|RUSSIAN ECONOMY TODAY
MOSCOW. (RIA Novosti economic commentator Nina Kulikova)
In the last few years, the GDP has been growing faster in Russia than in
the European Union (EU) or the United States, averaging an increase of six
The Russian Ministry of Economic Development and Trade reported that in
the first six months of 2006, the GDP increased by 6.3% as against the
corresponding period of the previous year.
This economic growth was possible owing to the restoration of
macroeconomic stability and implementation of market reforms on the one
hand, and the state’s continued control in several industries, on the
Russia’s success in social and economic reforms has been manifest in
consistent upgrading of its credit rating to the investment level (by all
major international rating agencies), and in the decision of the EU and
the U.S. to grant it the status of a country with a market economy.
Russia continues consolidating its financial position. Its permanently
growing Stabilization Fund and gold-and-currency reserves are a guarantee
against financial upheavals, which may ensue if the global demand for its
main exports suddenly drops. In 2006, Russia has the third biggest
gold-and-currency reserves (over $270 billion) after China and Japan.
Russia’s Stabilization Fund is formed from oil taxes, if a barrel of its
Urals brand is above $27 per barrel. Last May and June the average Urals
price was $64.46 per barrel. It is no surprise that the fund has been
growing rapidly. By the beginning of last July, it surpassed $75 billion.
According to the Ministry of Economic Development and Trade, it may exceed
100 billion Euros before the end of the year.
In the spring of 2006, the Russian government decided how to use the
Stabilization Fund’s money. It is possible to convert it into foreign
currency (US dollars, Euros, or British pounds), or purchase bonds from 14
industrialized foreign countries.
Starting from July 1, 2006 Russia lifted the last remaining restrictions
in the currency sphere in order to carry out a strategic task of making
the ruble convertible. The absence of limitations on current and capital
operations is indispensable for making domestic currency fully
convertible. The former restrictions have long been abolished, but capital
operations were limited until the spring of 2006. The Russian government
believes that lifting the remaining restrictions will encourage foreign
investors to do business in Russia, and will allow Russian businessmen to
invest abroad without any difficulties.
Last July saw a successful IPO of the Russian state-run Rosneft oil
company in London and Moscow. As a result, Rosneft sold 14.8% of its
shares for $10.4 billion. Considering the IPO amount and price, its
capitalization amounted to $79.8 billion. This was the biggest Russian IPO,
and the fifth in the world.
Russia’s improved economic and financial position has allowed it to pay
its creditors ahead of time. Thus, in August 2006 Russia paid off the
remainder of its debt to the Paris Club – about $22 billion. The Finance
Ministry reported that the overall federal budget savings on interest
payments up to 2020 would surpass $12 billion. Moreover, the ratio of the
external state debt to the GDP is reduced to 9%.
This was a major event for the Russian economy. Since 1993, Russia was the
Club’s creditor and debtor at the same time. Now that it has paid off
its debts, it has become a fully-fledged creditor.
This is the biggest early debt payment in the history of the Paris Club.
The Finance Ministry hopes that it will consolidate Russia’s
international reputation of a financially solvent country, which borrows
in good faith and strives to improve its investment climate.
As a donor, Russia declared its intention in 2006 to join the G8
initiative and write off $700 million worth of debts to the poorest
In January-June 2006, Russia’s industrial production grew by 4.4% over
the relevant period of 2005. Trade and construction experienced the
fastest growth. The first six months of 2006 witnessed changes in the
structure of investment in different industries, which contributed to the
quality of the economic growth. The favorable changes took place in
processing industries and infrastructure, which are not linked with the
production of natural resources: manufacture of machines and equipment,
metallurgy, pulp-and-paper and chemical industries, food production,
pipeline transit, and communications.
Living standards in Russia are gradually rising, primarily in big cities.
Retail trade is booming, too. In the first six months of 2006 it increased
by 11.3% as against the relevant period in 2005. The growing demand was
based on the increasing available incomes, which went up by 11.1% during
the same time.
In the last few years Russia has enjoyed a steadily positive balance of
payments, and a deficit-free state budget. But budget surplus did not curb
inflation. Although price growth rates in Russia have been gradually
decreasing, inflation still remains one of the government’s greatest
concerns. In January-June 2006, it stood at 6.2% as compared to 8% over
the same period in 2005. In June 2006, as against June 2005, inflation
amounted to 9%, having almost reached the targeted upper limit for 2006
Credit for Russia’s rapid economic growth still largely goes to the
favorable situation in the world markets of fuel and other natural
resources. Owing to the high growth rates of the world economy, and,
primarily, to the Asian countries’ demand for raw materials, world oil
prices have been extremely high recently. According to the Ministry of
Economic Development and Trade, in the first six months of this year, the
price for the Russian Urals oil brand on the world market was $61.3 per
barrel, which is a 35% increase over the corresponding period in 2005.
Therefore, now Russia is concentrating on the quality of growth and
economic modernization. The government has chosen the policy of
innovations development, and has declared its intentions to launch
institutional reforms, and upgrade manpower skills.
In order to improve the human factor, the government launched four
priority national projects in the fall of 2005 – in healthcare,
education, housing, and agriculture. The budget has earmarked more than
six billion dollars for their implementation. These projects point to the
government’s intention to make the economy more socially oriented.
Whereas previously the authorities tried to steer clear of business
projects, now they have created mechanisms for targeted support of
investment projects, such as special economic zones (SEZ), and the
Russia has already established four technical-innovation and two
industrial SEZs. The 2006 federal budget allocated eight billion rubles
($280 million) for the creation of their infrastructure. Regional and
municipal authorities are going to spend the same amount for this purpose.
By law, residents of special zones will enjoy customs and tax benefits.
More zones will be set up in Russia in late 2007 – early 2008.
The main purpose of the Investment Fund established in 2005 will be to
provide financing for major projects of national significance. The
government is planning to earmark about $2.5 billion for this goal, and
expects the private sector to help co-fund these projects. -0-