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From: "Stanislav Menshikov" <menschivok@globalxs.nl>
Subject: US RECESSION IS NOW OFFICIAL. But Russia Has Yet To Determine Its Policies
Date: Sat, 1 Dec 2001

"MOSCOW TRIBUNE", 30 November 2001
But Russia Has Yet To Determine Its Policies

By Stanislav Menshikov

By tradition US recessions are not official until recognised by the National Bureau of Economic Research. When five or six major monthly business cycle indicators, like employment, personal income, industrial production, manufacturing and retail trade sales contract for at least half a year the NBER calls it a general economic recession. The current slump, according to the Bureau, started last March.

NBER methodology is criticised by other experts as being too formal. For instance, the deep slump in the so-called "new economy", which includes modern information technologies, started in early 2000. It was hoped at the time that the recession would not spread to the basic industries and manufacturing in general. But industrial production, as a whole, peaked in September 2000, well before the date mentioned by the Bureau, and has been falling ever since. Profits, dividends and stock prices began slumping even earlier. After the terrorist shock of 11 September 2001 contracting personal consumption and capital investment became precipitous. Yet the recessionary state of the economy was obvious long before that happened. The same was true about the economies of Western Europe and Japan. Taiwan, Singapore and Hong Kong also joined in the fall making the recession a widespread international phenomenon.

Being late in acknowledging a recession is important politically because it tends to delay anti-cyclical measures and make them less effective. In the US the Federal Reserve was lowering interest rates for many months but no special fiscal measures to bolster aggregate demand were taken until after the September 11 shock. Europe was late in reducing interest rates and practically no fiscal incentives have so far been used. The new Japanese government made the fatal error of discontinuing fiscal programmes initiated by its predecessors. This only aggravated business conditions.

A similar mistake could be made today on the timing of a new cyclical upturn. According to some forecasters there is a 50 percent probability that the recession has ended. This optimism is based on assumptions that output cuts by producers have already reduced inventories to normal levels. Yet there are no signs so far of a turnaround in profits, capital investment or share prices. Most experts fail to see resumption of growth until late 2002.

Economic growth in Russia has not yet suffered from the recession. GDP is driven mainly by domestic demand and is rising this year by 5.5 percent or more. The current federal budget is heading for a comfortable annual surplus This explains why government planners have until recently largely ignored the recession abroad and, of all external indicators, have concentrated solely on oil prices. This was the major factor used to calculate the initial optimistic and pessimistic budget scenarios for 2002.

But even the worst case scenario was based on an average price for next year that is higher than the current price in the market. Government experts did not expect an oil glut of major proportions. Today, after a big output cut earlier in the year, OPEC estimates another 2 million barrels per day reduction is needed to stabilise the market. That assumes total overproduction equal to 7 per cent of world oil output. To adjust Russia needs to reduce its current production by about 3 percent. So far it has not decided whether to do so.

However, oil is not the only incidence of global recession as it affects the Russian economy. Natural gas is another case. Gas prices tend to follow oil but there is no cartel structure similar to petroleum in the gas market. Here Russia has to make its own decision without trying to co-ordinate with other exporters. This is no easy task for Gasprom, which has been blamed even by Vladimir Putin for losing money to intermediaries on price mark-ups.

Another example is steel, of which Russia is also a big exporter. The glut here seems to be equally large and steel prices have fallen to a 20-year low. In December the US is starting talks with leading exporters trying to convince them to reduce their total output by 20 million tons. Talks will be held individually with Japan, South Korea, China, the EC, Brazil and Argentina. Sooner or later Russia will be engaged, too. According to officials from the Ministry of Economic Development and Trade, Moscow is not prepared for this new dialogue and is waiting to see what happens.

The main problem is that Russia does not have a policy to deal with external cyclical effects on its economy. Since Soviet times it has been a passive actor in world markets accepting demand and price conditions as given. Also dominant is the old-fashioned view that earning hard currency at any price is preferable to cutting output when prices are low. This passive psychology has to change if the country wants to integrate in serious. It has to play an active role in markets where it is a large exporter. Strategies have to be worked out to make Russia a strong participant in price setting rather than remaining a passive price taker.

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