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As President Vladimir Putin’s second term draws to a close, markets could not be more enamoured with Russia’s strong economic performance. The country is viewed as a haven at a time of global credit market turmoil. Goldman Sachs is not alone in suggesting that the Russian economy could surpass that of Germany by 2020.While there can be no gainsaying Russia’s very strong economic performance between 2000 and 2007, during which period its economy quintupled in size in dollar terms to about $1,200bn, one is struck by how sanguine markets have become about Russia’s economic prospects. For markets ignore several special, and most likely transitory, factors that have underpinned Russia’s remarkable economic performance over the past seven years. They also ignore the fact that Russia’s inflation demons are rearing their ugly heads and showing every sign of getting worse.By far the most important of these special factors has been the trebling of international oil prices from about $30 a barrel in 2000 to more than $90 a barrel by the end of 2007. This not only allowed for a strengthening in Russia’s balance of payments, as reflected in international reserves surpassing $450bn by end-2007. It also allowed for sizeable public sector surpluses, which have allowed Russia’s stabilisation fund to swell to more than $150bn. Further supporting economic growth was the great degree of unutilised capacity following the 1998 crisis, which allowed the Russian economy to grow rapidly despite a relatively low investment rate. Similarly, Russia’s external sector was supported by a markedly undervalued currency following the 1998 devaluation, although almost all of that competitive advantage has since been eroded by rising inflation.Over the next presidential term, there would appear to be a host of factors suggesting that there will be an appreciable slowing in the Russian economy. No longer will the economy benefit from a high degree of unutilised capacity or from a highly competitive exchange rate. Nor will it benefit from structural reform, which since 2003 has been stalled, as epitomised by an increased degree of state control, particularly in the natural resource extraction sector. Worse, there is the possibility that international oil prices might decline significantly from today’s heady levels, especially if there were to be a global economic slowdown.To read more go to:
As in the days of Noah....
