Asia Times: Sustainability of Russia's economic growth questioned


	December 23, 2000	atimes.com

Central Asia/Russia

Sustainability of Russia's economic growth questioned
By Sergei Blagov

MOSCOW - Riding the crest of a wave on high commodity prices, Russian's government has painted a rosy picture of the country's economy.

However, analysts warn that continued over-reliance on oil and gas exports may create a vicious circle of debt and lead to increasing dependence on international commodity prices, a pattern repeated all over the Third World.

In 2000, Russia's gross domestic product (GDP) annual growth is expected to reach 7 percent, while industrial output is up by 10 percent year-on-year, says Russian Prime Minister Mikhail Kasyanov. The average revenue of Russians is also up by 10 percent, he added.

The Russian economy appears to have picked up after a decade-long decline. In 1999 Russia recorded 3 percent GDP growth, which nonetheless amounted to a mere US$180 billion.

The year 2000 is likely to be a very good year, probably the best of the previous decade, as investments were up some 20 percent, while the industrial sector saw growth of 40 percent, says Mikhail Delyagin, an economist who heads the Institute of Globalization Problems.

Moreover, high prices for its gas and oil exports have boosted Russia's revenues. In 2000, the foreign trade surplus is expected to reach an unprecedented $60 billion, compared to $30 billion for the previous year. Correspondingly, the nation's gold and hard-currency reserves have risen to nearly $30 billion, almost tripling 1998's level, according to the central bank.

In terms of economic growth, this year was a sort of showcase for President Vladimir Putin, who took over the Russian Federation in the aftermath of Boris Yeltsin's surprise resignation on December 31, 1999.

The country's economic financial health has improved significantly since the 1998 crisis, largely due to high world market prices for its main energy and commodity exports. Nonetheless, the year 2000 was lost for the reform process, and growth was largely driven by high commodity prices, though this was not sustainable, says Delyagin.

Yet another potential challenge to the sustainability of Russia's development is the country's foreign debt totaling about $150 billion owed to Western governments and banks, to the World Bank and the International Monetary Fund. This debt represents roughly four fifths of the country's GDP. In 2001, Russia will spend 25 percent of budget revenues on servicing its foreign debt, Kasyanov said.

A consensus has emerged among the leading industrialized nations that Russia is neither a developing country nor an emerging economy, but a world power, thus it's not eligible for debt forgiveness.

Former finance minister Boris Fyodorov has argued that Russia could service its sovereign debt if it could reduce theft, corruption and capital flight. Russia is "shameless" to beg for debt reduction, Fyodorov said.

Earlier in December, Russia proposed paying off Soviet-era $19 billion in debts to Germany by swapping equity stakes in some of its companies to German businesses. But analysts argue that the debt-for-equity plan should not be taken seriously. The idea of debt-for-shares swap is rather a smoke-screen designed to kill time and avoid technical debt default, which Russia may well face in 2001, Delyagin argues.

Despite the fact that the Russian economy is currently doing well, capital flight still accounts for about $20 billion per annum, the same rate as it was around the time of the financial meltdown two years ago, said Delyagin.

Even though there's a rosy macroeconomic picture, there have been some warning bells recently. By mid-December Russian equities dropped to year lows, as Urals futures hovered close to $22 per barrel.

The government policy of "spending instead of infrastructure investments" is correct, from the point of view of the people who intend to leave Russia in a couple of years, Delyagin claims. But this policy may cause grave collapse of the infrastructure by 2004, he added.

Though in 2000 the country's economy was expanding at the fastest rate since the Soviet Union's collapse, it remains a matter of debate whether Russia would be able to sustain growth with a backdrop of lower commodity prices.

(Inter Press Service)