RIA Novosti January 24, 2005 EXPENSIVE OIL - PROS AND CONS FOR RUSSIA MOSCOW. (Yana Yurlova, RIA Novosti political commentator.)
The final economic results of a year are normally summed up in March in most countries. But it is already safe to say that last year was a good one for Russia.
World oil prices grew rapidly last summer. According to the Economic Development Ministry, the average price for a barrel of Russian oil was $34.5 between January and November. Oil-rich Russia naturally enjoyed a windfall. Production in 2004 totaled about 450 million tons, and exports, according to the State Customs Committee's statistics for September 2004, rose by 15.4%.
The growing flow of petrodollars greatly improved Russia's economic results. Last year's federal budget ran a surplus of $25 billion (4.1% of GDP). Indeed, this was the fifth straight surplus. Budget revenues in 2004 totaled approximately $107 billion, or 104.5% in relation to the target for 2004, and spending came to $97 billion, or 98.8%.
Under the law, budget revenues earned when the oil price exceeds $20 per barrel go to the Stabilization Fund. As a result, it had received over $20 billion by January 1, 2005. The basic level of the Stabilization Fund is 500 billion rubles (the present dollar rate is about 28 rubles per dollar). It is an untouchable reserve that may be built up by investing in highly liquid foreign assets. The money gained in excess of this reserve may be spent on paying back the country's foreign debt and covering the Pension Fund deficit. And this is exactly what has happened - last year Russia's foreign debt was down a third on the 1999 figure and stood at $112.9 billion on October 1.
Moreover, Russia's gold and currency reserves over the past year increased by almost 70% and are approaching $120 billion. The like of this was never seen even in Soviet times. Today the gold and currency reserves exceed the country's foreign debt, and Russia may well be called a net creditor.
GDP, according to preliminary estimates, was about$613 billion, and its average annual economic growth rate was 6.8%, which was not up to the Economic Development Ministry's year-end target of 6.9-7.1%. Nonetheless, this level is not below what Russia achieved in the past five years. Per capita GDP was nearly $4,000.
Investment in the country's fixed capital rose by more than 10% and direct investment in the past year totaled about $10 billion. The leading country investors in the Russian economy still are Germany, Cyprus, the Netherlands, Luxembourg, Britain, the United States and France.
The investment result, of course, could have been better, but last year did provide hope that the figures would improve. At the end of 2004, the Fitch Ratings international agency increased Russia's long-term sovereign rating in foreign national currencies from BB+ to BBB-, the short-term rating from B to F3 and the rating of a country ceiling from BB+ to BBB-. The outlook for all the categories is stable.
Industrial output in Russia, according to the Federal State Statistics Service, increased by 6.2% in January to October, 2004, as against the same period in 2003. The highest growth was in the glass and porcelain-and-earthenware industry (16.7%) and the lowest was in power generation (0.3%). Output in mechanical engineering and metalworking went up by 12%, in the fuel and chemical industries by 7.5%, in the construction materials industry by 5.5%, and in the ferrous and non-ferrous metal producing industries by 5.3% and 3.6%, respectively. Food industry enterprises increased their output by 3.8%, the timber and woodworking industry by 2.9%, and the printing industry by 2.2%. Meanwhile, production in the flour and cereals industry and the medical and microbiological industries declined by 3.1%, 5.5% and 6.7%, respectively.
Imports of goods increased almost by 25%, while exports exceeded import by nearly 100%. As result, the balance of trade was almost $80 billion in the black.
However, Russian producersare generally less competitive than many of their Western partners. The reason is that the considerable increase in the balance of foreign trade was achieved due to the favorable prices for oil and gas, and also metal. Unfortunately, Russia can offer little to global markets except oil, gas, metals and arms.
Although it may seem to be a positive factor, the growth of global oil prices appears to be having a negative effect on the country, because the economy remains oriented towards raw materials production. Meanwhile, other industrial sectors are of secondary importance and are developing very slowly. As a result, Russia, according to the Global Competition report for 2004 and 2005 circulated by the World Economic Forum in Geneva, is only 70th out of 104 countries in terms of economic competitiveness. Incidentally, the high oil prices prevented Russia from reducing inflation last year. It had been forecast that inflation would not exceed 8-10% in 2004, but according to the latest data provided by the State Statistics Service, it ran at 11.7%.
Nevertheless, as President Vladimir Putin said at a press conference in December, economic growth in 2004 led to real household incomes growing. They rose by 9%, whereas pensions went up by about 5%, and wages increased from 10% to 12.5%. The number of unemployed fell to 7.4% of the economically active population, or 5.5 million people. At the same time, according to the Russian State Statistics Service, Russia registered growth in household spending on end consumption. In the second quarter of 2004, as compared with the same period in 2003, spending on end consumption in Russia rose by 12.7%. In the U.S. this figure, including the expenditures of non-commercial organizations servicing private households, increased by 3.6%, in Japan by 3,5%, Great Britain and Canada - by 3.2%, while in France and Italy the increase was 2.8% and 1%, respectively. In Germany, household spending on consumption went down by 0.8%.
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