into a deep financial crisis. Today the former Soviet Union is in the eighth straight year of recovery, growing an average of 6.4% per year since the crisis.

Here are seven little-known insights that may well represent storm clouds on the Russian trade horizon.

1. Economic growth slowed to 5.9% in 2005 and, while the underpriced Russian currency is fuelling increased exports, Russia's inflation rate remains high.
2. China being the modest exception, fast-growing economies like Brazil and India are not major customers for Russian exports that totalled some US$250 billion in 2005. Based on 2004 statistics, leading countries for Russian exports are the Netherlands (9.1%), Germany (8%), Ukraine (6.4%), Italy (6.2%), China (6%), United States (5%), Switzerland (4.7%) and Turkey (4.3%).
3. Led by consumer staples (meat), commodities (sugar), machinery and semi-finished metal products, Russian imports are long-term essentials that grew to an estimated $125 billion in 2005. Top importers into Russia include Germany (15.3%), Ukraine (8.8%), China (6.9%), Japan (5.7%), Kazakhstan (5%), United States (4.6%), Italy (4.6%) and France (4.4%).
4. Russian imports of machinery and metal products reveals an underlying trade weakness. Specifically, Russia's old and worn manufacturing base must be modernized or replaced to compete in the global economy.
5. Russia's banking system is weak and does not support the needs of small and medium-sized businesses. Some Russian banks are owned by elitist power barons who often use customer deposits to lend to their own companies, leaving little capital available for smaller-sized entrepreneurs.
6. Both foreign and Russian companies are handicapped by import barriers set by local specialist firms like the Russia Import Company that unfairly control the flow of goods and services into Russia.
7. After the breakup of the USSR, Russia's population growth has declined by over 500,000 to 143 million people. This fact brings into question whether the Russian economy can grow fast enough to compete at the highest levels of the global economy.

And The Winners Are...

Sure Russia has been benefiting from rising oil prices, and has paid off that huge debt that in 1998 had some analysts predicting the end of the world. But consider the three most compelling reasons why some international trade analysts are lowering their expectations for Russia in both the short and long-term.

1. More than 80% of Russia's exports are oil, natural gas, timber and metals. This leaves Russian trade vulnerable to swings in world prices and demand.
2. Russia's economic development has been overly concentrated in Moscow. With only a tenth of Russia total population, Moscow contributes a hefty one-third of the country's Gross Domestic Product (GDP).
3. Finally, foreign investors shy away from Russia because of its corruption and a widespread distrust of institutions in Russia. The arrest of Russia's richest businessman Mikhail Khodorkovsky on fraud and corruption charges plus an increased number of company acquisitions by President Putin's government cause some concern about the stability of the Russian economy.

Perhaps the biggest beneficiaries from Russian trade will be investment analysts who hedge their modest side bets on Russia's future. For example, Claymore Investments includes Russia in its recently launched Brazil-Russia-India-China (BRIC) Exchange Traded Fund. However the percentage of the BRIC ETF's investment in Russia is a mere 5%, with much higher percentages diversified into Brazil (48%), China (33%) and India (14%).