Oil tanks and the pipeline network of the Klaipeda seaport oil terminal in Lithuania.
Photo: Alexander Potapov
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Circular Motion
// Why Russian Economic Growth has Exceeded Expectations
December is the month of predictions, when forecasts about what will happen in the year ahead fly thick and fast. But in order to evaluate and understand predictions about the Russian economy, it is useful to take into account both how the year now ending was viewed in December 2005 and how it actually turned out.
Opprobrium for the Skeptics
This week Russian Finance Minister Aleksey Kudrin asserted that the rate of Russian GDP growth for 2006 could reach 6.9-7%. Earlier, the Ministry of Economic Development and Trade put the number at 6.6-6.8%. The World Bank is certain that it has the capacity to reach 7%, while the IMF yesterday reiterated its prediction of 6.5%. For all intents and purposes, the corrected growth predictions for the year move the economy onto the notorious trajectory of GDP doubling. Meanwhile, a year ago both Russian cabinet ministers and economic analysts unanimously believed that Russia's economy would slow down in 2006.
In 2003 the rate of economic growth in Russia was 7.3%; in 2004, it was 7.2%; and in 2005 it slowed to 6.4%. The tendency seemed clear. Riding the wave of pessimism, almost all domestic and foreign economists predicted 5.5-6.3% for 2006. The International Finance Institute, for example, expected 5.2%; Trust Bank predicted 5%; and the numbers from the Ministry of Economic Development and Trade ranged from 4.7% to 5.8%. Among the reasons most commonly cited for the slowing economy were stagnating petroleum production, growing pressure from imports on the domestic market due to the strengthening of the ruble, and a worsening investment climate after the Yukos affair. It was said that the growth model based on domestic demand was close to exhaustion. The only institution that looked at the Russian economy with optimism – and thus whose prediction was closer to the mark than most – was the investment bank Goldman Sachs (6.7%).
Oil and Investment
Kommersant recently asked analysts what had happened in the Russian economy in 2006 that they had not be able to foresee last December.
"The rising price of oil is one of the most important factors that experts underestimated," said Troika Dialog economist Anton Struchenevsky. In 2005, the year's average price for a barrel of Urals was $51, and in December 2005 the price had fallen from its peak in August ($65-70) to approximately $56. Thus, for 2006 the majority of analysts predicted a price of $45-55 per barrel. Goldman Sachs analyst Rory MacFarquhar, whose growth prediction for 2006 turned out to be much more accurate than most, estimated the price of oil much higher, at around $66. The 2006 average per barrel turned out to be $61.
"The higher price of oil increased revenues for corporations, the federal budget, and the population. That, in turn, increased their spending. The demand for goods was higher and the consumer boom continued," explained Sergey Smirnov, a leading expert at the Center for Development. The trade and service sectors developed the fastest. According to data from Rosstat, the government statistics bureau, retail trade turnover accelerated from 12.9% in October 2005 to 14.6% currently. The rate of growth of payable services grew from 8.2% to 10.5%, while growth in the communications sector went from 2.9% to 22.3%.
Most often, however, analysts point to the fall investment boom as the reason for the acceleration in growth rates. Although the rate of growth of investments was 10.7% last year and in the first half of 2006, in autumn of this year investments took off, jumping to 15% in September and 19.1% in October.
Experts disagree on where the investment boom come from. Anton Struchenevsky believes that it was fueled entirely by rising oil prices at the beginning of the year. Companies actively invested funds borrowed from abroad, taking advantage of the favorable conditions for borrowing created by the excellent indicators of the trade balance, the gold reserves, and the budget being in the black.
"I believe that the growth of investments took place thanks to investments by Gazprom, UES, and other government-owned corporations. At the beginning of the year, there was not yet any idea of what the cost of the problem of energy resource shortages would be. But towards the end of the year, the corporations increased investment to resolve the problem," said Natalya Orlova, the head economist at Alfa Bank. The author of last year's most conservative prediction, Trust Bank economist Evgeny Nadorshin, links the investment boom with the fact that the liberalization of the ruble was moved from January 1, 2007 to July 1, 2006 because of political considerations (the G8 summit that took place in St. Petersburg in July): "For large companies, that didn't make much of a difference. But for direct investment funds of between $100-150 million, both increased expenses and the ease of entry into and exit from the market were important."
In general, it can be said that the rising indicators are the result of two factors: higher oil prices, which breathed fresh life into a growth model based on domestic demand, and the fall investment boom. The question of what will happen to the Russian economy in 2007, on the other hand, comes down to the future price of oil and whether the sharp growth in investments will be a steady tendency.
A Repeat of Past Events
Today the majority of experts are again predicting that the Russian economy will slow to 6-6.1%. Together, the Economic Development and Trade Ministry's official prediction and the consensus prediction of the 32 foreign and domestic analysis centers that make up the Center for Development lead analysts to expect that this year's trends will continue (growth of investments, personal income, retail trade, and the service sector), but at a slower pace.
Pessimistic predictions with regard to industry are again bringing to mind the negative effect of the strengthening of the ruble. ING Bank believes that the only industries to benefit from the stronger ruble are the service sector and several fields that are oriented towards domestic demand. The bank believes that the modernization of equipment that has become possible thanks to the strengthening of the ruble will tell only after an eighteen-month delay, and investment at the end of 2006 will hardly influence economic indicators for 2007. Bank analysts have thus lowered their predictions for industry growth from 5.7% to 5.3%. The delay between investments and their influence on industry growth can be explained: the production of heavy machinery is paid for at the time of the order, and such investments instantly influence GDP growth. But industry then undertakes virtually all production of new equipment only after several months.
On the other hand, the strong ruble ensures that the consumer boom will continue. Thus, ING Bank believes that the GDP growth rate will be 6.5%, and the IMF, which suggests that both investments and consumer demand will have positive impacts on the economy, agrees. Nevertheless, the IMF believes that the Russian economy cannot grow faster than 6.5% without reviving structural reforms. A more optimistic view of the country's economy is taken by Alfa Bank and Goldman Sachs, who predict a growth rate of 7%. "The investment boom will have an impact on Russian industry within the next year," believes Alfa Bank economist Natalya Orlova, adding that industry growth rates will reach 5%.
"Import growth will have a negative impact on Russian industry. But that will be compensated by increased expenditures from the federal budget on nationwide projects and on overhauls of infrastructure," said Rory MacFarquhar of Goldman Sachs. He believes that 2007 will look much like 2006: the consumer boom will continue, people will take out more credit, industry will grow, and the retail trade and sectors oriented towards consumers will develop actively. In addition, he believes that the global macroeconomic conditions that are so beneficial for developing countries will continue.
M&K
All the Article in Russian as of Dec. 08, 2006
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