Russian economy update

ChrisD(RJ) chrisd at russiajournal.com
Sun Aug 4 03:23:04 PDT 2002


The Russia Journal August 2-8, 2002 Russian and those August macroeconomic jitters By Peter Lavelle

For the most part, Russia remains a tiny economic oasis in a world economy that seems to be losing ground to an advancing desert. Any country, the developed economies in the West and emerging markets throughout the world, surely would be pleased to have Russia's macroeconomic ratios.

So, with vacation time ahead and the dead month of August upon us, I suggest we put Russia into global economic perspective. Are things as good or as bad as some are beginning to claim? Said differently, is it a question of whether the glass is half-full or half-empty? Or, better yet, do we look at the Russian economy through eyeglasses of the correct prescription? Maybe too much emotion is involved.

Those of us who went through and survived the crisis of August 1998 are scared. We all worry for Russia and may be a bit oversensitive. A slip in one ratio, lower-than-expected results in another, and external shocks all make us worry that those black days four years ago may return to wreak havoc on the child we call the Russian economy. Economic Development and Trade Minister German Gref's recent press conference gave me the impression he spoke as a concerned father as well as a man cognizant of a tight labor market.

President Vladimir Putin emerged with promises of reform and stability. In many ways, he has made good on these intentions. Most see him as serious and committed to a no-nonsense path to make Russia into something resembling a "normal country." During his presidency, we have seen macroeconomic ratios few could have predicted from the perspective of the ruins of 1998. But, as of late, those sterling results we had just got used to seeing have begun to lose their luster. Putin has made it clear that he is not pleased with these new numbers as well.

A snapshot of some ratios gives the sensitive among us concern. Industrial production growth has fallen from 5.5 percent in the first half of 2001 to 3.1 percent in the first half of this year. Domestic investment this year to date is almost flat at 2 percent on the back of 18 percent in 2000 and 15 percent last year. And budget constraints have crawled back into the picture.

The federal government had to bail out regional budgets in May. This is not the result of the recently instituted tax laws, but of poor administrative performance in the regions. Profits generated in the industrial sector, if adjusted for inflation, have halved compared to the first six months last year. The ugly face of barter is again on the screen. State officials are again being paid late, and UES collections are falling behind schedule with barter payments in evidence.

Should we be worried? It is difficult to say; it depends on what worries you. All of the above issues considered separately are not so disconcerting. Collectively, they point to overall and relative economic deterioration. The reason for this is a problem that has never been properly addressed in the wake of the August meltdown: The economy, for all the reforms, remains rigid in terms of reacting to a rapid deterioration in price competitiveness. This rigidity is an obvious area of concern.

One of the biggest problems is the value of the ruble against the dollar. With real appreciation of the currency at 8 percent a year and wage increases at 20 percent - add to this increased utility tariffs - Russian companies either have to sacrifice profits or price themselves out of the market. The latter increases inventories and lowers demand - and eventually lowers industrial output. The incentive to delay payments is obvious.

The banking sector has been scarcely touched. Labor and capital mobility are hardly in a better state. Without reforming these areas, market inefficiencies will remain, and some of the best and brightest of Russia's corporations will be punished by their unreformed peers.

On the other hand, things are not as bad as some would have us believe. There are some good signs about the macroeconomic situation as well. The Russian assets market remains promising at least for the balance of the year - the world oil-price regime willing.

Additionally, it needs to be pointed out that some Russian corporations are performing very well. In spite of a business environment challenged by government commissions or omissions, some firms are poised to continue to benefit from the inefficient market environment as a result of the inattentive bureaucrats sponsored and protected by Prime Minister Mikhail Kasyanov & Co.

Are we missing the big picture? Have we maybe forgotten that an economy is something that has to be managed and is politically sensitive? August 1998 made our worst nightmares come true. It is quite possible that we are allowing ourselves to be overly influenced about something that is really an illusion. Russia's current economy is not the same house of cards it was during the Yeltsin years. It is far more sophisticated than it was in 1998.

Some areas of the economy are more reformed than others. The reformed and the unreformed do not always work well together. There is no textbook for the Russian economy; a countless number of economic actors are currently writing it. On top of this, four years ago most of us had an enormous, almost religious, faith in the economic model exported by the United States. The approaching desert appears to be making ground there as well.

It is never a good idea to go on vacation when one has worries. So go off to one of those exclusive and expensive desert beaches somewhere and remain thoughtful and concerned about Russia's economic state.

Let the economists sit it out in sweltering Moscow to debate the gloomy collapse of the economy. There is a reason why economics is called the "dismal science."

(Peter Lavelle is a Moscow-based analyst. E-mail him at plavelle at rol.ru.)



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