Russian econ growth

[Chris Doss <lookoverhere1@xxxxxxxxx>]

PS Rosbalt's english-language site is closing. Damn.

Rosbalt, 01/06/2004, 18:06
Putin's Interesting Arithmetic
Analysts are divided over the ambitious plans for
national development outlined in President Vladimir
Putin's recent state of the federation speech, but
they are agreed that realizing them, if they can be
realized, will take some doing.

Leaving aside vague declarations--'the tax system must
not weigh excessively on business,' 'the state and
business must make every effort to reduce unemployment
and poverty'--we asked a number of leading analysts to
comment on the few exact figures that the president
did offer.

'First of all,' said Vadim Kotikov, an analyst for
NetTrader.ru, 'many of Putin's assertions have already
been amended by Economics Minister German Gref. Putin
is, of course, a politician, not an economist, and so
a few errors on his part can be excused. But it is odd
that the people who wrote his speech let such mistakes
get by.'

'Gross domestic product (GDP) grew 8% in the first
four months of 2004,' Putin stated at the start of his
speech. While that number might seem too good to
believe, the analysts don't question it.

'There is no reason to doubt it. It is no great jump,
just a perfectly credible increase in the rate of
growth [7.3% in 2003] arising from historically high
prices for oil and the investment and consumer boom
that high oil prices stimulated,' Kotikov said.

Anton Struchenevsky, an economist with Troika
Dialogue, said: 'To judge by the growth rate, the
country will outperform last year. Moreover, growth is
not being powered by the raw materials sector alone,
and its particularly favorable price conditions, but
by other elements of industry as well. Still,' he
said, 'it is hard to believe that this kind of growth
will last very long. Oil prices are not going to stay
up forever, and when they begin to decline, so will
growth.'

Aleksey Vorobyev, an analyst for Aton, said
preliminary figures from the Economics Ministry
indicate an 8% growth rate for the January-April
period of 2004 as compared with the same period in
2003. 'More exact figures will come in time from the
Statistical Service,' he said. 'However, judging by
the 7.9% growth rate in basic sectors of the economy
(manufacturing, construction, agriculture,
transportation, retail trade), the announced figures
look reliable.'

But what about the president's confidence that GDP can
be doubled by 2010? Is this realistic?

The notion of doubling GDP by 2010 is, obviously, a
great motivator, said Maksim Sheyn, who heads the
analysis department of Broker Credit Service. 'But to
double national output in 10 years will require growth
of 7.3% a year,' Sheyn said. 'And to double it by 2010
(that is, in six years), a rate of 12.2% a year would
be needed, not 8%. . . . This kind of exaggeration may
be all right for fairy tales but not for serious
statements of policy. . . . One can only hope for a
more sober approach in any corrections that are
forthcoming.'

Kotikov also was critical of the president's
arithmetic. 'Even assuming continuation of current
high growth rates of 8% a year, simple arithmetic
shows that GDP can be doubled no earlier than 2012
(taking 2003 as the base year),' he said. 'The real
question is on what basis Putin and the government
believe the current growth rate can be maintained.
Doubling GDP is a nice-sounding slogan, but there's
not been a word about concrete measures that the
government plans to take to see it into reality. The
most disappointing thing is that the president said
nothing about government plans to encourage small and
medium businesses, which are the source of 40%-60% of
GDP in developed countries and less than 15% for us.
Creating favorable conditions for small business would
set the stage for a real economic breakthrough, but
that apparently is harder to do than resting on the
laurels of high petroleum prices and taking credit for
the growth those bring with them.'

In the opinion of Struchenevsky of Troika Dialogue, a
doubling of GDP is possible only with very high
petroleum prices or if there are radical reforms in
the economy. 'Unfortunately, reforms are barely
moving,' he said. 'All we can say at this point is
that the president's figures are part of a political
game. We'll only really be in a position to say how
the president's declaration is being acted on when we
see the budget for 2005.'

Even maintaining the current 8% growth rate won't
produce a doubling of GDP by 2010, Aton's Vorobyev
said. 'Doubling GDP in 10 years is an extremely tricky
business,' he said. 'Much depends on the economic
picture outside Russia and that is completely beyond
the control of the Russian government.'

Finally, the president called for full ruble
convertibility within two years while holding the rate
of inflation to 3% annually.

Vorobyev said: 'Sharply reducing the rate of inflation
while stimulating high rates of economic growth is
virtually a contradiction in terms. One certainly
cannot expect a substantial cut in inflation in the
next two years, as that would hurt the effort to
double GDP. As to a freely convertible ruble, that is
unlikely any earlier than 2007, when the laws on hard
currency are to be fully liberalized. Convertibility
has to be a long-term goal, attaining which will
require that the economy becomes more competitive,
balanced budgetary policies and liberalized rules for
hard-currency capital operations. All that would
encourage trust in the Russian economy as a whole and
thus in Russia's currency as part of that.'

Even if the ruble is entirely liberalized,
Struchenevsky asked, 'Who will want it?' There is only
one answer, he flatly declared. 'It is not going to
happen without entry into the World Trade
Organization.'

On the matter of inflation, Kotikov noted that German
Gref had already quite correctly stated that an
inflation rate of 5%-6% is normal during a period of
reform (in housing sector, for example), with a 3%
inflation rate possible after 2008. 'Generally
speaking, inflation always accompanies high rates of
growth. It's at 2% in Europe, where GDP is growing at
less than 1% a year,' Kotikov said.

'As to ruble convertibility, that is a realistic goal
but only if there is a gradual relaxing of the curbs
on capital movement. But the new law regulating hard
currency, which comes into force on June 18 this year
takes what looks like just the opposite approach.
There is, for example, the requirement to keep 20% to
100% of the amount involved in a hard-currency
operation on deposit in the Central Bank for two
months to a year,' Kotikov said. 'If we want to make
the ruble convertible in two years, it hardly makes
sense, as the Chinese say, to harness the horses for
the north when you're planning a trip south.'

Maksim Sheyn, of Broker Credit Service, in an effort
to take the discussion beyond economics, said the
current national situation contained crucial new
elements. 'For example, on the matter of building
strength on oil exports. This runs directly contrary
to calls to reduce the country's dependence on natural
resources, yet it makes perfect sense geopolitically.
Bringing in new wells in Eastern Siberia, the Caspian,
Sakhalin are keys to Russia's political and economic
integration both with the West and the East,' Sheyn
said. 'We are talking of foreign affairs, the area in
which Russia has seen some very favorable changes.
Instability in the Near East and international
terrorism are all the more reason for integrating
Russia into the world. At the same time, big
expenditures toward harnessing the resources of
Eastern Siberia and Sakhalin will push Russia toward
creating a stable investment climate and government
concern for investors.'

In this regard, Sheyn said, the United States may well
move from being a mere potential customer for Russian
oil (although it is certainly seeking an alternative
to Near Eastern oil) to becoming a basic source of
financing. After September 11 the geopolitical
landscape shifted. The US has lost some of its faith
in Persian Gulf oil. But the cost of pipeline
construction and its effect on oil prices cannot be
overlooked. From this perspective, deliveries to the
West Coast of the United States are less promising
than deliveries to China. Transportation costs would
raise the barrel price of oil delivered to California
by USD 3.5-7.4, while delivery of Saudi oil to
California adds USD 1.5-2.5 a barrel.

Sheyn concluded: 'The president stipulated as the main
tasks: the economy and the army. Any state that wants
to take a leadership position in the world today must
have these three constituents of success: a strong
economy, a powerful military and natural resources.
The US has the first two, both of which Russia lacks.
That is why we see the president's goals as absolutely
right. But can they be reached in the foreseeable
future?'

Sheyn left that question unanswered.

Viktor Tsuker, Agency for Conflict Situations
Translated by Howard Goldfinger



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