The Russian economy's rapid growth forces Economic Development Minister German Gref to revise forecasts and suggest higher anticipated GDP rates.
Photo: Ilya Pitalev
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Global Credit Crisis Slows Down Russian Investment Boom
Russia’s GDP went up 7.9 percent in the first seven months of the year, the Economic Development and Trade Ministry said on August 28 in a survey on the economic situation in January - July 2007. The Russian stock market is growing not so fast. The RTS benchmark has added as little as 3.8 percent this year as institutional investors are withdrawing from the market in the aftermath the global liquidity crisis.
Steady Development
The GDP rose 7.9 percent in January-July against 6.1 percent in January-July 2006, the Economic Development and Trade Ministry said in the survey. Economic officials estimate an average monthly GDP growth between 0.7 and 0.8 percent. This pace is leading to the year-on-year 8.4 percent rise, beating forecasts of the World Bank and Russian government which predicted the gross domestic product to add 7 percent this year. A rapid growth of the Russian economy forces the Economic Development Ministry to constantly revise their forecasts. In January, the ministry expected the gross domestic product to go up 5.5 percent this year. The ministry revised the growth prognosis three more times, and the latest monitoring has shown that there are more upgrades to follow.
The Economic Development Ministry notes that the industrial growth was lead by sectors which aim at investment demand, primarily in construction and machinery building. This is a good sign since fast GDP growth rates are supported not only by gas and oil exports but also by domestic demand. Economic officials report that mining operations grew 2.7 percent in January-July. The extractive industry was growing at more or less the same pace as last year. Industrial production added 7.7 percent from January to July.
Russian industry is growing three times as fast as the extractive sector, according to the Economic Development Ministry. Construction shows some impressive results and not only in housing but also in industrial and road building. Between January and July, production of construction glass rose 45 percent, cement 16 percent, steel pipes 21 percent. Production of machinery and equipment – and those used in housing and road construction in particular – added almost 28 percent, the ministry said in the report.
However, there are three major negative factors – high inflation, resource restraints and growing imports. Consumer prices jumped 6.7 percent in the seven months against 6.9 percent in the same period last year. But inflation added as much as 0.2 percent in the first two weeks of August, which is much higher than the indicator last summer when prices slipped 0.1 percent. Apparently, the government’s forecast for summer price drop is not coming true. More importantly, the 8 percent year-on-year goal is becoming more and more unfeasible. Most experts predict inflation to come to at least 8.5 percent by the end of the year. Electric power, gas and water production and distribution continued their decline, 3.1 percent down between January and July. The statistics show that Russia’s growing industry still feels the shortage of resources. This is certainly disturbing but between May and July, the infrastructure sector saw some moderate growth. The shortage of resources is still acute but at least this gap is widening less quickly.
Growing imports pose an even graver problem. The Economic Development Ministry says Russia’s foreign trade surplus came to $71.5 billion in July, down 17 percent compared to $86.3 billion last July. Exports added 9.6 percent while imports rose 37.4 percent.
Construction of new facilities and refurbishment of old distribution networks can overcome the shortage of resources, but the problem of growing imports and shrinking foreign trade surplus cannot be solved quickly. Import is sure to keep growing until Russia starts producing goods that would beat foreign brands in terms of both quality and price.
World Craze
The survey shows that Russian economy is on a steady rise. With current GDP growth pace the year-on-year 8 percent will not only come to be Russia’s all-time high but it will also come close the fastest developing economies. China’s records of 10 or 12 percent a year will not seem an unattainable goal.
The buoyancy of the Russian economy makes the country very attractive for investors. Russia is still experiencing an investment boom. Investments almost doubled over just one year, growing 22.7 percent between January and July against 10.6 percent the same period last year. Foreign investments make up a considerable part of the investment flow. In the first half of 2007, Russia received $73.6 billion in foreign investments and loans including $24.6 billion direct investments, according to the Bank of Russia. It is almost two times as high as last year.
In the first seven months of the year, the Russian stock market was following the upward movement of the GDP. The RTS benchmark lifted 9.2 percent from 1,796 points on January 10 to 1,961 points on July 31. In growing economies, financial markets tend to be growing faster that the GDP as investors and players not only analyze the current economic growth but they also invest in future profits.
Compared to the record-breaking 2006, the stock market’s 9 percent rise looks more than just modest. Last year, the RTS index soared 38.3 percent in seven months and almost 70 percent in twelve months. Still, the current pace should be considered normal, all the more it is going on in the pre-election year. Some market participants even say that the Russian stock market was over-appreciated by the start of August correction.
A liquidity crisis hit international stock floors in late July, pushing institutional investors to withdraw funds from developing markets in early August. It affected Russia as well as the RTS index lost 5.5 percent in August. The Russian stock market was on a decline throughout the month although Russia’s economy was still growing at a high pace. By the end of August Russian stock indices were growing half as fast as the GDP. The RTS benchmark added 3.8 between January and July, while the GDP rose 7.9 percent.
Market participants say that capital outflow caused by institutional investors was the main reason for this disparity. Experts estimate that portfolio investors withdrew some $25 billion from the Russian market in August, which sent down most quotations including blue chips.
Sometimes They Go Back
There are always two possible answers to the eternal “How long?” – an optimistic and a pessimistic one. Optimists believe the crisis won’t last longer than two months. At the end of the third quarter of 2007, portfolio investors are going to calculate their losses from the crisis and start coming back to developing markets. At this time, Russia’s impressive macroeconomic indicators will make its stock market extremely attractive.
Troika Dialog chief economic Evgeny Garvilenkov says that “recent turmoil on world financial markets” will be fraught with both short-term and long-term consequences for Russia. “The former are most likely to come in the form of somewhat lower investment activities for a few months,” according to Mr. Gavrileknov. “A lot of issuers will put off the placement of their bonds as conditions for borrowing on foreign and domestic markets have sharply deteriorated. But we still keep our forecast 20 percent for investment growth in 2007 unchanged. As a long-term consequence, the Central Bank may decide to change its currency policy. It may ease control over the ruble rate and increase its volatility.”
There is another point of view. More pessimistic analysts believe that the global liquidity crisis and slump on stock markets in August open the door to a global recession in the United States to spread around the world. If this proves true, Russia should not expect institutional investors to come back earlier than in two years’ time. At the same time, world markets will see fuel prices losing at least 20 or 25 percent.
The pessimists support their theory by a gigantic foreign debt of the United States. The total amount of US Treasures state bonds exceeds $42 trillion. Washington spends $2.5 trillion on debt servicing alone while the country’s annual GDP comes to $10.2 trillion.
Surely, spending one-fourth of the annual income on debt servicing is at least unpleasant. But according to a common banking practice, borrowers are considered not reliable if they spend 30 percent of their current incomes on loans. Even when a person applies for a consumer loan the banks asks for information about their income and credit history on outstanding debts. The United States is walking a fine line in this situation, though it is still a reliable borrower as it is clearing its debts. That is why American still enjoys investors’ trust. Even if the U.S. economy sees a recession, it is most likely to be gradual.
We would like to make a prediction that institutional investors will return to Russia before long. But only few will go back after the third quarter’s results. The largest part of investors are likely to come back no earlier than in late December or even at the start of 2008 when Russia elects a new parliament.
Maria Glushenkova and Pavel Chuvilyaev
All the Article in Russian as of Sep. 03, 2007
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