MOSCOW, March 31 (Reuters) - Russia's economy looks set for a stronger than expected 2003 on the back of soaring exports, rising investment and robust domestic demand propelled by high oil and commodities prices, economists said on Monday.
But economists noted that volatility in the price of oil, Russia's main export, and excessive rouble strength may later in the year take some of the gloss off what looked like a very rosy picture in January and February of 2003.
Oil prices surged last week on fears of an extended war in Iraq with crude prices hitting their highest since the conflict began with some contracts over $30 a barrel.
Economists said, however, that despite the war in Iraq the average 2003 price for Russia's Urals blend should be higher than the $21.5 per barrel set in Russia's 2003 budget.
Russian industrial output jumped by an annual 5.7 percent growth in the first two months of the year with gross domestic product (GDP) powering ahead by an annual 6.1 percent.
"It is not only a commodity price story it's the fact that you've got strong export volume growth and also the capital account getting much stronger," said Al Breach, chief economist at Brunswick UBS Warburg who has recently revised Russia's 2003 GDP growth forecast to 6.5 percent from previous five percent.
Russia, the world's second largest crude exporter, had been aiming for 3.5-4.4 percent growth in 2003 depending on global crude prices but after a strong start officials raised their forecast to 4.5 percent for the year.
Peter Westin, a senior economist at Aton Capital said his better economic growth outlook stemmed largely from rising investment in fixed assets which reportedly soared almost 10 percent in the first two months of 2003.
"We now expect GDP growth of 4.8 percent (initial forecast was 4.1 percent), industrial growth of 4.5 percent and fixed investments to rise 8.5 percent," Westin said.
Investment saw anaemic growth of 2.6 percent in 2002 and was the main cause for concern that Russia's economic expansion was sputtering. Russia's GDP grew 4.3 percent last year after a 5.0 percent expansion in 2001.
INVESTMENT FIGURTES DISTORTED
Breach said it appeared that the headline investment figure for last year was distorted after the abolition of a tax break on capital investment at the start of 2002 had forced firms to inflate investment the year before.
"People underestimated the economic growth last year as they took headline numbers on investment and construction at face value and that was wrong. They were growing by eight to 10 percent rather than the reported two to three percent," he said.
Westin noted that an important economy driver this year will be higher than expected crude prices, that should allow firms to cash up for further investment. It will also mean more money for domestic consumption, giving a further fillip to economy growth.
"We believe strong growth in the first two months will continue through to summer, easing off slightly then and resuming at more moderate rates towards the end of the year.
This leads us to forecast investment growth of 8.5 percent in 2003," he said.
However, Russia's largest private bank, Alfa Bank, said it left its 2003 GDP forecast unchanged at 4.2 percent. Its economists want to wait for a few more months to see that growth is on a sustainable path.
"I am concerned by the real appreciation of the rouble which I see as a factor that could limit the investment attractiveness of Russian projects as the profitability of key sectors is shrinking given high inflation rates," Natalia Orlova, economist of Alfa Bank said.