MONTREAL - Near-term economic growth in Russia will be consumer-driven, as
government spending and transfer payments, together with an unwillingness to
raise taxes, will lift disposable income and real wages in the run-up to
parliamentary and presidential elections.
That is the consensus of three authoritative public policy studies by different
Moscow research centers, according to the Russia newspaper Nezavisimaya gazeta.
Also, economic growth is not foreseeable, and a new crisis is increasingly
likely.
According to the newspaper, political uncertainty over the presidential
elections next year, in addition to a general mistrust of the investment
climate, is responsible for a decline in
investment. The privatization plan announced with great fanfare in 2010 was
expanded this year, but the full plan has still not been authorized and may
undergo further modification before approval.
Newly released economic statistics from Russia point to a stall in the economy,
and there is a consensus inside and outside the country among independent
experts that things will likely get worse before they get better.
Paradoxically, business confidence inside the country is higher than a year
ago. The Purchasing Managers Index (PMI) in manufacturing dipped below the
neutral level of 50 in August but remained expansionary at 52 in the service
sector.
Gross domestic product (GDP) during the second quarter of the year grew only
3.4% over the same period in 2010, compared with a 4.1% growth rate in the
first quarter. Russia is the slowest-growing of the BRIC (Brazil, Russia,
India, China) countries. A major reason why is that that oil and gas make up
about one-sixth of its GDP (the figure for Brazil, for example, is one-tenth)
and two-fifths of government revenue; and world prices for these energy
resources have been falling.
The price of Urals blend, Russia's benchmark export product, has been
oscillating lately around $110/barrel after hitting a high near $123/barrel in
April. Commerzbank has estimated that a $10 decline in the price of oil
increases the government budget deficit by 1.5% of GDP, while a separate study
last year estimated that such a decline also slows overall economic expansion
by 0.5%.
Thus last week the economic ministry warned that a hypothetical negative world
economic scenario next year, with an oil price decline to US$60, could stymie
economic expansion and lead to a "substantial" devaluation of the rouble.
Finance Minister Alexei Kudrin affirmed the estimate publicly in St Petersburg.
Nevertheless, President Vladimir Putin earlier this month projected GDP growth
at 4.2% to 4.3% for calendar year 2011. This is slightly higher than the
independent international consensus. The World Bank expects the Russian economy
to grow by only 4% this year, with the rate falling to 3.7% in 2012.
The rouble-denominated MICEX stock index in Moscow closed at 1,507 yesterday,
down from a high of 1,860 in early April after breaking to the downside through
a combined medium- and long-term support at 1,525 (short-term support still at
1,430), while the dollar-denominated RTS was at 1,503, down from 2,124. The
fact that they are at nearly the same nominal level yet with radically
different highs for the year reflects the rouble's weakness. Indeed, the rouble
has closed down against the central bank's dollar-euro basket for nine
consecutive trading days, falling 5% in two weeks.
The central bank's current target "corridor" for the rouble between 32.15 and
37.15 to the dollar in a "managed float", where the market is in general
allowed to determine its value while the central bank, rather than trying to
influence it on a day-to-day basis, intervenes so as to alter overall patterns
in the fluctuation or to reduce the effects of external economic shocks.
The Customs Union with Kazakhstan and Belarus has so far had little effect on
the Russian economy. Ukraine's new orientation towards negotiating a free trade
agreement with the European Union will draw away an important potential anchor.
Only smaller, further-flung economies such as Kyrgyzstan and Tajikistan have
expressed an interest in joining the Customs Union, which remains mainly a
multilateral fig-leaf for managing Russia-Kazakhstan economic relations. This
is, in fact, more a political than an economic union.
According to the World Bank, a series of simulation exercises showed that the
implementation of the union would put brakes on trade with third countries,
weakening the international position of its participants. Moreover, their
membership in the Customs Union will only complicate their individual attempts
to join the World Trade Organization, while the prospect of their adhesion en
bloc lacks a well-defined organizational mechanism.
The fact that Russian industry is generally uncompetitive on world markets and
the dependence of the country's trade turnover on natural resources are
disincentives for Moscow to embrace a global trading regime. And Georgia, where
Russian troops in South Ossetia and Abkhazia have only cemented the Kremlin's
grip on these regions, continues to block Russia's bid for World Trade
Organization membership.
Dr Robert M Cutler (http://www.robertcutler.org),
educated at the Massachusetts Institute of Technology and The University of
Michigan, has researched and taught at universities in the United States,
Canada, France, Switzerland, and Russia. Now senior research fellow in the
Institute of European, Russian and Eurasian Studies, Carleton University,
Canada, he also consults privately in a variety of fields.
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