Thursday, June 25, 2009

Russia Faces Mixed Economic Signals

Sources: Reuters, Russia Sees Some Economic Rebound, More Rate Cuts; AP, Russia's Fiscal Hawk Reins in Currency Ambitions; Reuters, Russian Officials Send Mixed Signals on Stress Test; New York Times, Oil's Price Rise Eases Push for Reform in Russia; The Economist, BRICs, Emerging Markets, and the World Economy: Not Just Straw Men; Bloomberg, Russian Stimulus 'Delay' Means GDP to Shrink 6.8%, OECD Says; Forbes, World Bank: Russian Economy to Shrink 7.9 pct

Growth forecasts for Russia started off positive early this month, but with each new figure released the outlook seems worse and worse. Numbers released by Russian officials early in the month predicted that the economy would contract slightly less than the 6.5% forecast by the IMF in 2009, albeit with performance varying greatly across sectors and among companies. The stock market also climbed 80% in the spring after devastating performance in late 2009, leading to hopes that Russia's fate might not be so dismal after all.

The expectation was that inflation would also fall this month and that the net outflow of capital could cease. Russia could then continue the strategy of cutting interest rates in order to encourage banks to loan and focus on economic recovery. Russia has also seen some relief due to recovering oil prices, though a New York Times article suggests that this may actually be a bad thing for Russia, since economic recovery tends to halt political reforms that might otherwise.

One part of Russia's recovery strategy involves close relationships with the other BRIC countries—Brazil, India, and China. At the first BRIC summit, held in Russia, all but India agreed to start switching currency reserves from dollars to IMF bonds, decreasing dependency on the dollar. Though Finance Minister Kudrin has stopped claiming that the ruble will be the new global reserve currency, Russia does continue to push for a move away from the dollar. Kudrin recently suggested that the yuan would be the quickest possible new reserve currency, though it would probably take about ten years for China to sufficiently liberalize and make the yuan convertible.

However, despite some positive signs and the possibility of productive cooperation with other emerging economies, there are also some signs of economic and financial weakness. For example, the state of Russian banks is uncertain, with government officials sending mixed messages on whether a general stress test of the banking system occurred, or whether only some banks have been tested. It is unlikely that capital injections will be used in the future, but as many as 20% of all loans may be non-performing by 2010 and bank lending is crucial to the recovery.

Growth forecasts released this week are also significantly less optimistic than the Russian numbers. The OECD predicts a 6.8% contraction for Russia in 2009, based on the Russian government's delay in enacting a stimulus package. It cautions that the government must quickly implement reforms and also inject capital into the banks to deal with delinquent corporate loans. The OECD does, however, recognize the importance of oil price recovery and a lessening of capital outflow pressures.

The World Bank's numbers are by far the worst, with a predicted 7.9% contraction for 2009 and unemployment rate of 13%. The World Bank expects that the downward pressure from the first half of the year will overpower any significant positive impact of oil price recovery, and that poverty will rise in Russia along with the need for social spending. The World Bank is cautious in terms of forecasting how long the recovery will take in Russia, and expects 2.5% growth in 2010 as opposed to the 3.7% predicted by the OECD.


1) Do you think that the oil price recovery can save Russia, or at least minimize the impact of the crisis and make recovery happen sooner? Do you agree with the New York Times article that the political impact of oil price recovery is bad for the country, or do you think recovery is in Russia's interest?

2) Considering the possible motivations of the Russian government, the OECD, and the World Bank in developing predictions about the Russian economic outlook, do you trust a particular institution more than the others? Do you think that Western institutions may have a tendency to downplay Russian recovery for political reasons, or conversely do you think that the Russian government is trying to put a positive spin on what is essentially a sinking ship?

3) Do you think that the crisis will lead to more dependency on Russia's part on Europe or the United States, such as was the case in the 1990s, or do you expect that Russia will pull away from these countries due to the U.S. role in the crisis and rely more heavily on BRIC countries or others? What political consequences do you expect the economic relationship between Russia and China to bring about for Europe or the United States?

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