Sign Emergency
Russia and it’s part as an Emerging Market Economy in 2011
Economic growth registered at 2.7 percent in the third quarter of 2010, a slight change from the good performance during the first half of the year when growth topped out at 5.2 percent in the second quarter, specifically.
The slowdown in the third quarter was due to slower export growth and the effects of the summer drought. Going forward, economic momentum in 2011 is expected to be moderate. On the one hand, Russia will benefit from high global prices of oil and natural gas. It is likely that the high prices seen at the beginning of 2011 will be sustained and could go higher. On the other hand, Russia’s energy production is not going to increase in 2011 as there has been insufficient investment in recent years. In addition, Russia’s non-commodity exports will be hurt by the slow growth of demand in Western Europe.
The Impact of Poliicy
The government has put in place a fiscal policy of spending reductions designed to cut the budget deficit
over the coming two years. While the spending cuts will have a direct negative impact on economic activity, the reduction in the deficit could have a positive impact on credit markets and business confidence. Deficit reduction, if credible, could suppress interest rates. It could also help to hold down the value of the ruble. Hence, the net effect of deficit reduction is hard to judge. In part, it will depend on what the monetary authorities do.
Monetary policy is, as usual, caught between a rock and a hard place. Inflation remains higher than desirable. After falling early in 2010, inflation accelerated in the second half of the year. This was due to the impact of higher food prices (stemming, in part, from the drought), rising real wages (the result of shortages of skilled labor), and the lagged effect of fiscal and monetary stimulus. While the central bank clearly wants to create conditions for disinflation, it is not clear what the best approach would be to bring this about. Raising interest rates – the usual route to lower inflation – might attract hot money from overseas and boost the value of the ruble. This would have a negative impact on export competitiveness at a time when the government wants to move Russia away from excessive dependence on oil and natural gas exports.
Yet currency market intervention to suppress the value of the ruble would have the effect of boosting the money supply. This, of course, would be inflationary. Russia is in a similar position to several other emerging nations like China, for example.
For now, the ruble remains relatively weak, especially against the euro. While good for export competitiveness, it probably reflects low confidence in the Russian economy given its modest growth and dependence on commodities.
Longer Term Issues
President Medvedev has announced that the state will sell stakes in about 900 companies over the next five years, raising about US$60 billion. This appears to be principally designed to reduce the budget deficit without having to directly cut spending as much as otherwise. It is not clear, however, whether this plan represents a shift toward more market orientation of policy. There are conflicting signs in this regard.
On the one hand, Russian accession to the World Trade Organization (WTO) appears to be imminent following agreement with the United States on the terms of entry. Moreover, the president has spoken of the need for modernization and increased investment in nonresource industries in order to diversify the economy and take advantage of a highly-skilled labor force. On the other hand, there has not yet been any significant movement away from protectionism and state control of the resource sector.
The big question is whether Russia can successfully move away from dependence on natural resource exports.
Many obstacles exist. Among them are the high regulatory costs of doing business, corruption, poor infrastructure and high costs of capital. On the other hand, Russia has an abundance of highly-skilled labor that could be utilized in information technology, life sciences and other highvalue-added industries if sufficient investment were to take place. Barring a shift toward such investment, the only other factor that could significantly boost long-term growth would be more investment in energy production capacity.
About the Author
Research and analysis are integral to making the right decisions when looking to Emerging Markets as an investment opportunity. That is why we thoroughly vet any new investment program/ change to our portfolio. Although many will see Russia as a hard egg to crack, our track record speaks for itself and we will continue to search out opportunities within the Emerging Markets to offer to our clients. To learn more, contact us at info@allianceemergingmarkets.com to see how one of our associates can help you make the right decision when it comes to the Emerging Markets.
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