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Economic Prognosis in Review: 2007 People's Moneymaker
This has been a year of rapid economic growth, once again underpinned by excellent domestic demand. That demand not is only at the base of production growth, it is at the base of the deafening collapse of anti-inflationary plans as well. Even the dollar's latest setback in Russia has not helped fight inflation.
At the beginning of the year, we predicted that 2007 would not differ greatly from 2006. Russia will still show rapid growth, over 6 percent. That is what happened.
In comparison with previous years, growth is even picking up its pace. In 2003, the GDP rose 7.3 percent, in 2004 7.2 percent, in 2005 6.4 percent. In 2006, according to preliminary data, it grew 6.7 percent, and for the first nine months of this year GDP growth reached 7.8 percent per annum.
We also predicted that everything would be outstanding with trade, which has become the real moving force behind the GDP lately. Its growth is higher than 10 percent. In the first nine months of the year, growth of the GDP produced in wholesale and retail sales (and repair of automobile transportation and household items) reached 10.5 percent per annum. In the same period of last year, those rates were 9.9 percent. So Russian citizens are trading and fixing with increased energy.
But, if we take retail trade separately, it amounted to 8.5105 trillion rubles, and the growth rate was 14.8 percent. This year was noticeably better for retail trade than past years. In 2002, it grew by 9.3 percent, in 2003 by 8.8 percent, in 2004 by 13.3 percent and in 2005 and 2006, a stably high 12.8 percent.
While trade is the moving force behind economic growth, trade is moved by personal income. In our prognosis for 2007, we noted that the average salary in Russia is growing markedly. In 2005, for example, it was 8555 rubles per month, and in 2006, it was 10,636 rubles. We suggested that this year that pace would pick up as well, and income may reach 15,000 rubles monthly. By September, it was 13,540 rubles and its annual growth rate was 25.4 percent. Authorities later announced that salaries must grow faster. Russian President Vladimir Putin said this month that the salaries of those paid from the federal budget and of military servicemen should be raised not by 7 percent on September 1, 2008, but by 14 percent on February 1. General monetary income per capita in September was 12,901 rubles (annual growth 22.4 percent).
Today's Russia has come to resemble the USSR in the declared level of the authorities' concern for the monetary income of its citizens and those citizens' unflagging attempts to spend that income on various goods fast. It was not by chance that First Prime Minister Alexey Kudrin, with great pleasure, compared the high rates of economic growth to the Soviet data of the 1960s at an economic conference.
In our prognosis for the year, we noted that growth of industrial production was going not as well as that of the economy in general. In 2003-2004, the growth rate was over 8 percent annually, in 2005, it was halved, and on 2006, it remained 4 percent. We suggested that industrial growth would come in around 4.5 percent in 2007. In the first quarter of the year, things got better in industrial production. Its rate was 8.4 percent. But then the pace began to slow. In the second quarter, industrial growth was 6.7 percent annually, in the third quarter 4.9 percent. In November, it had slowed to 4.7 percent. Thus our prediction that the rate of economic growth would lag significantly behind general economic growth was accurate.
In spite of the fact that record high oil prices continued into 2007, and at some point a barrel of oil was priced at $100, oil production was flat. In 2007, the rate of oil production increased by only 2.4 percent, and natural gas production decreased by 1.3 percent. Authorities said that they had long ago predicted that decline in production. Western Siberian deposits are exhausted to a significant extent and production is falling at them. New deposits only compensate for the losses. Not by chance, Russian authorities discussed the possibilities of producing oil at the North Pole with great enthusiasm this year and deputy speaker of the State Duma Artur Chilingarov expressed his intention of visiting Antarctica as well. (The shelf of that continent also hold significant hydrocarbon deposits.)
But in spite of the insignificant growth in the physical volume of oil produced, and thanks to the world prices Russia was a classical oil country in 2007, exchanging petrodollars for imported, including food. By July, oil exports had risen 4.4 percent compared to last year. Between January and July, export totaled 128.4 million tons and the price of oil, reaching $474.70 in June, continued to rise, hitting $507.10 per ton in July. Simultaneously, between January and August, Russian increased its imports of goods from beyond the CIS and Baltic countries by 49.7 percent, compared to the same period last year, to $101.055 billion. In August 2007, import of goods from beyond the “far abroad” were up 32 percent compared to August 2006, reaching $15.15 billion. Compared to July 2007, August imports increased by 2.4 percent, or $358.1 million. In seven months in 2007, sugar imports increased 16.8 percent, to 2.316 million tons, which cost $732.1 million, compared to $835.5 million in the same period a year ago. All sugar was imported from the “far abroad.” The importation of meat to Russia increased 20.6 percent in 2007 through July, compared to the same period a year earlier, reaching 746,200 tons. That cost $1.825 billion in 2007, and $1.214 billion a year earlier.
In our prognosis for 2007, we said that the authorities would obviously be unable to hold inflation down to the planned level of 8 percent annually. That prediction was completely accurate. The plan was not just a failure, it was a resounding failure. Inflation was already 10.6 percent at the end of November. The question now is whether or not it will stay under 12 percent. If it does, it will be the highest inflation since 2003. That was the only year that the authorities ever met their anti-inflation goals. The government and Central Bank tended to blame external factors for the failure of their plan this year. The high price of oil provided for too great an influx of petrodollars, which were followed by the influx of foreign speculative money. Not only that, in the EU countries, the price of food rose due to lowered subsidies, and that price rise was imported to Russia. Finally, the price of grain rose sharply worldwide because of an increase in the production of alternative fuel. Fields were use to grow strains best suited for bioethanol production.
To show its determination in the fight against inflation, federal and regional authorities turned to administrative measures to convince traders to freeze prices voluntarily or face threatened action. Thus, paradoxically, the failure of their anti-inflation plan allowed the authorities introduce their plan for speeded-up wage increases, even though that is considered in world practice the surest way to guarantee further inflation in a wage-price spiral. The public, shaken up by all the economic events of the year, cannot be expected to lower their inflationary expectations, although that is, theoretically, a way to fight price growth too. But the public's inflationary expectations have clearly increased and that is expressed in an even more determined shopping trips. It is better to buy goods today than tomorrow. The salesmen obviously like the public's determination, and have obviously decided that it is better to raise prices today than tomorrow.
We also predicted that 2007 would be the year of the fast fall of the dollar, with a landing place under 25 rubles. And so it was. With the dollar falling on the Russian currency market, the Central Bank was able to point to it falling value on world markets, and the very large influx of petrodollars into Russia. When facing accusations of an unsuccessful anti-inflation plan, the Central Bank was able to say that that it was doing everything it could in the fight against inflation. Its refusal to hold the dollar up was also an anti-inflationary measure. Not a lot of money had to be printed to buy dollars with, and imports would increase, which would stimulate competition. As a result, the public was completely disappointed in the dollar. Its fall had been unbelievable, and it has not stopped. For the authorities, it was a type of refutation of the heritage of the 1990s. The dollar grew from the financial crisis of 1998. In 2003, the dollar stopped growing and the ruble began to rise. That can all be chalked up to correct economic policy. Theoretically, the Central Bank, with its huge gold and currency reserves, third behind China and Japan's, could raise the exchange rate to 6 rubles/$, as it was before the 1998 default.
Sergey Minaev
All the Article in Russian as of Dec. 24, 2007
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