2002-2003/RUSSIA: Economy Brighter but Still Brittle

By IPS Correspondents Reprint | | Print |

Sergei Blagov

MOSCOW, Dec 23 2002 (IPS) - The Russian economy is picking up after a decade of decline through the nineties, though the pace of growth has slowed. Some fundamentals are still uncertain.

The growth in GNI (Gross National Income) is expected to reach 4 per cent for 2002, a drop from 5.5 per cent in 2001 and the record 10 per cent in 2000.

President Vladimir Putin says the economy is getting stronger. "The country has become richer and the living standards of most citizens have somewhat improved," Putin said during a two-and-a-half hour call-in show on television last week. Many people gathered in freezing town squares to hear Putin.

Putin said the government had cut its foreign debt to 40 per cent of GNI, compared to 130 per cent in 1998, although that still leaves a debt of 105.6 billion dollars owed to Western governments and banks, to the World Bank and the International Monetary Fund. Inflation was down from 85 per cent at the peak of the financial crisis in 1998 to 15 per cent this year.

Despite the slowdown, the Russian economy grew faster than many others. The Kremlin, the seat of Russian government, introduced some bold reforms like the new Land Code and restructuring of the pension system.

High oil and gas prices boosted export revenues. Trade surplus exceeded 30 billion dollars though it was less than half the 65 billion dollar surplus in 2000. Gold and hard currency reserves rose to 48 billion dollars, four times the 1998 level, according to the Central Bank.

Experts warn, however, that over-reliance on oil and gas exports may push Russia into increasing dependence on international commodity prices. There is new uncertainty over oil prices, fuelled by worry of possible U.S. military strikes against Iraq. Russia’s financial health has improved largely due to high global prices for its energy and commodity exports.

Russia is the biggest natural gas exporter. It produces 550 billion cubic metres (bcm) a year and exports more than 200 bcm. And with 12 billion metric tons of proven oil deposits, it is the world’s second largest oil producer, at more than seven million barrels per day (bpd).

But this is good news to just a few. Under privatisation much of the oil and metals industry was sold to well-connected tycoons at dirt-cheap prices. The top 65 private companies in Russia are controlled by just eight holding companies. Many of the new oil and metal magnates have transferred profits to obscure off-shore entities rather than investing in production.

The concentration of ownership in a few hands, the relatively small number of new firms entering the market and a lack of diversification in the economy suggest that much reform work still needs to be done, says Christof Ruehl, chief economist for Russia with the World Bank.

Deputy Economic Development and Trade Minister Arkady Dvorkovich has warned that the economy will begin to shrink as early as 2004 if the pace of reforms does not accelerate.

Putin’s top economic adviser Andrei Illarionov says the government needs to bring spending down to 25 per cent of GNI from the current 35 per cent. At present spending rates growth will average 2.9 per cent a year through 2015 but if spending drops to 25 per cent, growth could average 8.9 per cent, he says.

Russia’s performance since the 1998 crisis has been impressive, but the GNI is still almost 30 per cent less than it was at the beginning of the nineties, says Joseph E. Stiglitz, professor of economics at Columbia University. At 4 per cent growth it will still take another decade to get back to where Russia was at the beginning of the transition period, says Stiglitz, who won the Nobel Prize for economics last year.

Putin has promised that the average Russian will be "happy" by 2010.

2002-2003/RUSSIA: Economy Brighter but Still Brittle

By IPS Correspondents Reprint | | Print |

Sergei Blagov

MOSCOW, Dec 23 2002 (IPS) - The Russian economy is picking up after a decade of decline through the nineties, though the pace of growth has slowed. Some fundamentals are still uncertain.
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