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External factors dealt the final blow. Short-term external debt of commercial banks grew to $19 billion and spelled doom for the financial system of the country. Artificially supported ruble led to the warp of prices on export and import – competitiveness of Russian goods became low, it became inefficient to produce goods domestically. As a result, for example, 60% of food items were imported. The country had a clear oligopolistic socio-economic model with 10% of domestic companies producing 70% of goods. Consumption level was high and there was no saving. Everything which was produced was “eaten away”. Canceling export duties instead of excises led to inflating of energy prices, which also decreased competitiveness of domestically produced goods. Further, oil prices fell, which decreased budget revenues. Capital investment into the economy fell sharply too.
Moreover, published statistical data was often misleading. Informational war of oligarchs versus new reformers who came to power led to the fall of confidence in markets, among banks and foreign investors. Then the Asian crisis came to Russia and the country saw a massive sell-off of assets. There was an intensive capital outflow from the country. CBR’s interventions did not have an effect. Yields on GKOs exceeded 100%, money market rates overnight reached 170% and the stock market crashed. Moreover, the anti-crisis program was of no help and IMF didn’t agree to give the second rescue money tranche. Result – default.
But, then it was long back. Whether Russian economy has became sturdier or not is the real question now. Yes, certainly, it has. Currently Russia faces favourable external economic conjuncture (with oil prices above $110/bbl) and continues to accumulate economic and political weight in the world.
Russia’s annual GDP growth amounted to 8.1% y-o-y in 2007 while the nominal figure stood at $1.39 trillion. Unemployment rate amounted to 6.6% in February with 5 million people from the labour force currently unemployed. Disposable income of the population grew by 10.6% y-o-y in February 2008. Russia’s industrial production demonstrated good dynamics in February with 7.5% y-o-y growth figure. Despite all talks about poor democracy of elections, political risks were diminished with the end of the presidential elections campaign. The country will keep the economic course unchanged, which creates a sustainable background for healthy investment climate. Moreover, it retains positive ratings from leading rating agencies: Moody’s (Baa2), S&P (BBB+), Fitch (BBB+) with Moody’s further going to increase Russian rating soon.
Small number of emerging market economies can boast of such high results, which Russia achieved in recent years. Russian banking sector is also strong and shows good growth dynamics despite the fact that it was affected by global financial crisis triggered by the meltdown of the US housing market and sophisticated structured investment products. Gold and forex reserves of more than $500 billion, the Reserve Fund, the National Welfare Fund and higher than expected budget surplus lend confidence with respect to the strong support of the economy.
However, there are a lot of problems which the government is planning to solve: higher than expected inflation and increase in real disposable income of the population are some of them. Possible difficulties with payouts of corporate and banking foreign debt, which have been heavily discussed recently are exaggerated. Debt burden is moderate and is manageable. The situation on money market is also much better than expected before. The Russian economy, indeed has come a long way since 1998.
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Source : IIPM Editorial, 2008
An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).
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