Moscow: To the relief of its leaders, Russia is finally emerging from the worst economic crisis of the Vladimir Putin era, but the slowdown has done nothing to break its chronic dependence on hydrocarbons.
Russia—which failed to implement significant economic reform during boom years over the last half decade—has been hit harder by the crisis than any other major developing economy with the possible exception of Turkey.
The depth of its slowdown has undermined the country’s ambitions to be a major player in the nascent Bric group of the world’s four major emerging economies it hopes will rival the West.
Fellow members Brazil, India and China are all emerging from the crisis with significantly less damage to growth rates.
“Russia’s hard landing reveals the major weakness of an economic growth model based on commodity exports and massive foreign loan inflows,” said Jean Michel Six, economist at Standard and Poor’s. “Should economists now refer to BICs rather than Brics?” he asked.
The Russian economy shrank 9.8% in the first quarter on a 12-month basis and, according to preliminary data, by 10.9% in the second quarter.
Of major emerging economies, only Turkey fared worse in the first quarter, shrinking by 13.8%.
The crisis had dealt a major psychological blow to Russians who had grown used to high growth under the rule of its strongman president-turned-prime minister, Vladimir Putin, after the trauma of the 1998 financial crisis.
But gross domestic product (GDP) increased 7.5% in the second quarter from output in the first quarter and economists are expecting double- digit quarter-on-quarter increases as activity picks up.
Rail load data—a key indicator of Russia’s non-oil economy—is showing signs of improvement over the summer while gas production from state-run giant OAO Gazprom is also recovering, according to investment bank Renaissance Capital.
Meanwhile, hikes in unemployment benefits and pensions have bolstered consumer spending while banks are showing less reluctance to lend. “Green shoots have found fertile soil and are now clearly visible,” said the bank’s head of fixed income research, Alexei Moissev. “However the northern spring is notoriously unstable and green shoots can be wiped out with the return of frost.”
Help has also come from inflation, which in August was zero from the month earlier, its lowest such reading in four years.
Above all, Russia has been helped by a recovery in the price of crude oil, which slumped to around $33 (Rs1,613.70) a barrel in December 2008 and is now trading at just under $70 a barrel, still well off the 2008 peaks of $147.
Yet the country remains dangerously vulnerable to fluctuations in the price of oil and gas, which account for at least 60% of Russia’s export revenues and 20% of GDP.
Renaissance Capital said the recovery in Russia “has been largely enabled by a rebound in world commodity prices and the abundance of money globally”. “If either turns, Russia will probably enter a prolonged period of stagnation.”
Vedomosti, a financial news daily warned: “Our economy remains based on hydrocarbons and if the high oil price remains, the lessons of the crisis will be gratefully forgotten.”
The recovery in consumer spending is also set to come at a price as government spending programmes leave a gaping hole in the budget with the deficit forecast to reach over 8% of GDP this year.
To finance the deficit, Russia has been plundering tens of billions of dollars from its reserve and national wealth funds built up during the days of high oil prices.
Standard and Poor’s forecast that the reserve fund—which boasted at least $137.1 billionin January—“is likely to be fully depleted” by 2010-11.