#14 - JRL 7137
OPINION: Wither Russia -- a model of economic growth
Contributed by Ben Aris, Daily Telegraph Correspondent
MOSCOW, April 8 /Prime-TASS/ -- The IMF this week revised down its forecast for 2003 GDP growth from the already optimistic 4.9% to a comparatively pessimistic 4%, at a time when almost all of Russia’s leading investment banks are revising their forecasts up. Even the government has increased their prediction this month from 4.3% to 4.5%. The IMF’s decision has more to do with politics than economics.
As far as guess what Russia Inc is doing, the IMF has one of the very worst records for getting it right. In the wake of the financial crisis the IMF estimated Russia would grow 1.3% in 1999, when it actually put in an impressive 5.4% growth. Margin’s this big simply means you have no clue what is going on.
However, second guessing Russia is not easy and currently there is a lot of confusion over this year’s prospects amongst the analysts. The spread ranges from Renaissance Capital’s 3.9% to Brunswick UBS Warburg 6.5% -- another huge spread by economic standards.
The argument comes down to what analysts believe is driving economic growth: the first (and pessimistic camp) believe that growth it largely predicated on oil production and international prices. The second camp (and optimistic camp) believe that small- and medium-sized enterprises and burgeoning services sector has already overtaken raw materials as the economic engine.
Russia’s two «bread and butter» money-making layers surround an unreformed «icky pink filling» of a Soviet sandwich. No one disputes that the bottom of the sandwich is becoming more important. Indeed the Economic Development and Trade Ministry recently upgraded their GDP forecast because of strong investment and retail sales.
But no one has satisfactorily been able to separate the affect of oil prices on the economy either. What happens if oil falls to $14 for 6 months? Will growth stall or just slow down? No one can agree on a clear answer.
Still, given the that IMF seems to be so out of step with what is the consensus on the direction of Russia’s growth prospects (even if there is no consensus over the number), I suspect what is behind this is a concern over the shape of the Russian economy, rather than overcoming structural problems per se.
John Odling-Smee, who oversees IMF activities in former Soviet Union countries, urged Moscow to tackle four areas of reform that were "being blocked by a lot of vested interests, but are critical for moving toward a more market-oriented economy."
A powerful handful of oligarchs are snapping up all the juicy assets and extending their empires out from the traditional raw materials into things like agriculture and food processing. This week Planeta management, associated with Sibneft and Roman Abramovich, gained control over Petmol, St Petersburg’s biggest dairy producer. Agros, the agricultural arm of Vladimir Potanin’s Norilsk Nickel is doing the same with pig farms and meat packers.
The IMF is worried about the «oligarchification» of the Russian economy and wants to push structural reform faster – irrespective of the rate of growth – to give the new breed of «mini-garchs» that run all the firms on the bottom layer of the sandwich a chance to grow and protect themselves from misuse of the courts or bankruptcy laws.
Russia growing strongly for the first time in three decades and the IMF is asking the Kremlin to make a decision: what kind of economy does it want to build? Something like the German model where the «Mittlestand» of SMEs make up the biggest part of the economy, or a Korean model, where the economy is dominated by a few «Chaebols,» huge industrial groups.
Until now the Kremlin hasn’t really thought about it. Reforms have been ad hoc, designed to fix individual problems and the economy has grown despite, rather than because of, anything the government did. That is no longer true.
Two groups are battle at the beginning of this ideological battle. On the one hand is the liberal German Gref who has recently rewritten his «Gref plan», the economic blueprint that delivered the success we enjoyed so far. On the other is the state-owned natural monopoly mafia that last month decide, for example, that it would be a good thing if Gazprom was in charge of developing all the gas deposits in East Siberia. And God forbid oil companies be allowed to build and own their own pipelines, no matter how badly needed they are.
These two opposing trends highlight the lack of clear direction in the government's mind as to what kind of economy it wants to build and highlights the fact that Russia's development remains subject to infighting amongst power fractions, all with different ideas about what Russia Inc should look like.
May should be a telling month as the Energy Ministry will release a "Russia's Energy Strategy" blueprint for development of the sector. What comes out of this will say quiet a bit about how the Kremlin sees Russia's development unfolding as it, in itself, will force it to think about what it wants do long term.