Moscow News
http://www.mnweekly.ru/
August 18, 2009
On the road to recovery
By Ed Bentley
Russia has just suffered its "worst on record" GDP contraction, but behind the numbers economists are keen to see this as evidence that the crisis has finally bottomed out.
The worse-than-expected second quarter drop of 10.9 per cent saw an increase from the 9.8 per cent year-on-year decline between January and March, but quarterly data offered more reasons to be positive.
"Quarter-on-quarter change in GDP was about zero real growth," said Elena Sharipova, an economist at Renaissance Capital.
The investment bank is predicting a turnaround in the second half of the year, with GDP to be 4 per cent higher than in the first six months, though this would still mean a 5 per cent annual decline in the fourth quarter.
Other indicators are also suggesting that the worst is over, particularly June's year-on-year numbers for manufacturing, construction and transport outperforming May's.
"Electricity consumption went up by 4 per cent month-on-month in July, which is very unusual given the summer season," said Natalia Orlova, chief economist at AlfaBank. "This is a positive sign that the manufacturing industry is starting to accelerate."
Russia is trailing behind European powerhouses France and Germany, which posted 0.3 per cent growth, but this was put down to the additional blow of last year's oil price collapse.
President Dmitry Medvedev again called for reform to reduce dependence on crude, which accounts for the majority of Russian exports along with other commodities.
"We can't develop like this any longer," Medvedev said, Bloomberg reported "It‘s a dead end. And the crisis has placed us in a situation where we will have to make decisions on changing the structure of the economy."
The failure to restructure despite the high growth of the previous decade is likely to continue as natural resources continue to bring substantial funds to the national budget.
"It is going to take a lot of time, probably decades, rather than persevering with this [policy] of lowering the vulnerability to external shocks," said Yaroslav Lissovolik, chief economist at Deutsche Bank.
The Putin-era boom now appears a deterrent to reform and Sharipova believes the government "should try to avoid high growth rates" to diversify.
"A lot of the capital inflows were based on speculation on the rouble, betting that it would appreciate," she added.
Last year the currency depreciated 35 per cent in a managed devaluation and a repeat of this or rouble instability would see a decline in investment.
"The risk from a sharply lower oil price would be for these funds not to go via lending to the real sector of the economy but to go directly to the forex market," Lissovolik said.
He added that the currency was at equilibrium at the moment, while Sharipova warned the rouble could depreciate in the medium term if oil stays at $60-$70 a barrel.
Russia already lags behind other emerging markets in terms of investment and the drop in lending has seen capital formation plummet.
"In our view, this [lower investment] will dampen medium-term growth potential and make it more oil-price dependent," Elina Ribakova, chief economist at Citibank, wrote in a note to investors.
Reducing inflation is a key task for the government and Central Bank to encourage investment and stability.
"Clearly it is necessary to [get] inflation to around 6 to 8 per cent," said Orlova.
The consumer price index remains above 10 per cent for the year and interest rate rises needed to control it would be at odds with the government's plan to promote growth.
"The priority is to boost lending and this is why the Central Bank still continues to cut the rate," said Orlova.
