Understanding the peculiarities of Russia’s municipal economies can help guide private investment decisions—and public spending.
Russia’s largest cities—those with over a million inhabitants—account for one third of its GDP. But they suffer from unequal levels of investment, and large variations on the quality of their urban environments and public finances. Levels of investment in Moscow are double those of many other large cities, while its public revenues are over seven times higher.
The Economy of Million-Plus Cities: The Right to Develop, a new report by Strelka KB’s Centre for Urban Economy, looks at the factors that have kept Russia’s large cities from flourishing. And it paints a way towards rebooting economic activity across Russia’s municipalities—by focusing on comparable metrics of economic output and taking into account differences in market concentration and economic specialization between cities.
“This is one of the few studies dedicated to the gross metropolitan product of Russian cities,” said Elena Korotkova, director of Strelka KB’s Center for Urban Economy. “Such assessments of urban economies—over several years, in large aspects, and on a large scale—are a rarity in our country. This study is yet another step towards an understanding of what makes up urban economies, what they depend on, and what tools can stimulate their growth.”
The gross metropolitan product—a comparable metric of economic output
In Russia, metropolitan economies are typically measured in terms of metrics that are non-comparable or yield an incomplete picture of economic development, such as average wages or enterprise revenues.
Average wages tell us very little about a city’s economic health: a metropolis with high wages might nonetheless suffer from low productivity.
Likewise, although this metric is used by Russia’s Federal State Statistics Service, enterprise revenue is not reliable enough to understand a city’s economy. For example, two companies manufacturing the same car model for the same price might have a radically different effect on the local economy if the first company built the car from pre-assembled components purchased abroad, while the second company built the car from the ground up. The second company would create jobs, skills and investment locally, while the first would likely extract wealth from the local economy by importing the parts used in the manufacturing process.
The gross metropolitan product (GMP) provides a solution.
Like the GDP, which measures the market value of all goods and services produced in a given country in one year, the GMP looks at the same data on a municipal scale. This figure, while also yielding an incomplete picture of economic health, facilitates comparisons between cities’ economic outputs and takes into account a broader range of factors than wages and profits. It can therefore be instructive for governments and businesses deciding where and how to channel investment.
Beyond that, Strelka KB’s research also found a positive correlation between GMP figures and a city’s ‘urban environment quality’, a metric designed by Strelka KB that measures factors relevant to urban life, such as the state of public infrastructure, the quality of housing, the availability of green spaces and other criteria. This finding adds impetus to the need to boost economic development in Russia’s municipalities.
The research also identified a significant mismatch between GMP growth and public revenues: nominally, the GMP of the 14 largest cities in Russia (excluding Moscow and Saint Petersburg) have, on average, doubled in seven years. Public budgets have only grown by about 50 percent over the same period.
Strelka KB’s report says that this mismatch is rooted in the peculiarities of Russia’s taxation system. Taxes that could generate increased revenue from economic growth (including VAT, income tax, property tax) generate revenue for regional or federal budgets, not municipalities. This removes incentives on local authorities to support municipal economic growth, as the resultant increases in municipal budgets are marginal.
“Today, the cities with population over 1 million provide a third of Russia’s GDP, more than half (54%) of which is created in Moscow,” said Strelka KB CEO Denis Leontiev. “In order to increase the contribution of these cities in the country’s economy, we must support the growth of small and medium businesses, especially in those cities where the basis for development still comes from industrial behemoths. We should also stimulate a steady flow of investments into the most promising fields, and give cities the opportunity to make full use of the value that they create, thereby fulfilling their right to development. We need to start looking at cities as a platform for systemic, comprehensive investments. These measures will allow us to speed up the growth of our cities’ economy.”
Specialization and concentration
The report also looks at the specialization of Russia’s municipal economies, as well as levels of market concentration in each city.
Specialization refers to the dominant economic activity in each city. For example, Krasnodar’s most active economic sector is trade, but in Ufa it is manufacturing.
There are also marked differences in concentration. In Ufa, Novosibirsk, Krasnodar, Chelyabinsk, Voronezh, and Rostov-on-Don, small business’ growth rates exceed those of large businesses. But large businesses grow faster in Omsk, Samara, Kazan, Nizhny Novgorod, and Volgograd.
A clearer understanding of both concentration and specialization can help guide investment decisions—an entrepreneur may have a better chance of building a successful business in Voronezh than in Volgograd. Strelka KB’s report will therefore help investors understand each city’s potential.
It can also support the decisions of municipal leaders, who can use the data to implement local policy to support their most successful industries. A clearer understanding of a municipal economy’s specialization will help guide decisions about training programs and other labour market policies.