#20 - JRL 7016
January 13, 2003
FEAST ON THE EVE OF A PLAGUE
Pre-crisis stability will be the feature of the Russian economy in 2003
Author: Dmitry Orlov
[from WPS Monitoring Agency, www.wps.ru/e_index.html]
JUDGING BY PRELIMINARY ESTIMATES OF THE STATE STATISTICS COMMITTEE, THE RUSSIAN ECONOMY IN 2002 SHOWED A FAIRLY IMPRESSIVE LIST OF ACHIEVEMENTS. HOWEVER, THERE ARE SEVERAL FUNDAMENTAL NEGATIVE FACTORS DIRECTLY AFFECTING THE NATION'S ECONOMIC DEVELOPMENT.
Are there any real threats to economic growth in 2003? Experts in the employ of the government say that there is nothing to fear.
Judging by preliminary estimates of the State Statistics Committee, the Russian economy in 2002 showed 4% growth of the GDP, 15% inflation, and a 17.4% rise in real wages. Last summer, real incomes regained the pre-crisis level. Financial reserves should amount to 200 billion rubles. Control over budgets of natural monopolies was established. The United States and European Union granted Russia the status of a free market country.
In other words, the list of achievements is fairly impressive. All the same, the Russian economy in 2003 will be affected by expectations of a crisis. The Economic Development Ministry emphasized in its report that the factors of growth that appeared after the 1998 crisis were all but exhausted by late 2002.
At the same time, there is more to the threat to economic growth in 2003 than expiration of the abovementioned factors, or colossal foreign debt payments Russia is expected to make. The matter concerns several fundamental negative factors directly affecting the nation's economic development.
TENSE OIL PRICES SITUATION
Economic growth in 2002 was growth based on the fuel and energy sector, and on the oil industry to a decisive degree. Oil determined everything: budget revenue and consumption levels depended on oil prices (they exceeded $22 a barrel all year, approaching $30 in December), and growth of oil production (9%) export of oil (13%) and petroleum products (by 17%). Industry overall grew by only 3.7%.
TOO MUCH MONEY IN THE COUNTRY
This is not, however, investments in industry. This is oil dollars that end up in coffers of the Central Bank and in citizens' pockets. This Dutch malady (abundance of "export" money in economy) will enter the decisive phase this year. The situation in the oil market will clearly be less beneficial for Russia and actually catastrophic in the United States went ahead with its blitzkrieg plans with regard to Iraq. Prices may fall below $18 a barrel and this state of affairs will pose a direct threat to implementation of the federal budget. Upping oil export dramatically is hardly an option because technological capacities of oil production and of the system of pipelines have their limits too.
MILD WEAKENING OF THE DOLLAR
In my opinion, views and policy of US Finance Secretary John Snow conflict with the interests of Russia's hard currency policy. The US president put Snow in charge of a tasklist including lower taxes, stimulation of consumption, economic growth, lower unemployment, and keeping the dollar strong. Miracles are rare these days. It is the dollar that will become - has already become, in fact - the weak link in the list, with a budget deficit, balance of payments deficit, and accumulation of state debts. The dollar was falling against the euro and some other European currencies all through December, slowly but surely.
Does Russia need a weak dollar (relatively weak, of course)? In fact, this is the last thing Russia needs. A firming of the ruble in 2002 by 5.5% only boosted imports and created serious sales problems for Russian companies. And 2003 promises continuation of the mild weakening of the dollar. Simultaneous devaluation of the ruble will affect real incomes, while relative firming of the ruble will lead to increased imports and restrict the rate of growth in the real sector. A poor alternative, either way.
RESTRICTION OF DOMESTIC DEMAND
The government stimulated consumption capacities all through 2002. Pensions were raised by 30-40%, leaving behind even the growth of salaries of state-sector workers (another concessional category). All the same, little of the money was spent on domestically-produced goods. This stimulation inspired imports of cheap goods from abroad, and this state of affairs restricted domestic demand instead of expanding it. Nominal salaries did not grow at all in some sectors of the economy. It means the loss of 9% income for the citizens whose salaries depend on the dollar and almost 15% for those with salaries depending on the ruble.
History is repeating itself. A similar situation took shape in 1996-98, when a strong ruble and high inflation combined to take their toll. There will be no one in 2003 to spend money on expensive domestically-produced goods. The production lines at AvtoVAZ and GAZ have come to a grinding halt; output of construction materials is in decline (it should be noted that this sector became one of the driving forces of growth in the wake of the 1998 crisis). Food and oil and chemical industries are in a period of stagnation for the first time in years. Mid-level consumers have turned back to imported goods, and this trend will only strengthen in 2003. Only a more or less pinpoint devaluation of the ruble may alleviate the situation, but it will mean another blow at real incomes.
INADEQUATE GROWTH OF CURRENT CONSUMPTION
Retail and wholesale trade boomed in 2002 and may go on in 2003. A simple glance at the appearance of networks of malls makes it clear that consumers - particularly the middle class - are on a buying spree, just like in the unforgettable year of 1997, the year Viktor Chernomyrdin's Cabinet proclaimed the first year of economic growth. A feast on the eve of a plague: this is the only definition that fits.
On the other hand, the whole world is having its problems nowadays. The World Bank has found the vicious connection - slow growth in East Asia, Russia, and Brazil affected the demand for investment, and the worst deterioration of direct foreign investment in the developing countries since the global depression of 1981-83 affected the rate of growth. In other words, we should not hold our breath waiting for investment in 2003.
Along with everything else, we may forget about a higher rate of growth and structural reforms. At least for the time being.