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#7 - JRL 7252
Analytical department of RIA RosBusinessConsulting
July 16, 2003
Russian economy remains very dynamic
But there are no triumphant reports on the occasion so far

"Don't count your chickens before they hatch"

Russia's GDP grew 7.2 percent during the first six months of this year, against 3.6 percent in the same period last year, Russian Economy Minister German Gref said at a meeting with President Vladimir Putin on Tuesday. According to Mr. Gref, fixed investment increased by 11.9 percent in January-June 2003, against 2.5 percent in the corresponding period last year.

On the same day, the State Statistics Committee published a report saying that industrial production rose by 6.8 percent in the first half of this year, up from 3.2 percent in the same period in 2002. In other words, there was a twofold increase in all major indicators.

However, unlike in the previous years, when even small positive changes in the macroeconomic dynamics inspired official optimism, this year, government officials are doing their best to reduce economic expectations. "Investment growth will slow down in the second half of the year, and investment will increase by 9 percent by the end of the year," Mr. Gref said. At his meeting with Vladimir Putin on Tuesday, the Economy Minister did not mention the possibility of raising the economic growth forecast for this year. So far, the government expects the GDP to grow by 4.6 percent in 2003.

At first glance, such cautiousness befits statesmen. Economists are well aware of the so-called "effect of the basis", when growth figures look impressive compared with low results of the previous year. Investment growth slowed down sharply in 2002 because of changes in tax laws. Companies that lost investment allowance were withdrawing investments, particularly in the first half of last year. And now they are adapting themselves to the new situation.

The "effect of the basis" is also reflected in GDP dynamics. In the first half of last year, the tempo of Russian economic growth was the lowest in the post-1998 crisis period. To a significant extent, this was connected with a fall in oil prices on international markets in early 2002. And now, the situation is more favorable for Russia's main exports, and related sectors are also reviving. According to the State Statistics Committee, high manufacturing growth in January-June 2003 was reported in the fuel sector (10 percent), in ferrous metallurgy (9.5 percent), mechanical engineering and metal processing (7.6 percent) and the electricity sector (7.1 percent).

Meanwhile, industries that depend on domestic demand the most are still declining. A manufacturing slowdown was reported in the first half of the year and in June in the microbiological industry (26.1 percent and 18.8 percent, respectively), in the printing industry (9.6 percent and 8.7 percent) and in the light industry (0.8 percent and 0.2 percent), according to the State Statistics Committee. So, the export-oriented nature of the Russian economy imposes "natural" limitations on its growth. And Mr. Gref cannot but take it into account.

But the cautiousness of the Economy Minister means that Russia's economic growth might be sluggish in the second half of the year. There are no other stimuli except high oil prices. Domestic consumer demand is shifting towards imported goods, investment goes primarily into the raw material sector, and the possibility of import replacement is restricted by the strengthening of the ruble against the dollar. In other words, the cautious approach of government officials means that actual economic stagnation in the second half of the year seems the most likely scenario to them.

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