Kolya is back in Moscow to interview for jobs. A Russian national he has just graduated from Liverpool university where he majored in Business, but has a long standing interest in aviation software and has even sold some of his software to Russian carrier Transaero. So far Kolya has had eight interviews and received eight offers. And this despite the fact that he graduated with a third from Liverpool (the grade above fail in the British system).

Apart from his obvious skill in programming (that is a sellable skill in any market) Kolya would struggle to get a job in the UK with a third from Liverpool, even in a boom. But God forbid that he went looking in Spain or Portugal where youth unemployment is now at 50% and even students with a starred first in PPE from Oxbridge would struggle to find a job.

Russia's economy is booming even if its businessmen remain glum and nervous about the future, thanks to the never-ending Eurozone crisis story. Unemployment is down to a historical low of 5.4% of the working population, which president Vladimir Putin pointed out at the St Petersburg forum in June means all the production capacity is used up.

The tight labour market is already sending wages up, which were rising by 14% at the end of the first quarter on an annualized basis. And this has fed through into rising confidence and robust growth of retail borrowing, which was up a whopping 43% in May.

Indeed, the Kremlin release a whole bunch of economic data this week that shows the economy is in robust health (for the moment). The reserve fund was supposed to be emptied by the end of 2010, but is now at just under RUB2 trillion ($60bn) and the national welfare fund (that is used to support social spending) is over RUB2.8 trillion.

Russia's external debt is up slightly to $585bn, slightly more than the gross international reserves of $513bn as of the end of June but this still means that Russia can cover its debt nearly dollar-for-dollar with cash, unlike most western economies that have national debts of around 100% of GDP these days. And even capital outflow is finally slowing and is expected to drop to $9.5bn in the second quarter, following a $43bn outflow in the first quarter.

All this means economists are starting to ask if the economy is overheating. Deputy governor of the Central Bank of Russia Alexsei Ulyukaev says that when consumer lending growth rises above 28% the economy is in danger of overheating and Russia is well beyond that point now.

The danger in this lending is that some analysts are suggesting that the quality of loans is falling, which opens banks up to problems if there is another bad external shock from Europe. However, nearly everyone agrees if this does happen the CBR has more than enough cash in reserve to prop the banks up and avoid a system financial crisis.

The black spot is in the corporate sector where companies have already started to destock. One of the reasons the 2008 crisis was so painful was companies were carrying a lot of inventory to meet the burgeoning demand of a booming market. However, when the crisis struck these companies basically switched off their machines to save money and sold their inventory instead. The result was the economy came to a stand still literally overnight and resulted in a 7% contraction. The process took about six months to complete after which companies had to turn their machines on again after stocks ran out to meet new orders and the economy began to recover. This time round, fearing another (and possibility worse) meltdown in Europe companies have already started destocking before the crisis has even appeared.

As opposed to 2008 when strong consumption was accompanied by overheated industrial production growth, this year we see producers to take much more cautious approach. In 2010-2011 the recovery of the economic growth was at 70% driven by stock building, said Natalia Orlova, chief economist at Alfa Bank. However, starting in the fourth quarter of 2011 Russian economy entered a destocking process. According to our estimates, in that quarter inventories contributed -0.2% to GDP growth and -0.4% in the first quarter of this year. This was the first sign that producer started to be cautious earlier than expected.

Russia finds itself in a very weird place now. Kolya's experience and the robust consumer demand means the economy is getting hot to the point where inflation is starting to rise. Russia's inflation overshot the central bank target last month and left it struggling to keep consumer-price growth below last years record low as a weaker ruble stokes food costs and utility tariffs rise, economists in Moscow said.

What is surprising is how quickly headline inflation has reversed its deceleration, wrote Alexander Morozov, chief economist at HSBC Holdings Plc in Moscow in a note to clients. The central banks job of keeping inflation in the range is seen as Mission impossible.

But on the other hand the behavior of companies suggests that the economy is slowing down. Industrial production took a nose dive in March (as did the rest of the world as growth collapsed for psychological as much as anything else). This means the CBR should move to bolster confidence and encourage growth.

Put in simple terms the dilemma is: the CBR should increase interest rates to curb inflation and cool the economy; and at the same time it should cut rates to encourage more investment and growth. The upshot of this confusion is the spread on what economist are forecasting for growth this year is very wide ranging from at least 3% to 5%. When spreads on forecasts get this wide it always means the experts are basically clueless about what will happen next.

To be fair to them the strong growth is fragile as it is partly connected to the recovery of the oil price, which is currently back at around $100 a barrel. Because of the lack of reforms and investment the high oil prices are pumping money into the economy which is feeding through to consumer demand. If oil prices fall and the government is adding a $60 scenario to the budget planning even though it is still assuming an average price of $115 for this year then that would quickly take the wind out of Russias sails. But that has always been Russia's problem. The strong consumer demand has encourage real progress and investment, but it is still no where near what is needed.

Keywords: Russia, Economy, Business - Russian News - Russia

Kolya is back in Moscow to interview for jobs. A Russian national he has just graduated from Liverpool university where he majored in Business, but has a long standing interest in aviation software and has even sold some of his software to Russian carrier Transaero. So far Kolya has had eight interviews and received eight offers. And this despite the fact that he graduated with a third from Liverpool (the grade above fail in the British system).

Apart from his obvious skill in programming (that is a sellable skill in any market) Kolya would struggle to get a job in the UK with a third from Liverpool, even in a boom. But God forbid that he went looking in Spain or Portugal where youth unemployment is now at 50% and even students with a starred first in PPE from Oxbridge would struggle to find a job.

Russia's economy is booming even if its businessmen remain glum and nervous about the future, thanks to the never-ending Eurozone crisis story. Unemployment is down to a historical low of 5.4% of the working population, which president Vladimir Putin pointed out at the St Petersburg forum in June means all the production capacity is used up.

The tight labour market is already sending wages up, which were rising by 14% at the end of the first quarter on an annualized basis. And this has fed through into rising confidence and robust growth of retail borrowing, which was up a whopping 43% in May.

Indeed, the Kremlin release a whole bunch of economic data this week that shows the economy is in robust health (for the moment). The reserve fund was supposed to be emptied by the end of 2010, but is now at just under RUB2 trillion ($60bn) and the national welfare fund (that is used to support social spending) is over RUB2.8 trillion.

Russia's external debt is up slightly to $585bn, slightly more than the gross international reserves of $513bn as of the end of June but this still means that Russia can cover its debt nearly dollar-for-dollar with cash, unlike most western economies that have national debts of around 100% of GDP these days. And even capital outflow is finally slowing and is expected to drop to $9.5bn in the second quarter, following a $43bn outflow in the first quarter.

All this means economists are starting to ask if the economy is overheating. Deputy governor of the Central Bank of Russia Alexsei Ulyukaev says that when consumer lending growth rises above 28% the economy is in danger of overheating and Russia is well beyond that point now.

The danger in this lending is that some analysts are suggesting that the quality of loans is falling, which opens banks up to problems if there is another bad external shock from Europe. However, nearly everyone agrees if this does happen the CBR has more than enough cash in reserve to prop the banks up and avoid a system financial crisis.

The black spot is in the corporate sector where companies have already started to destock. One of the reasons the 2008 crisis was so painful was companies were carrying a lot of inventory to meet the burgeoning demand of a booming market. However, when the crisis struck these companies basically switched off their machines to save money and sold their inventory instead. The result was the economy came to a stand still literally overnight and resulted in a 7% contraction. The process took about six months to complete after which companies had to turn their machines on again after stocks ran out to meet new orders and the economy began to recover. This time round, fearing another (and possibility worse) meltdown in Europe companies have already started destocking before the crisis has even appeared.

As opposed to 2008 when strong consumption was accompanied by overheated industrial production growth, this year we see producers to take much more cautious approach. In 2010-2011 the recovery of the economic growth was at 70% driven by stock building, said Natalia Orlova, chief economist at Alfa Bank. However, starting in the fourth quarter of 2011 Russian economy entered a destocking process. According to our estimates, in that quarter inventories contributed -0.2% to GDP growth and -0.4% in the first quarter of this year. This was the first sign that producer started to be cautious earlier than expected.

Russia finds itself in a very weird place now. Kolya's experience and the robust consumer demand means the economy is getting hot to the point where inflation is starting to rise. Russia's inflation overshot the central bank target last month and left it struggling to keep consumer-price growth below last years record low as a weaker ruble stokes food costs and utility tariffs rise, economists in Moscow said.

What is surprising is how quickly headline inflation has reversed its deceleration, wrote Alexander Morozov, chief economist at HSBC Holdings Plc in Moscow in a note to clients. The central banks job of keeping inflation in the range is seen as Mission impossible.

But on the other hand the behavior of companies suggests that the economy is slowing down. Industrial production took a nose dive in March (as did the rest of the world as growth collapsed for psychological as much as anything else). This means the CBR should move to bolster confidence and encourage growth.

Put in simple terms the dilemma is: the CBR should increase interest rates to curb inflation and cool the economy; and at the same time it should cut rates to encourage more investment and growth. The upshot of this confusion is the spread on what economist are forecasting for growth this year is very wide ranging from at least 3% to 5%. When spreads on forecasts get this wide it always means the experts are basically clueless about what will happen next.

To be fair to them the strong growth is fragile as it is partly connected to the recovery of the oil price, which is currently back at around $100 a barrel. Because of the lack of reforms and investment the high oil prices are pumping money into the economy which is feeding through to consumer demand. If oil prices fall and the government is adding a $60 scenario to the budget planning even though it is still assuming an average price of $115 for this year then that would quickly take the wind out of Russias sails. But that has always been Russia's problem. The strong consumer demand has encourage real progress and investment, but it is still no where near what is needed.