#11
Financial Times (UK)
26 October 2001
Russia booms as west heads into downturn:
Attacks on US have had little impact on a healthy and well-managed economy
By ANDREW JACK
While many of the world's economies are reeling in the aftermath of last month's attacks on the US, one country is bucking the trend.
Russia is set to report gross domestic product (GDP) growth of 5 per cent for the first half of 2001 and many economists are predicting it will do the same for the second six months, putting it on track for 5-6 per cent for the year.
The continued optimism reflects a process of sustained growth which has been under way for many months. Russia has been shielded from the rest of the world in areas where its economy could be most damaged and exposed in areas where little harm has so far been done.
"The Russian economy has held up remarkably well," says Christof R uhl, chief economist in the Moscow office of the World Bank. "As with companies in the US and Europe, those which are suffering today are those which were in trouble before, like in aviation, insurance and banking. Those which were sound before September 11 are recovering now."
Moscow has been busy over the past few weeks, with openings of shops, restaurants and cafes. Plentiful building renovation and construction bears witness to a willingness by investors to make medium- or long-term commitments.
The latest statistics bear out this pattern. Russians expressed their sympathy for the US, having suffered terrorist threats in the past and even experienced recent anthrax scares. But business and consumer activity has not been weakened.
Retail sales were up 11.3 per cent this September compared with last and 11.1 per cent for a rolling average over the three months of July to September 2001. Fixed investment rose 9.5 per cent year-on-year - the highest monthly increase since the start of 2001 - and was up 8.6 per cent on a three-month rolling average.
"I don't see any domestic effects on the Russian economy as a result of September 11," says Alexei Moiseev, economist with the brokerage Renaissance. He also points out that - while it remains high - capital flight has continued to decline, a sign of confidence by Russians themselves.
The latest Central Bank figures suggest Dollars 900m (Pounds 620m) a month left in the third quarter this year, compared with Dollars 1.4bn in the second quarter and Dollars 1.9bn in the third quarter last year.
Much of the growth has been explained by the sharp rise in the price of oil and other commodities over the past two years, on which Russian exports heavily depend.
The devaluation and default of August 1998 also left domestic manufacturers at a competitive advantage after previously suffering from an overvalued rouble.
While President Vladimir Putin has been lucky to benefit from this more positive environment since he was elected in the spring of 2000, his administration has also pushed ahead with significant economic reform. A new tax code has created a flat rate personal income tax of 13 per cent and reduced the tax on corporate profits to 24 per cent, with the removal of many distorting exemptions.
Sound fiscal management has also given Russia a balanced budget.
Alexei Zabotkine, economist with the UFG brokerage in Moscow, says: "The only serious threat is from a decline in commodity prices." While oil has slid towards Dollars 20 a barrel, Mr Zabotkine argues that this will only have serious repercussions for the economy if it falls to Dollars 15.
The country's modest equity and bond markets have suffered, however, dragged down with worldwide gloom. The Moscow stock market is only just clawing its way back to the level it was at before September 11. Yesterday, the Russian government also said its planned sale of 6 per cent of the oil group Lukoil - which ironically it decided to list in New York to gain a better valuation - will now be delayed until early next year in view of current market conditions.
Yet in a more positive sign of new-found faith in Russian management, the International Finance Corporation indicated plans this week to lend over Dollars 10m to four purely Russian banks and to examine business with companies in other sectors. Previously, it has normally only lent to foreign companies or ones with foreign guarantees.
Mr Ruhl warns that, aside from its dependency on oil, productivity growth is lagging the appreciation of the exchange rate and there are many question marks over how well further economic reform will be implemented. But for now Russia is, for once, standing out from the crowd in a positive way.
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