MONTREAL - Positive Russian
economic numbers for May, showing strong
industrial production, an improving outlook and
rising investment, mask underlying weaknesses -
notably a weakening price of oil, whose export
revenues are central to to the economy and
government spending.
Industrial production was up 3.7% year on
year, beating the consensus expectation of 1.7%,
while the HSBC/Markit purchasing managers' index
(PMI) rose to 53.2, the highest since March 2011.
Investment in fixed capital for the January-March
period rose 19.9% year on year, up on the 18.8%
for the last quarter of 2011. Retail sales in May
were up 6.8% year on year, bettering April's 6.5%
increase, while May unemployment dropped to to
5.4% from the previous month's 5.8%. The sales increase
was
due mainly to motor vehicles and parts, while the
best employment sectors were finance, insurance,
and real estate. Real disposable income in May
grew 8.1% year on year, up from April's 4%.
At
last week's St Petersburg International Economic
Forum, President Vladimir Putin paid only lip
service to recognizing the economy's long-term
underlying problems. To some surprise, he said the
state's dependence on revenue from energy was not
necessarily its biggest weakness. Hydrocarbon
exports account for nearly half of the federal
budget, and two-thirds of all export revenue. Oil
and gas have risen to represent one-fifth of all
exports in 2011, creeping up from one-sixth just
over a decade ago, and nearly as great a
proportion of the country's gross domestic product
(GDP). Meanwhile the price of oil, at around
US$92, is now at its lowest since January 2011
having plunged in the past three months from above
$125.
Putin, however, begged to
differ. "Corruption is the biggest threat to
Russia's development," he said in St Petersburg.
"Here, risks are significantly more serious than
even oil price fluctuations." He was not entirely
wrong, even if part of his intent was only to
assuage foreign industrialists with his good
intentions.
According to Vladimir
Makarov, head of the Russian Investigations
Committee's directorate for control over the
investigation of corruption-related crimes, the
most corrupt organizations are law-enforcement
bodies, followed by health care and social
services, with education and science taking third
place, as quoted by Russia's RIA Novosti news
agency in the days before the summit. Another often obscured
problem that came into the open at the St
Petersburg Forum was the parlous state of Russia's
infrastructure. The country's top transportation
officials went on record with the open secret that
the country's long-neglected infrastructure is a
major brake upon continuing long-term economic
growth, and there is a consensus that this is due
to lack of investment from the private sector.
Russia invests only about
2.5% of its gross domestic product (GDP) in
infrastructure, according to Russian Railways
president Vladimir Yakunin, against around 6% for
the United States and many European Union
countries. A KPMG report last month reveals that
due to infrastructure problems, commercial goods
in Russia can travel only 290 kilometers on
average per day, one-fifth the average daily
distance in Europe.
Between 7% and 9% of GDP is
still lost due to poor roads. (In Soviet times
one-third or more of harvested potatoes would
regularly bounce off their trucks en route to
delivery, and Russia's infrastructure still dates
by and large from that period.)
According to Yakunin,
government-backed private-sector infrastructure
bonds are the way of the future. But Russia
Profile quotes David Fass, CEO of Macquarie Group
in Europe, Middle East and Africa, to the effect
that "the main issue [accounting for lack of
foreign investment in Russia] is horse-and-buggy
regulation and the presence of legions of
rent-seeking officials in the sector." The last phrase is a
euphemism for corruption, and his explanation
applies as much to the infrastructure sector as to
any other.
These problems were
embarrassingly on display at the other end of
Russia just a few days before the St Petersburg
Forum opened, when the roadbed and retaining wall
of a just-opened road, built to connect
Vladivostok's airport with the island where Russia
will host the September 2012 Asia-Pacific Economic
Cooperation summit, collapsed, taking with them
the adjacent facilities and private garages.
Problems with corruption were
whispered around, but of the $930 million
construction cost, over two-thirds of which was
borne by the central government, Prime Minister
Dmitry Medvedev only ventured that this "rich
endowment" did not obviate "a construction quality
[that] was quite low." So corruption and poor
infrastructure are actually fraternal twins in the
Russian economy awaiting the surgical intervention
of foreign investors who shy away while only
Putin, if anyone, can separate them.
But
can he? Medvedev tried to be the anti-corruption
czar when he was president, but he ran into
trouble from Putin's own entourage over a series
of really rather timid reforms that never even
tried to toughen up the law-enforcement bodies
that Makarov said are the worst affected. As the
editor of Moscow News wrote in the run-up to the
St Petersburg Forum, " ... if Putin was going to
undertake major reforms, foreign investors will
reason, it would have [already] happened."
As
for oil and gas, Putin in St Petersburg made his
pitch to the heads of US and European majors,
promising access to Russian resources in return
for access to their international assets,
including capital and technology. Rosneft reached
accords with Italy's Eni and Norway's Statoil at
the forum, supplementing agreements signed over
the past two months. Russian companies would be
interested to gain access to technology in joint
ventures outside Russia, much as China has sought
to do regarding shale projects in the US and
Canada.
Russia has promised tax
incentives for offshore and hard-to-recover
resources, but even this may not be enough. BP
chief executive Robert Dudley, whose company is
seeking a buyer for its stake in the joint venture
TNK-BP due to embroilment in a dispute with some
Russian "oligarchs", put on a brave face.
"The
energy industry takes very big risks and needs to
work with partners," he is reported to have said
at the forum, "and that's not only in Russia but
outside of Russia."
Foreign energy executives
have good reason to question the promises of
Russian riches given Shell's 2006 compelled
transfer of the Sakhalin-2 project to Gazprom,
Dudley's own travails that go back a number of
years, and other maltreatment of foreign partners.
Even as Russia seeks to decrease its budgetary and
economic dependence upon energy revenue, it would
still like to keep output up around 10 million
barrels per day at least into the next decade. But
pipelines are also infrastructure, and the devil
is always in the details.
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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