28 August 2003 10:19
No Accidential Boom
The excellent situation on the world raw materials and financial markets led to rapid growth in the first six months of 2003. The Russian economy managed to transform this positive outside impulse into confident investment and consumer market growth.
Ekaterina Shokhina
Prime Minister Mikhail Kasyanov proudly reported highly respectable numbers for the Russian economy in the first half of 2003. The GDP grew by 7.2% compared to the same period in 2002, though it has only grown by 4.1% for this year. In addition to GDP growth, Kasyanov noted a strong growth in investments and a confident upward trend in manufacturing.
The fuel industry saw the biggest expansion in output (10%). Next came ferrous metals, which grew by 9.5% versus the same period last year. The top three was rounded out by machine tools and metal products. In recent months their output rates have increased considerably, by 7.6%. Energy and electricity also demonstrated fairly strong results for January to June, and production in the industry grew by 7.1%. Only light manufacturing showed negative growth, as production fell by 0.8% when the ruble’s growth versus the dollar led to an increase in dollar imports from Asia.
According to this year’s numbers, GDP growth should reach 6%, or so believes German Gref, head of the Ministry of Economic Development. One would think the first step toward the goal of doubling the GDP growth rate set by Putin earlier this year has already been taken. However, the Ministry of Economic Development is already forecasting a decline in economic growth and a rate of 5%. The government also continues to link its growth forecasts to world oil prices, which promise to be significantly lower next year.
External stimuli
Experts attribute the sudden, dramatic economic growth to a uniquely advantageous situation on foreign markets. “Three sets of factors had a positive influence on the economy,” noted Nikolai Kascheyev, an analyst at Trast Investment Bank. “First of all, the high prices for raw materials early in the year and increased exports, not just of oil but also of ferrous and non-ferrous metals. Secondly, the strength of the euro versus the dollar which encouraged imports. Finally, low interest rates for capital on the world market, which made it easier for Russian corporations to get access to Western loans and made Russian assets more attractive to investors.”
The total cost of exports in the first six months of 2003 reached $61.3 billion, 28.5% more than last year. The influx of hard currency into Russia increased the country’s gold and currency reserves. As ruble emissions are strictly tied to the amount of incoming hard currency, the money supply expanded by approximately 15% and the amount of money flowing through the economy increased substantially.
The expansion of the money supply did not lead to any big jumps in the inflation rate. According to figures for this year, actual inflation will exceed the official target rate of a 10-12% increase in consumer prices. However, for the time being, inflation continues to slow gradually. “The expansion in the money supply did not lead to increased inflation, because at the same time a de-dollarization occurred as people got rid of hard currency,” recounted Andrei Belousov, Director of the Center for Macroeconomic Analysis and Short-Term Forecasting.
The investment boom
One of the most exciting trends for 2003 is the clear tendency toward increased investment. Investment in basic funds in the first half of 2003 increased by 12%, as compared to only 3% last year. Investment demand was mostly defined by the export industries, where companies have significant resources of their own, strong credit ratings, and are very attractive to investors. Exporters in turn became more active investors in industries related to their own, first and foremost, in machine tool builders.
According to the figures for the first half of 2003, the influx of capital into Russia exceeded capital flight for the very first time. In this context, reserves expanded and the monetarization of the economy and liquidity on the financial markets remained high. The cost of domestic credit fell as well, and this allowed companies to attract more funds within Russia. Statistics show that this new burst of activity was felt in all sectors of the Russian economy.
“Companies have finally started to think about how to increase the competitiveness of their products. To do this, they need to optimize production and invest in fixed assets,” believes Anton Struchenevsky, an economist at Troika Dialog Investment Company. “This time, economic growth is occurring in the context of active investment on the part of companies themselves and is extremely health in nature.”
“Everyone has understood,” says Evgeni Gavrilenkov, Head Economist at Troika Dialog Investment Bank, “that it is basically no longer possible to grow by taking full advantage of existing capacities. As a consequence, imports grew and Russians’ increased incomes are changing demand patterns. Russian companies have begun to fight for survival.”
Gavrilenkov offers increased unemployment figures as proof that the Russian economy has changed in quality: “Over-employment is decreasing and the health of the private sector is improving. The 7% growth in manufacturing is evidence of this, along with the 5% increase in unemployment.”
Nonetheless, direct foreign investment in Russia remains insignificant at less than 1% of the GDP. This figure is several times less than that of the leading transitional economies.
The increase in the profitability of Russian companies, brought about thanks to the increased monetarization of the economy, led to growth in Russians’ personal incomes. According to the State Statistics Committee, incomes increased by 14% in the first half of 2003, which meant that consumer spending also increased.
Troubling symptoms
Experts we polled saw the outlook for future growth as unclear. They all emphasized the fragility of the economy’s structural changes. “The positive impulse in the first six months of this year is so great that there is little reason to expect any dramatic slowdown in economic growth during the second half of the year. GDP growth will likely exceed 6% for the year. However, we shouldn’t forget that the positive transformation of the economy is still very fragile,” warns Kascheyev from Trast.
“Economic growth remains unstable,” agrees Georgi Boos, “because it is still based on positive factors on foreign markets. If these factors change, growth will fall dramatically.” Several negative trends have already emerged that could seriously limit future growth. “In the second half of 2003, oil prices will fall, the euro factor will come into effect, and growth will slow,” believes Belousov.
The YUKOS scandal could have a negative effect on Russian economic growth. “The YUKOS situation demonstrated that political risks in Russia remain very high. This has put both domestic and foreign investors on their guard. The changes in gold and currency reserves make this very clear. Since June the trend has shifted and capital began to leave the country. In recent months the stock market and domestic liquidity have fallen. It is possible that the
Antimonopoly Ministry’s approval of the YUKOS-Sibneft merger will reassure investors,” argues Struchenevsky. “Nonetheless, I think that the influx of capital will decline in the second half of the year. Overall, the growth in reserves and the money supply will slow and as a result interest rates will rise.”
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