Viktor
Tsuker, Denis Pinchuk, Agency for Conflict Situations
The departing year, in the opinion of most economists, turned out very
successfully for the Russian economy. Actual growth belied generally
pessimistic forecasts and led to an increase in the value of the ruble against
the dollar for the first time during the reform period. Nonetheless, continued
dependence on external factors means that the gains of 2003 may disintegrate
without further structural reform.
The Year's Successes
The most pleasant economic surprise was the high rate of growth, which,
according to the State Statistics Committee, was 6.8% for the first 11 months
of 2003. For the year, according to forecasters, the figure will be 7%. And
since factory employment has not risen, productivity clearly is up. For
comparative purposes, it may be noted that Russia's gross national product rose
5.4% in 1999, 9% in 2000, 5% in 2001 and 4.3% in 2002.
The rise in gross national product (GDP) for 2003, in the view of Anton
Struchenevsky, an economist with Troika Dialogue, 'looks very good
against the backdrop of a stagnant Europe and the rather moderate American
figures. Among the major powers only China outperformed Russia in 2003.'
Struchenevsky's counterpart at Aton, Aleksei Vorobyev, recalled that 'at
the start of the year, predictions were for growth of 3.5%-4.5%.' Moreover,
economists do not entirely attribute the actual doubling of the forecast
estimates to the persistence of high prices in world markets for Russian
raw-material and other exports. That, in fact, is one of the year's major
surprises. Ekaterina Malofeyeva, an analyst for Renaissance Capital,
noted: 'No one expected that the high prices for raw materials would last so
long. One can only hope that the economy will make use of them correctly.'
Raw materials were not the sole catalyst for the rise in GDP. 'Positive
changes in the model of economic growth are quite manifest,' Struchenevsky
said, noting that in the recent period 'Russian business has been concerned
about the competitiveness of its products, and that has been a big factor in
the investment boom.' In fact, capital investments rose 12% in the first 11
months of 2003, a rate that Struchenevsky expects to hold for the year. 'This
is a very positive dynamic, considering that investments grew by only 3% in
2002,' he said. Two years ago, he said, economists feared a decline in capital
investment arising from the loss of the special privilege on the profits tax,
which was withdrawn in 2002. As Vorobyev of Aton recapitulated, a lower
tax rate more than made up for the loss of the privilege, and investments
picked up.
'At the same time, Russian enterprises moved to raise productivity and
improve working conditions,' said Malofeyeva. 'Oil prices kept the level of
liquidity high and made financing cheap,' she said.
The experts believe that the country's macro-economic stability will
continue. 'The ruble is strengthening, gold and hard-currency reserves are
growing, investments and wages are rising and the outflow of capital is not
critical for the balance of payments,' Vorobyev said. Struchenevsky agreed. 'Don't
forget the big budget surplus,' he said. 'It takes pressure off the government,
no matter how much oil prices fall.' Gold and hard-currency reserves almost
doubled in the course of the year, going from USD 47.8 billion on January 1,
2003, to USD 71.8 billion on December 12, 2003, a historic high. As for
inflation, Prime Minister Mikhail Kasyanov said the rate for the year would not
go through the 12% 'ceiling,' giving the government confidence that it can hold
the 2004 rate to 10%, he said. The most important gauge of the stock market,
the RTS (Russian Trading System) Index, is up almost 60% for the
year-from 360 (on January 4, 2003) to 570 (on December 24, 2003), with
capitalization of the market exceeding USD 144 billion. Renaissance
Capital's Malofeyeva said: 'They've succeeded in keeping inflation under
control, despite the inflow of liquidity, and thus have kept the pressure on
the ruble from becoming a burden on the real economy.'
The economy grew, she noted, in the face of serious pressure from the
stronger ruble. 'The ruble's nominal rise in value meant that Russian products
might not be able to hold off the competition from imports. Despite the fears,
however, growth occurred not only in the extractive sectors but in
manufacturing as well,' Malofeyeva said.
Vorobyev of Aton said: 'For the first time in the post-Soviet period,
2003 saw a nominal strengthening of the ruble against the dollar as a result of
generally favorable international circumstances and the devaluation of the
dollar on world currency markets.' He said the ruble was up 9% nominally
against the dollar for the year. The ruble's actual rise (taking into account
differences in consumer prices) is in the 19.5% range, he said. Struchenevsky
of Troika Dialogue cautioned, however, against exaggerating the
'successes' of the ruble this year, for it has weakened considerably against
the Euro.
Nor can one exclude the possibility that further strengthening of the ruble
will intensify the negative effects for manufacturing and lead to a period of
economic stagnation. Customs data indicates that the biggest increases in
imports are for food manufactures, raw food and products of the chemical
industry and light industry. Imports of machinery and equipment are also
strong. This, apparently, has reconciled federal officials with current trends
in the currency field.
Failures of the Year
Most of the basic industrial sectors grew in 2003. Thus: overall output for
the year's first 11 months rose 9.4% in the fuels sector, 8.9% in ferrous
metals, 8.5% in machine-building and metallurgy, 6.1% in non-ferrous metals, 5%
in food manufacturing, 2.5% in electrical energy and 1.2% in forest,
woodworking and paper and pulp. Light industry was the only exception, down
2.5%.
At a glance, the picture looks quite good. The year's industrial growth
continues to be a source of pride for the government. Detailed statistical
analysis, however, dampens the joy.
The trouble is that as early as last spring the specialists of the Institute
of the Economy in Transition (IET) noted that the latest surge of economic
growth, which had gathered strength early in the year, had begun to fade.
Slowing sales growth rates were forcing businesses to cut back on output,
correct inventory valuations and look forward less optimistically (the IET's
Index of Industrial Optimism is based on a survey of more than 800 of the
largest Russian companies-ed. note).
The surprise came in the three summer months, when industry revived,
confuting the pessimism of the forecasts. However, the situation changed in
early autumn. September saw a decrease in sales growth rates, a flattening of
output growth and a drop in expectations that these indexes were going to
change. Again, the upward trend of the Index of Industrial Optimism halted.
November's results have borne witness to the continuing negative trends in the
dynamics of demand, output and profits. The basic impediments to growth
remained: low demand, inadequate turnover and a shortage of qualified
personnel.
The 'negatives' are related to the stronger ruble, which has led to a rise
in imports, and to the raw-materials orientation of Russian exports. 'Among the
negatives, I would include the economy's continued great dependence on oil
prices,' said Anton Struchenevsky. The only way to change this, he said, are
further reforms of the Russian economy. 'There have been positive moves: the
Duma passed a packet of laws to restructure the electric companies, and there's
been a kind of pension reform, although in both cases questions remain for the
government. Laws on hard currency regulation and insuring savings have been
passed,' Struchenevsky said. Nonetheless, what will happen to the natural
monopolies, in particular to Gazprom and the Natural Resources Ministry
is uncertain, he pointed out. And negotiations on entering the World Trade
Organization are still 'hanging,' he said. 'Thus, the question of reform
probably remains extremely painful,' Struchenevsky said.
According to these analysts, progress has been lacking in many spheres
crucial to the viability of the national economy. Ekaterina Malofeyeva, of Renaissance
Capital, included among these administrative and judicial reforms that
would make it possible for businesses to defend their rights more effectively.
She also pointed to the financial sector as ineffective and performing badly.
She noted, too, the failure to adopt legislation to spur development of small
and medium businesses. Without such reforms, she regretfully concluded that
high rates of growth cannot be maintained beyond the short term.
Political Risks
The experts are certain that this year's figures would have been very much
better, had it not been for negative events on the 'political front.' Those
events seriously hurt the stock market, lethally affected the movement of
capital and trust in Russia generally. The worst of it is, they say, that these
'extra-economic factors' may turn out to be a kind of time-bomb already ticking
under the country's economic growth. Now, they said, it is up to high-ranking
officials and the 'siloviki' (Interior Ministry and prosecutors) to decide what
to do about the 'infernal machine'-disarm it or set it off. Or, perhaps, leave
it to chance.
'Political instability before the elections negatively affected the
investment climate and the stock market,' Aleksei Vorobyev said. The result,
the Aton analyst said, was cancellation of the huge deal to merge YUKOS
and Sibneft and indefinite delays of very large foreign investments in
the oil and gas sector. And growth in the capitalization of the stock market came
to a screeching halt. Still, he noted, the increased political risks did not
dissuade rating agencies from deeming Russia of investment grade. Many
observers, however, lean to the view that continued persecution of individual
businessmen could make the rating agencies think again about keeping Russia
listed as a place to invest.
As Struchenevsky of Troika Dialogue noted, the European Bank for
Reconstruction and Development regularly reviews the 'progress' of
countries moving from socialism to capitalism. 'On this scale, we don't look
bad against the background of the Commonwealth of Independent States, but
against the countries that are to join the European Union, we are clearly
backward and falling behind. The next government will face the question whether
to continue following liberal principles, the question of reform continuing in
Russia.' This, the analysts said, is the basic economic question today.
So far, the 'capitalists' have reacted very sensitively to the attacks-by
'voting with their rubles.' The Russian Central Bank is forecasting that net
outflows of private capital from Russia will come to USD 3.5 billion for the
fourth quarter of 2003 and, for the year as a whole, to USD 7.1 billion. The
figures were provided in mid-November by Oleg Vyugin, first deputy chairman of
the bank. He put forward a very disturbing statistic: Whereas in the first half
of 2003 there was an inflow of private capital to Russia of USD 4.1 billion,
the direction of flow changed sharply in the third quarter, with the outflow
reaching USD 7.7 billion by October. It is true that some experts see movement
in this sphere as essentially multivalent and subject to political conditions.
Struchenevsky, for example, thinks it possible that December will see a net
inflow of capital. That would, incidentally, further strengthen the ruble.
The considerable capital inflow of the first half was related to stock
purchases. In addition, the non-finance sector was actively borrowing from
abroad. Stock investments dried up in the second half, which brought about a
rise in the hard-currency holdings of the banking system and the significant
capital outflow of the third quarter. 'That is, in the second half the banks
reduced their investments in Russian assets and returned to hard-currency instruments,'
Vyugin said. Similarly, the rise in the outflow of capital in the second half
was partly related to the curtailment of borrowing by non-financial companies,
he said. It is true that the central bankers say they see no factors justifying
an inference that political risks have risen sharply in Russia. First Deputy
Chairman of the Bank of Russia Vyugin said very firmly: 'Political risk is not
a matter of isolated events but a judgment of a whole system of government.'
It is obvious, despite the government's inclination to deny it, that the
'flight' of capital from the country was caused by the notorious events
surrounding the giant Russian oil company YUKOS. The arrests of the
co-owners of the company-Platon Lebedev in July and Mikhail Khodorkovsky in
October-shook the entire Russian market in financial instruments and made it
necessary to talk seriously about political instability in Russia. 'The
Khodorkovsky arrest served as an extremely unpleasant reminder of Russia's
riskiness as a country, its dubious legal system and its political
incoherence,' said Steven Dashevsky, an Aton analyst. The proofs offered
by analysts may be treated as fanciful, but one can hardly call accidental the
coincidence of the unfolding of the YUKOS affair with Roman Abramovich's
pulling substantial capital out of Russia (the oligarch invested the proceeds
of his sales of Rusala and Ruspromavto into his purchase of the Chelsea
football club and London real estate).
The governor of Chukhotsk Region can hardly be the only one who wants to
keep his money 'in comfort.' After all, most of the charges made against
Khodorkovsky are based on 'gray' areas of Russian law, where the line between
deft exploitation of poorly drafted laws and deliberate violations is very hard
to draw. Insofar as almost all Russian business since the early 1990s has been,
to one degree or another, in this 'gray' zone, it is likely that campaigns akin
to the 'YUKOS affair' could be developed against any other large player
in the market. 'Money goes where it's comfortable. If they're going to start
sending Russian businessmen to jail as they used to do, no money is going to
stay in the country,' said Vyacheslav Nikonov, president of the Policy
Foundation.
In line with the basic thrust of the nation's monetary-credit policy, the
estimated outflow of private capital from Russia is expected to be in the range
of USD 5.5-5.6 billion for 2004. How things actually turn out, only time will
tell.