RUSSIAN ECONOMY TODAY

28.08.06
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 percent.
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 other.
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 countries.
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 (8%-9%).
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 Investment Fund.
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-