Russian economy breaks free from oil curse
By Leonid Bershidsky
Signs are mounting that Russia’s economy will not die a painful death, but is just getting some powerful, long-awaited medicine. The country recorded unexpected growth in the fourth quarter of 2014, and it can now look beyond oil to find the drivers of recovery.
The Federal Statistics Service said Russia’s economy grew 0.4% in the last three months of last year, while economists expected zero growth. It could be what traders are calling a dead cat bounce: Late last year, as the ruble plunged alongside falling oil prices, Russians were hoarding imported electronics and buying expensive cars whose they didn’t need, expecting a price. raise.
Another reason why growth continued in this dark and panicked quarter was that “the Russian government and the Central Bank were able to react quickly with policy responses that succeeded in stabilizing the economy”, explains Birgit Hansl, economist Chief of the World Bank for Russia.
In his latest economic report on Russia, presented in Moscow, Hansl is optimistic about new growth prospects. The baseline scenario is a contraction of 3.8% this year and a further decline of 0.3% in 2016. Hansl and his team estimate that Russia has not yet fully absorbed the impact of lower oil prices. oil, and they expect lower incomes and consumption due to high inflation (16.5% on average this year) and reduced availability of consumer credit.
Investment demand will also fall sharply, according to the World Bank, although Hansl and his colleagues admit that “the weaker ruble could create incentives for small-scale expansions in certain tradable industries, financed by profits”. Skeptics, however, are likely wrong about the scale of the non-oil expansion. In a research note, Ivan Tchakarov, chief economist at Citigroup’s Moscow subsidiary, said this could herald a recovery “similar in nature, but not in magnitude, to that after 1998”.
That year, Russia defaulted on its domestic debt, sharply devalued the ruble and introduced capital controls – with disastrous effect. Imports have become even less accessible than they are now. Gross domestic product fell 5.3%. The following year, it rebounded by 6.4%, mainly because local producers and foreign investors saw an opportunity to fill the gaps left by falling imports in the Russian domestic market. Chakarov describes this in more technical terms. In 1999, he explains, the real effective exchange rate of the ruble aligned with the difference in labor productivity between Russia and its trading partners, making Russian products more competitive. This growth was not driven by hydrocarbons and fueled the emergence of successful Russian businesses, particularly in the food industry and agriculture.
In the years that followed, rising oil prices caused the ruble to appreciate faster than the productivity gap improved:
It was the “Dutch disease” of Russia. It became more profitable to import than to produce locally again. “Russia would have had to be around 30% more productive compared to its trading partners to maintain its external competitiveness at the same level as in 1999,” Chakarov wrote.
Russia’s current account surplus has fallen from 20% of GDP in 2000 to 3% today. The country entered the new oil crisis relatively unprepared. However, it still has the built-in spring that unfolded in 1999. The chart shows that the ruble’s real effective rate is again in line with Russia’s relative productivity. Chakarov says Russia will also likely have enough free capacity, in terms of industrial equipment and labor, to start filling the consumption gap left by imports – partly due to the onset of the crisis. , which led to a drop in capacity utilization: the only reason why Chakarov does not think that growth will be as fast as after the 1998 crisis is that he expects oil prices low, which will dampen the recovery and set the upper limit for expansion at around 3.5% next year.
Relative pessimists, like Hansl, and relative optimists, like Tchakarov, see the same data and expect the same phenomena. They differ only on the weight to be given to the various factors. This is a matter of economic modeling, but I side with the optimists for empirical reasons. Russia is a country with a large domestic market that has just experienced a sharp drop in imports. The last time this happened, in the late 1990s, still young and inexperienced Russian companies rose to the challenge. Today, economic conditions inside Russia are just as oppressive as they were then, but the entrepreneurs are more experienced and have more resources: the hundreds of billions of dollars that capital flight brought out of Russia can be reinvested, and given current interest rates in Europe. , Asia and the US, Russia might just be the best place for that (bond investors already seem to be aware of this).
My optimism about Russia’s economic resilience is not accompanied by admiration for Putin, or even for his highly capable economic team, which has been forced to reactively deal with the aftermath of the dictator’s military adventures and his increasingly warmongering statements.
These people did little for the Russian economy as the country benefited from high oil prices. They accumulated enough foreign exchange reserves to lead the country through a second economic crisis, but they did not improve the investment climate, stifle corruption or deregulate the economy. I firmly believe that the current potential for a Russian rebound exists despite the President’s actions and inclinations. This is the normal resilience of a fairly open economy in a highly sophisticated country. It’s the power of capitalism, not Putin’s regime. BloomberG