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Economic Research Department, Swedbank AB (publ), SE-105 34 Stockholm, tel +46 (0)8-5859 1028
e-mail: ek.sekr@swedbank.se Internet: www.swedbank.se Responsible publishers: Cecilia Hermansson +46 (0)8-5859 1588
Magnus Alvesson +46 (0)8-5859 3341, Jörgen Kennemar +46 (0)8-5859 1478 ISSN 1103-4897
Economic activity, 2003 – 2009
30
25
20
15
Annual change in percent
10
-5
-10
-15
-20
-25
Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3
03 04 05 06 07 08 09
GDP (real) Manufacturing Retail Investment
Source: Reuters EcoWin
The external demand contraction exacerbates the downturn. The Global demand
global recession has hit the Russian export sector hard and the value is slowing …
of exports fell by nearly 50% during the first three months of the year
compared with the same period of 2008, largely due to falling oil
prices. Despite lower imports, the trade surplus fell significantly,
reducing Russia’s foreign reserves. The rouble was devalued
stepwise last fall, but rising oil prices and tighter monetary policy has
strengthened the value slightly in recent months.1 The value of the
rouble has not fallen in real terms as much as during the crisis in
1998-99, when it dropped by more than 50%. In May 2009, it had
declined about 11% compared with November last year. This
provides the Russian economy with a slight competitive advantage,
while, however, the servicing of foreign debt becomes more costly.
50 130
40 120
USD per barrel
30 110
20 100
10 90
0 80
-10 70
-20 60
-30 50
-40 40
-50 30
jul okt jan apr jul okt jan apr jul okt jan apr
06 07 08 09
Export (value, USD) Oil price (Ural)
Import (value, USD) Rouble against basket (55% USD; 45% EUR)
Source: Reuters EcoWin
1
Russian exchange rate policy is built on a target rate for the rouble against
a basket consisting of dollars (55%) and euros (45%). During the latter half
of 2008, the target rate was raised as the international financial crisis
worsened and oil prices dropped. At present, the Russian central bank has a
target of 41 versus the basket.
17
50
Annual change in percent
16
40
15
Percent
30 14
13
20
12
10
11
0 10
sep nov jan mar maj jul sep nov jan
07 08 09
Lending rate (RHS) Credit to households Credit to enterprises
Source: Reuters EcoWin
Household demand has also slowed. Falling real wages and rising Households are
unemployment have pushed real disposable income down. The struggling with real
Russian labor market is flexible in terms of wage setting and is wage cuts and
quickly adapting to lower demand, but unemployment is still rising rapidly rising
substantially, and reached in April 10.2% before moderating slightly in unemployment
May to 9.9%. Growing wage arrears further worsen the economic
situation for households. Lower labor costs are helping to ease
declining profitability in the private sector, but could, at the same time,
create social unrest and tension. The consequences of the economic
crisis have been especially tangible in cities and regions dominated
by few industries and employers.
20 9.0
15 8.5
Percent
10 8.0
5 7.5
0 7.0
-5 6.5
-10 6.0
-15 5.5
-20 5.0
aug dec apr aug dec apr aug dec apr aug dec apr aug dec apr aug dec apr aug dec apr
02 03 04 05 06 07 08 09
Disposabel income (real) Real wages Unemployment rate (RHS)
Source: Reuters EcoWin
The risks remain high, however. Overly expansive policies could … but the economy
exhaust the possibilities of fighting the crisis at a later stage. The remains vulnerable
problems in the financial sector could be more severe than currently
estimated, and may require considerably greater resources to avoid
acute liquidity problems. Furthermore, tax cuts and increased
subsidies to the business sector could be hard to claw back once the
economy rebounds, eroding fiscal sustainability. Expansive policies
also put pressure on exchange rates and inflation. External capital
inflows and investments could also decline further if the international
outlook on the Russian economy deteriorates. Moreover, oil prices,
which are currently helping Russia to mitigate the crisis, could quickly
reverse again. The economy, thus, remains vulnerable.
8 600
7
550
6
US dollar billion
Percent of GDP
Reserves 500
5
4 450
3
Budget balance 400
2 (LHS)
350
1
0 300
2006 2007 2008K1 2008K2 2008K3 2008
The political situation in Russia can still be considered stable, despite The political situation
that the number of protests has grown in the wake of the economic is stable, but openness
crisis. Rumors are flourishing about President Medvedev’s and Prime to the world tends to
Minister Putin’s roles, and about the possibility of a new presidential be limited
election to reinstate Putin. This is unlikely, however, and both are still
popular and the opposition remains divided. The biggest risk of
disturbances is thought to be in regions where the recession has
been especially severe, and it is likely that a considerable part of the
fiscal stimulus package will target these areas. Foreign policy has
received less attention despite the BRIC2 summit last week.
Discussions of Russian membership in the WTO also seem to have
hit a roadblock. If anything, the latest maneuver by Russia
announcing that it would seek to join the WTO as part of a customs
bloc together with Belarus and Kazakhstan will delay rather than
speed up the membership process
2
Brazil, Russia, China and India.
Higher productivity and growth potential often require extensive and Opportunity to
controversial reforms. Certain industries and segments of the increase economic
population will benefit, while others will not. The political costs could reforms
be high. However, periods of economic crisis can offer an opportunity
to implement such reforms. When large sectors of the population are
financially affected by the crisis, there tends to be less resistance to
reforms that lead to change.
In many respects, Russian reform policy was put on hold during the Investments are
recent years of high growth. Investment, both public and private, has lagging
been neglected. In the EBRD Transition Progress Index, which
measures the transition to a market economy, Russia trails the
countries that have made the most progress in terms of infrastructure
reforms (see diagram). Despite, or perhaps as a result of, Russia’s
large energy resources, investments in energy-efficient technologies
have suffered. For example, nearly 40% of heating plants in Russia
are more than 40 years old, compared with less than 3% in China.
Low electricity prices have left little incentive to expand capacity and
make efficiency improvements. Other public investments have also
proved insufficient, and limited construction of roads and transports
have hindered productivity growth in the private sector.
Infrastructure reforms in Russia – EBRD transition index, 1989 - 2008
4.0
3.5 Best
3.0
2.5
2.0
1.5
Russia
1.0
0.5
0.0
89
91
93
95
97
99
01
03
05
07
19
19
19
19
19
19
20
20
20
20
Demographic trends are another factor that could limit growth Russian demographics
opportunities. Life expectancy and birth rates are low, and health pose a big risk to
problems persist, which will lead to a dwindling population and economic development
growing share of pensioners. In the next two decades, the Russian
population is expected to fall by 12%, from about 140 million to
slightly over 120 million. Moreover, participation rates are already
high.
Other important aspects affecting the productivity development are Doing business isn't
business conditions and the degree of competition. The business easy enough yet
environment and opportunities for domestic and foreign companies to
set up and expand operations in Russia have improved significantly in
recent years. The regulations have been simplified and start-up costs
are relatively low compared with countries such as Brazil, China and
India. Still, Russia is not considered a stable market and is ranked
75th of 177 countries in a recent survey on the efficiency of its
regulatory framework (World Economic Forum). In addition, there
remains a widespread notion that private enterprise is limited by
corruption (Transparency International, 2009). In the latest “Doing
Business” report from the World Bank, Russia fell from a ranking of
52nd last year to 65th in 2009. Productivity growth is also hurt by the
lack of competition. In Russia, reforms in this area have stagnated
compared with more reform-friendly emerging market economies (see
diagram).
Competitive reforms in Russia – EBRD transition index, 1989 - 2008
4.0
3.5 Best
3.0
2.5
2.0
1.5
Russia
1.0
0.5
0.0
89
91
93
95
97
99
01
03
05
07
19
19
19
19
19
19
20
20
20
20
Magnus Alvesson
Economic Research
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Legally responsible publishers errors or omissions in Swedbank Baltic Sea Analysis.
Cecilia Hermansson,
+46-8-5859 1588.
Magnus Alvesson, +46-8-5859 3341
Jörgen Kennemar, +46-8-5859 1478
ISSN 1103-4897