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Is Russia ready for a new economic development model?

MOSCOW. (Anatoly Gorev, financial analyst, for RIA Novosti) – Last week, several Russian ministries and agencies released their macroeconomic forecasts for the next few years. This is hardly surprising: the beginning of the year is the best time to make plans for the future and – if it is a pre-election year – to assess the economy's medium-term outlook. Nor is it unusual that all the major macroeconomic figures in these forecasts are pegged to oil prices, as this has long been a common practice when trying to predict Russia's economic development.

There is another remarkable thing about these forecasts, though: all of them are based on expectations that oil prices will gradually go down, but this makes the Russian authorities moderately optimistic rather than concerned, at least in estimating the rate of economic growth and inflation for the next three years.

This optimism may seem even more surprising given that ministerial forecasts speak not of a minor short-term slump on the global oil market, but of a significant drop in prices. The Finance Ministry expects the price of Russian Urals crude oil to fall from $61 to $55 per barrel this year. In 2008, this trend will continue and prices may end up at $53 per barrel, and in 2009-2010 at $52 and $50 per barrel, respectively. This means that the price of Russian oil is projected to fall by over $10 a barrel within three years.

As it turns out, the Russian authorities do not expect this development to aggravate budget problems or slow down the country's economic growth. On the contrary, they believe it may improve the situation in areas where significant achievements have been lacking so far.

Alexei Ulyukayev, first deputy chairman of the Russian Central Bank, said that declining oil prices would inevitably reduce the inflow of petrodollars into the Russian economy. This, in turn, will slow down the strengthening of the Russian ruble, which may come to a full stop by 2011, he believes.

If this does happen, the government's long-time dream may come true: the country's economic growth will accelerate because there will be no pressure on the non-financial sector from the strong ruble.

As to the financial authorities, they will be rid of at least one headache after the ruble stops strengthening. At present, the Central Bank has to both try to contain the inflation rate and buy an excessive amount of dollars in order to prevent the ruble’s exchange rate from growing too quickly. As the situation on the currency market stabilizes, the bank will only have to focus on the former task.

The Russian authorities forecast a relatively low inflation rate for the next few years. According to the Economic Development Ministry, consumer prices may grow by 7.5%-8% this year. The rate is projected to stay the same in the next three years, although during that time a significant increase in utility tariffs is expected. Notably, gas prices will surge by 25% in 2008 and by 27.7% a year in 2009-2010. Electricity tariffs for households will rise by 14% in 2008, 15% in 2009 and 18% in 2010.

Analysts at Deutsche UFG, a Russian investment arm of Deutsche Bank Group, say that the growth of utility prices will not allow the government to significantly reduce the inflation rate in the medium term. However, there are reasons to believe that it will not exceed the limits set by the financial authorities.

So the overall medium-term outlook of the Russian economy is fairly positive. There is one reservation, though: to sustain a high economic growth pace and to reduce the inflation rate and slow down the ruble's strengthening, Russia will have to change its economic development model. The present model can be described as "profiteering," according to analysts with FBK, a private audit firm. In a report published last week, they emphasized the typical features of this model, primarily the reselling of large amounts of goods in different sectors in order to make a profit. In fact, it is almost impossible to ensure stable and sustainable growth in a country with this model, because "financial investment remains notably higher than investment in fixed assets." This, in turn, hinders stable investment growth and, consequently, slows down GDP growth. Moreover, such an economy is exposed to serious risks because the stock market begins playing too big a part. These are ideal circumsta
nces for a stock market bubble. What happens to economies when such a bubble bursts could be seen almost ten years ago during the economic crisis in Southeast Asia.

However, the main danger for Russia now is not a potential stock market collapse, but the very real prospect of a slowdown in economic growth in the medium term, analysts say. The Russian economy performed fairly well last year, posting GDP growth of 6.7%. "Yet sooner or later, the trend toward an increase in purely speculative investment will lead to a relative decrease in investment in fixed assets," the FBK report says. "This, in turn, holds back economic growth. So, unless there is a decrease in speculative sentiments, the annual economic growth rate will fall to 4%-5% in the medium term."

Does Russia have time to change this model, which is no longer beneficial? Experts say that it does and point to positive shifts that have already taken place. The industrial production index in January grew by 108.4% over the same month last year. This increase came mainly from growth in manufacturing sectors. This is a very good sign, experts say. Does it mean that the profiteering model has become a thing of the past? Of course, not. But it does mean that Russia has an opportunity to change it. –0–