Russia risks severe economic crisis

Photo: SCANPIX

Economy of Russia characterised by slow growth and fast price rise.

Various signs point towards Russian economy possibly going into decline this year. The negative trends appeared long before Ukrainian crisis.

Last week, Russian economy ministry lowered its 2014 growth forecast from 2.5 percent to 0.5. According to the minister Aleksei Ulyukayev, the first quarter of 2014 underperformed quarter 4^th of 2013 by 0.5 percent. 

«We don’t think this forecast is conservative, it’s quite optimistic,» commented finance minister Anton Siluanov, adding that the economy might not grow at all in 2014. 

Capital leaking

So both ministries agree that the growth outlook is bleak. That’s where the unity ends. How to fight the meagre economic growth, the views of the ministries totally differ.

Economy ministry is in favour of assuming loans, the state undertaking to stimulate the economy; also, they would like to hinder the capital outflow. The finance ministry thinks the opposite: debt levels are to be kept low; foreign currency reserves are to be preserved just in case the oil prices should unexpectedly fall. As of April 11^th, Russia’s reserves stood at $477.7bn.

By now the greatest problem is «stagflation» i.e. slow economic growth coupled with rapid price rise. To fight inflation, in February Russian central bank raised its base interest rate from the 5.5 to 7 percent; this, however, serves to slow economic growth.

Partly, the lacklustre growth is caused by the events in Ukraine, which cost Russia a lot and speed the bleeding of capital.

According to initial central bank estimates, 1^st quarter net capital outflow amounted to $50bn; economy ministry thin the sum was $63bn – which equals the total of 2013. According to the Swiss bank Credit Suisse, in March alone $33bn escaped Russia. According to predictions by Russian economy ministry, by end of the year $100bn may have fled the land.

«This is the price of our peculiar independent foreign policy,» Russia’s former finance minister Aleksei Kudrin told a recent investors’ conference in Moscow. Due to differences regarding budget policy, Mr Kudrin left the government in the fall of 2011. According to him, the Ukrainian crisis will cost Russia hundreds of billions of dollars, through sanctions.

Mr Kudrin predicted that the people have not yet received the final bill for the annexation of the geographically isolated Crimea.

«The society has not seen the end result yet, but it puts brakes on real income,» he said. «At the moment, the society is accepting the price.»

As told The Telegraph by Danske Bank economist Lars Christensen, the Russian economy may already be in recession; in case new sanctions follow, the recession may reach four percent. That would mean a repeat of the events of 2008, when $135bn worth of capital flowed out.

Domestic consumption down

Meanwhile, the severe sickness of Russian economy – overmuch dependence on oil and natural gas – is a fact long known. So far, all attempts to diversify the economy into industrial production, advanced technology and other sectors have failed. At the same time, the leadership of the land has been unable or unwilling to curb the rampant corruption which has scared off foreign investors.

Oil and gas sector provides for about 70 percent of Russia’s export revenue, and approximately a half of tax income.

Over these past years as the price of oil has stabilised, the main engine for Russian economy has been domestic consumption; last year, the growth of that stopped also. According to polls by Levada Centre, the only independent researcher in the country, consumer confidence has been in a steady decline since 2010, while the fear of inflation, especially of price rise for staple goods keeps on growing.

«If you’d open your eyes, you’d realise that social optimism and consumer optimism are in a slow downwards trend,» said Levada Centre income and consumer research chief Marina Krassilnikova, speaking at the abovementioned conference. «The situation in Crimea and Ukraine has indeed raised patriotic and imperialist optimism, but that will not last for long.»

Growth engine missing

Private investor Miljenko Horvat, head of Citibank’s Russian offices in the 1990ies, told The New York Times that outside the energy sector Russia has not succeeded in making itself economically significant. 

The man told the newspaper how he often irritates his Russian friends by the following: «I wake up in the morning and drink a cup of coffee made with a Swiss Nescafé machine. I wear clothes designed in France or Italy and probably made in Turkey. I drive a German car, I use a Korean phone, I use a computer designed in California but made in Japan or Korea. In my everyday life, I have no contact with Russia whatsoever. Whence, then, the economic growth engine?»

According to Capital Economics, the macroeconomic think-tank, Russian economy is not about to collapse as many have feared; still, the Ukrainian crisis is escalating the negative processes and the worst may be yet to come. The centre points to the slowing industrial production and retail sales in first quarter, weighing on the economic outlook. By rouble weakening regarding dollars and euros, inflation is being sped up.