Near-term economic growth in Russia will be consumer-driven, as government spending and transfer payments, together with an unwillingness to raise taxes, will lift disposable income and real wages in the run-up to parliamentary and presidential elections.

That is the consensus of three authoritative public policy studies by different Moscow research centers, according to the Russia newspaper Nezavisimaya gazeta. Also, economic growth is not foreseeable, and a new crisis is increasingly likely.

According to the newspaper, political uncertainty over the presidential elections next year, in addition to a general mistrust of the investment climate, is responsible for a decline in investment. The privatization plan announced with great fanfare in 2010 was expanded this year, but the full plan has still not been authorized and may undergo further modification before approval.

Newly released economic statistics from Russia point to a stall in the economy, and there is a consensus inside and outside the country among independent experts that things will likely get worse before they get better. Paradoxically, business confidence inside the country is higher than a year ago. The Purchasing Managers Index (PMI) in manufacturing dipped below the neutral level of 50 in August but remained expansionary at 52 in the service sector.

Gross domestic product (GDP) during the second quarter of the year grew only 3.4% over the same period in 2010, compared with a 4.1% growth rate in the first quarter. Russia is the slowest-growing of the BRIC (Brazil, Russia, India, China) countries. A major reason why is that that oil and gas make up about one-sixth of its GDP (the figure for Brazil, for example, is one-tenth) and two-fifths of government revenue; and world prices for these energy resources have been falling.

The price of Urals blend, Russia's benchmark export product, has been oscillating lately around $110/barrel after hitting a high near $123/barrel in April. Commerzbank has estimated that a $10 decline in the price of oil increases the government budget deficit by 1.5% of GDP, while a separate study last year estimated that such a decline also slows overall economic expansion by 0.5%.

Thus last week the economic ministry warned that a hypothetical negative world economic scenario next year, with an oil price decline to US$60, could stymie economic expansion and lead to a "substantial" devaluation of the rouble. Finance Minister Alexei Kudrin affirmed the estimate publicly in St Petersburg.

Nevertheless, President Vladimir Putin earlier this month projected GDP growth at 4.2% to 4.3% for calendar year 2011. This is slightly higher than the independent international consensus. The World Bank expects the Russian economy to grow by only 4% this year, with the rate falling to 3.7% in 2012.

The rouble-denominated MICEX stock index in Moscow closed at 1,507 yesterday, down from a high of 1,860 in early April after breaking to the downside through a combined medium- and long-term support at 1,525 (short-term support still at 1,430), while the dollar-denominated RTS was at 1,503, down from 2,124. The fact that they are at nearly the same nominal level yet with radically different highs for the year reflects the rouble's weakness. Indeed, the rouble has closed down against the central bank's dollar-euro basket for nine consecutive trading days, falling 5% in two weeks.
The central bank's current target "corridor" for the rouble between 32.15 and 37.15 to the dollar in a "managed float", where the market is in general allowed to determine its value while the central bank, rather than trying to influence it on a day-to-day basis, intervenes so as to alter overall patterns in the fluctuation or to reduce the effects of external economic shocks.

The Customs Union with Kazakhstan and Belarus has so far had little effect on the Russian economy. Ukraine's new orientation towards negotiating a free trade agreement with the European Union will draw away an important potential anchor. Only smaller, further-flung economies such as Kyrgyzstan and Tajikistan have expressed an interest in joining the Customs Union, which remains mainly a multilateral fig-leaf for managing Russia-Kazakhstan economic relations. This is, in fact, more a political than an economic union.

According to the World Bank, a series of simulation exercises showed that the implementation of the union would put brakes on trade with third countries, weakening the international position of its participants. Moreover, their membership in the Customs Union will only complicate their individual attempts to join the World Trade Organization, while the prospect of their adhesion en bloc lacks a well-defined organizational mechanism.

The fact that Russian industry is generally uncompetitive on world markets and the dependence of the country's trade turnover on natural resources are disincentives for Moscow to embrace a global trading regime. And Georgia, where Russian troops in South Ossetia and Abkhazia have only cemented the Kremlin's grip on these regions, continues to block Russia's bid for World Trade Organization membership.

Asia Times