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Marking Time: Despite Higher Oil Revenues, Russia's Economy Continues to Stagnate

Officials at the Economic Development Ministry stayed up late on Friday to deliver a pessimistic report about the nation's economic outlook. In the updated report, officials slightly revised most of their earlier forecasts ­ an indication that the economy has shifted from projected growth to infinite stagnation, economists say. The ministry's re-appraisal covered the three year period from 2011 to 2014, and implied that despite higher oil revenues, the ministry is bracing for slower economic growth in the near future.

The baseline scenario assumes that the government can no longer achieve this year's planned growth rate, even with higher oil prices. GDP growth, earlier predicted to reach 4.2 percent in the first half of the year, has now been revised down to 4.1 percent, Gazeta.ru reported on Saturday citing the report. In addition to slashing its investment forecast, the ministry scaled down its forecast for industrial production growth to 4.8 percent this year, against 5.4 percent earlier projected. The decline in industrial growth rate will continue over the next three years and could reach 3.9 percent in 2013.

However, the yearly average price of oil, the main source of growth, was expected to reach $108 per barrel, three dollars more than earlier predicted. The ministry also raised its forecast for 2012 to $100 per barrel from the present $93, while it expects the average oil price to hit $97 in 2013, up two dollars from previous estimates of $95 per barrel. But while rising oil prices have helped the government to increase tax revenues, economic growth still depends on whether the government would invest new windfall oil revenues into the economy. The Finance Ministry said last month that a significant part of new incomes on oil sales will go to replenish the Reserve Fund and plug holes in the budget. The budget deficit is expected to be at 2.7 percent of the gross domestic product in 2012 to 2013.

"Withdrawing oil incomes from the economy could deprive it of any stimulus for growth," Otkritie Financial Corporation Chief Economist Vladimir Tikhomirov said. "That will surely keep our country's annual economic growth rate between 3.5 percent and 4.5 percent, which is the equivalent of economic stagnation in our own case."

The Economic Ministry's more conservative projection based on falling oil prices suggests even a more dramatic slowdown in growth. In this scenario, the oil price could fall to $96 per barrel in 2012 and to $80 per barrel in 2013 to 2014. Should crude prices fall down to roughly $80 per barrel, all investment programs will be slashed by an additional 1.5 percent, Gazeta.ru reported, citing Deputy Economic Development Minister Andrei Klepach. "This is by no means the worst-case scenario or a shock-therapy," Klepach said. In a crisis, crude prices could drop to $60 to $70 a barrel, he said.

The Finance Ministry expects to cut government spending and return to a deficit-free budget in 2015 if the world oil price remains at $100 per barrel, Finance Minister Alexei Kudrin said last month. But the Economic Ministry now sees this projection as too optimistic because weaker economic activity could lead to a worsening of financial conditions, which in turn could further damp economic growth. "I do not know how one can jump to zero-deficit after this [a projected two-percent budget deficit in 2014]," Klepach said.

On the upside, Russians' real disposable incomes will receive a modest boost and are expected to grow next year from the projected 4 to 4.8 percent to 4.4 to 4.9 percent in 2013 and from five percent to 5.1 percent in 2014. But more and more Russians will rely heavily on imported goods, whose volume is expected to grow by 25.9 percent this year, compared to just 3.4 percent expected growth in exports. Klepach said Russia expects "to eventually reduce its dependence on imports significantly." However, imports are expected to stay high until 2013.

The national currency, too, is expected to weaken, along with the weakening economy. This year, the ruble will strengthen by 6.6 percent instead of the 7.7 percent previously planned. Next year the average yearly exchange rate of the ruble to the U.S. dollar is expected at 28.7 rubles to one dollar, instead of 27.9 rubles in the previous forecast. Ruble depreciation could accelerate in 2013 and 2014 to 30.1 rubles and 32.2 to the dollar respectively, against 27.9 rubles previously projected.

Investors have continued to pull billions of dollars from Russia as uncertainty about who will lead the country come 2012 lingers. An estimated $31.2 billion left the country in the first half of this year, according to the Central Bank. The ministry expects the country's capital outflow to hit $30 to $40 billion this year instead of the earlier forecast zero capital outflow, Klepach said. "We will not be able to get zero capital outflows this year," Klepach said. Next year, capital outflow is expected at zero level while inflow could be between $10 billion and $20 billion, he said.

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