Statistical data encouraged everyone, but it must have brought particular joy to President Putin, with Russia emerging as leader in terms of GDP growth

Analytical department of RIA RosBusinessConsulting

On Monday, the Federal Statistics Service reported an unexpected news. It turned out that Russia was the leader in GDP growth among the world’s industrial countries in the first quarter of the year, and it had the highest industrial growth in the first half a year. It seems that the President and economic officials should be rejoicing, but analysts say it
is too yearly to celebrate.
After President Putin set a goal of doubling the country’s GDP, officials have been paying particular attention to this indicator. In March, preparing a forecast for the country’s economic development for 2005-2007, the Finance Ministry said it was unlikely that the ambitious target would be met over the next three years. At that time, economy officials forecast a GDP growth of 5.8 percent, while an annual growth of 7 percent is needed to double the GDP by the deadline. Some government economists believed the GDP growth was directly linked to oil prices. “We are able to achieve a 6 percent growth with relatively low oil prices ($24 per barrel), but this is not enough to achieve 7.2 percent,” Mr. Dvorkovich said in March. However, after reports were prepared on the country’s social and economic
development in January-June 2004, top economic officials breathed a sigh of relief. In the estimation of the Economy Ministry, the GDP increased 7.4 percent during the first six months of 2004 compared to the same period last year. Last week, Deputy Prime Minister Alexander Zhukov even suggesting shifting the deadline from 2002-2012 to 2000-2010.
Meanwhile, Russia’s economy should be compared not to industrially developed countries but to emerging economies. “It is too soon to refer to Russia as an industrially developed country. So, Russia is not the leader in GDP growth among the former Soviet republics, not to mention China,” Yevsey Gurvich, head of the Economic Expert Group, told RBC Daily. Another question is why the GDP began to grow and how long it will last. One of the main reasons is an unprecedented rise in oil prices. The average price for oil was $30.8 per barrel in the first half of the year, which is 15 percent more than last year. And currently oil prices are above $40 per barrel.
“Oil prices are not the main factor. According to our estimates, one fourth to one fifth of the overall GDP growth is connected with a rise in these indicators. If high oil prices drop to normal levels, GDP growth can drop from 6.8 percent to 5 percent,” Mr. Gurvich said. According to Andrey Kozyrev of the Economic Analysis Bureau, market mechanisms begin to work, and those industries that had been lagging behind are now developing in the first place. In particular, the position of the mechanical engineering industry improved greatly in the first half of the year. The country is becoming more attractive to foreigners, and the rising GDP is due not only to high oil prices but to changes in the country’s overall macroeconomic climate.
Most experts say the prospect of doubling the GDP is quite realistic. So, Mr. Gurvich believes that it could be achieved through raising the country’s innovation attractiveness, reforming natural monopolies, implementing administrative reforms and supporting the non-raw material sector.
But some economists think it is not necessary to double the GDP. “Even the UN, which introduced the term of ‘gross domestic product’ in 1953, believes that this indicator does not reflect a rise in net wealth,” says Sergey Chulok, an analyst at the Institute for Public Development Problems. “As regards Russia, this figure does not reflect how much of the product can be used for the replacement of obsolete funds, in the first place in the housing and communal spheres. It can be that at some point, the difference between obsolete equipment and produced product will be negative, which
means that production does not provide for the basic needs,” he said. In his opinion, it is impossible to improve the country’s economic situation without making significant investments.
Most analysts agree that industrial and economic development are determined by the development of hi-tech sector and investment climate. In this respect, a lot has yet to be done in Russia.