Russia down…but poised for growth

Although the Russian economy took a huge hit in 2009, it has weathered the storm is ready to resume the upward trend of investment and growth. Commodities prices will rise over the next several years and Russia will see it’s currency appreciate with this.

Feb. 1 (Bloomberg) — Russia’s economy shrank the most on record in 2009 after the price of oil slumped 77 percent from peak to trough and left businesses to start the year trying to adjust to smaller profits as banks cut off credit.

Gross domestic product fell 7.9 percent in 2009 after rising 5.6 percent the previous year, the State Statistics Service said on its Web site today, citing preliminary figures. The median forecast of 18 economists in a Bloomberg survey was for an 8.5 percent contraction, in line with the government’s prediction.

President Dmitry Medvedev has called 2009 the “hardest year” since Russia’s 1998 default. Banks withheld credit and companies were forced to restructure debts as 12 consecutive months of contracting industrial output depleted earnings. The sudden drop in Urals crude, the country’s chief export, to $32 in December 2008 from a peak of $143 in July that year ended a decade of growth in the world’s biggest energy exporter.

“Among the largest economies, growth collapsed the most” in Russia, Tatiana Orlova, an economist at ING Bank NV in Moscow, said before the report. “The economy was impacted by its high oil dependence and was vulnerable when external capital markets shut down.”

Household spending shrank 8.1 percent last year, the office said. Net exports, or exports minus imports, grew 58 percent in 2009 while fixed capital investment fell 18.2 percent, according to the report.

‘Humiliating’

GDP slumped a record 10.9 percent in the second quarter, underscoring what Medvedev in his “Go Russia” open letter called a “humiliating” reliance on commodities. Even as the contraction slowed to 8.9 percent in the third quarter, Russia’s performance lagged its emerging market peers. Brazil’s GDP fell 1.2 percent that quarter, while China’s grew 10.7 percent in the fourth and India’s increased 7.9 percent in the third.

The economy will expand about 3.1 percent this year and there may be a “quick return to a growth trajectory” of 5 percent to 6 percent, the government said in a Dec. 30 report.

The government exceeded its budget revenue target for the year by 9.3 percent and ratings companies Standard & Poor’s and Fitch Ratings raised their outlooks, citing improving finances.

That means the Finance Ministry’s foreign borrowing need won’t be “anywhere close” to the maximum $17.8 billion set out in this year’s budget, economists at Troika Dialog, Russia’s oldest investment bank, said in a Jan. 27 note.

‘Inflationary Risks’?

After 10 central bank interest rate cuts since April, lending may increase 20 percent this year, compared with 0.2 percent in 2009, helping the economy to grow 5 percent this year, Central Bank First Deputy Chairman Alexei Ulyukayev said on Jan. 20. At the same time, the recovery risks spurring speculative capital inflows, creating ruble volatility that may result in overheating, he warned.

“Inflationary risks are possible in the second half of the year,” and Bank Rossii may need to raise rates, Ulyukayev said.

Though 2009’s 83 percent rebound in the price of Urals crude has helped propel Russia toward recovery, policy makers warned the economic outlook may be as unsustainable as the last growth wave because of the country’s continued reliance on commodities.

“The economy will return to the quantitative parameters of its pre-crisis development quite quickly. But I don’t think this is necessarily a good thing,” Ulyukayev said. “Our pre-crisis development lacked quality, it was overheated development.” He said Russia needs institutional reform to manage its oil revenue.

“We are in the middle between Norway and Nigeria in this sense.”