(Poll of January 29 – February 10, 2003)

Deceleration of GDP and industrial growth in 2003, and their slight acceleration in 2004 are perhaps the most important results of the latest Consensus-forecast. However, the range of variations in predicted indicators of growth happens to be rather narrow. The experts believe that rate of growth of GDP in 2003 will decline to 3.9% (against 4.3% in 2002), but in 2004 it will go up to 4.1%. Industrial production will grow by 3.5% in 2003 and by 3.9% in 2004 (the 2002 increase was 3.7%).
Behind these minor fluctuations in general indicators, there are some major changes in mechanisms of economic growth. In 2002, the economy was driven mostly by export and consumer demand, and the latter was met largely with imported goods. Capital investment was made sluggish mainly by low investment activity of companies in fuel, ferrous and non-ferrous metals. The poll participants expect that in 2003, investment demand will gradually gather speed, while consumer and export demand will slow, and imports will take the lead.
Consensus-forecast indicates that the rate of increase in real personal income will slow from 8.8% in 2002 to 6.6% in 2003-2004. Consequently, retail sales (which are the main component of consumer spending) will also grow at a slightly slower pace: by 7.7% in 2003 and by 7.3% in 2004 (instead of 9.1% in 2002). On the contrary, capital investment will accelerate to 5.2% in 2003 and to 5.9% in 2004 (after its nose-dive to 2.6% in 2002).
Nevertheless, the analysts don’t believe that strong domestic demand (at least a 6-7% annual rate) will be able to back the increase in domestic supply at the same rate. According to the Consensus-forecast, imports in terms of value will increase by 9.6% in 2003 and by 7.0% in 2004, which will be faster than domestic demand. On the contrary, exports will grow merely by 0.8% in 2003 and are even expected to decline by 0.2% in 2004. Accordingly, contribution of external demand to GDP in 2003-2004 will be insignificant, and low competitive power of local producers that are serving domestic demand will leave them unable to use the opportunities of rapidly growing domestic market.
Our poll proved that assessments of competitive power of the Russian economy had become much poorer even in the last three months. In the last poll, only 43% of all respondents had pointed at decline in competitiveness “in recent four quarters”, but this time their share reached 71% (meanwhile, none of the experts believed that competitiveness had increased).
Lack of improvement in enterprise efficiency bars the Russian economy its way to rapid development. The Russian Federal Government is obviously concerned about this problem, but the experts have not yet seen any particular advance to its solution. About 70% of all poll participants believe that there were no changes in efficiency of government policy last year. The share of analysts, which noticed improvements in investment climate, declined from 43% in the last poll to 33% now, indicating that this efficiency was not so high.

In spite of record high oil prices in January-February 2003, the Consensus-forecast indicates that average annual price of Urals brand crude oil will decline to $23.2 per barrel in 2003 and to $21.2 per barrel in 2004. No doubt, these price levels will be extremely beneficial to the Russian economy, although the experience of recent years shows that they alone cannot guarantee any significant acceleration of GDP and industrial production.
Nevertheless, oil prices still ensure a substantial positive trade balance and a steadily positive current account balance.

Leading increase in imports will cut the positive trade balance down to $41.4 billion in 2003 and to $36.6 billion in 2004. This drop from the level of 2001-2002 ($46-48 billion) will be not so dramatic. Under moderate decline in positive balances on trade and current account, stability of overall payments will depend mainly on reduction of capital outflow. In 2002, net capital outflow declined from $16.6 billion to $14,1 billion; in 2003, this value will go down to $10.5 billion, and in 2004, to $7.4 billion. The Bank of Russia will still have the opportunity to further increase foreign currency reserves, although the rate of their expansion will fall to less than a half (from $11.5 billion to $5.3-5.8 billion in 2003-2004).
A strong trade balance and diminishing outflow of capital will help the ruble get stronger in real terms but will hamper the decline in the rate of inflation.
Consensus-forecast of the exchange rate of the ruble by the end of 2003 is 33.6 rubles per dollar, and by the end of 2004, 35.2 rubles per dollar. Assessment of the exchange rate by the end of 2003 is one ruble lower than in the previous poll. The experts seemingly begin to believe that the Bank of Russia is shifting the focus of its exchange rate policy from “targeted” devaluation of the ruble aimed at keeping Russian enterprises competitive to keeping inflation under control by the means of stabilization of the exchange rate.
In nominal terms, the ruble is expected to be devalued by 5.8% in 2003 and by 4.7% in 2004, and in real terms, it will be appreciated by 6.3% in 2003 and by 5.7% in 2004.
Consensus-forecast for consumer price hikes is 12.9% in 2003 and 11.0% in 2004, which is slightly above the upper limit on targeted inflation that was set by monetary authorities.
Balance on the federal budget will keep in positive territory in 2003-2004 at about 1.0-1.1% of GDP ($3.8-4.6 billion), which is higher than the officially approved parameters of the 2003 budget.
Consensus-forecast for 2003 expects that the monetary situation will gradually improve, which will be expressed in terms of higher money multiplier, i. e. in the efficiency of money supply. If the demand for money (M2) grows by 22.5% in 2003, supply of reserve money from accumulation of foreign exchange reserves will rise only by 10.5%¹.
Altogether, the Consensus-forecasts give a more or less bright picture for 2003-2004. In particular, the experts forecast that:

- The level of oil prices will be highly favorable to Russia;
- Outflow of private capital will decline further, and foreign exchange reserves will be on the rise;
- Inflationary and exchange rate expectations will slide gradually down;
- Wages and real disposable personal income will be rising, though somewhat slower;
- Consumer demand will increase at a fairly rapid pace;
- The “investment pause” will come to an end;
- Finally, rates of growth in GDP and industrial production will be quite respectable by standards of advanced economies (3.5-4.1% a year).

High rates of growth in imports will be perhaps the single obviously negative trend. However, this will be the very fly that spoils the ointment. The impression is that Russia is going to irreversibly miss its another opportunity because competitive power of its enterprises is so poor. Local enterprises serving domestic market take so few incentives from the extremely favorable conditions of domestic and external demand. If in the nearest future, mechanisms for transformation of huge foreign exchange earnings, low real interest rates etc. into high economic growth fail to start working in Russia, really high rates (8-10% a year) will be castles in the air.