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Why is the Russian Slowdown Overhyped ?

by kraju

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The Eurozone is showing signs of economic recovery with increased manufacturing activity in France and Germany, Eurostat reported on August 14th that second quarter GDP for the Eurozone expanded by 0.3 percent compared with the first quarter, ending its worst economic phase which lasted six quarters. The Markit Flash Eurozone PMI report for August indicated that the Eurozone Composite PMI jumped to 51.7 from July’s 50.5 for its highest reading in more than two years. But Russia, which is politically aligned to Europe though most of the land area of the country is in Asia, is headed towards recession with its currency plummeting, subpar GDP growth and poor domestic demand. Vedomosti, a Russian business daily reported that the Russian economy contracted at 0.1 percent annually and 0.3 percent in the first and second quarters of 2013. Russia, which will host the 2014 Winter Olympics in Sochi has seen withdrawal of investments by private investors to the extent of $ 50 billion a year and private investment by large and medium sized companies was down 6.3 percent in the first half of 2013 compared with the same period of 2012. PMI Index published by HSBC last week dropped below 50 points, showing signs of a contracting economy.

High Inflation

President Vladimir Putin has been under intense scrutiny and pressure as the public are protesting the lack of willingness of the government to combat corruption and introduce economic reforms. The central bank has not changed the interest rates despite the currency seeing a sharp decline against the Euro and annual inflation in the year has been at 6.5 percent. The central bank has said it can cut the rates once the inflation is within the target corridor of 5-6 percent, it has cited the lack of investment as a major impediment for the lack of growth, capital investment by Russian companies fell by 3.7 percent in June undershooting the forecast of a 0.1 percent rise.

Rouble hits four year low against Euro

The rouble hit a four year low point against the Euro on Thursday amid signs of tapering by U.S. Federal Reserve, the Russian currency fell to 44.33 roubles against the Euro early on Thursday before staging a slight recovery to 44.27 by mid afternoon. The rouble has lost value along with emerging market currencies on the belief that the Federal Reserve would taper its $ 85 billion bond buying programme, a roll back of stimulus would yield higher returns on U.S. bonds and draw in investors who had invested in other countries following the low interest rates in U.S.  Policymakers have given full fledged support to Bernanke’s plan to taper bond buying this year and end it by mid-2014, assuming the positive trend of job growth continues to pick up. The minutes were released on Wednesday.

“Safely” Stagnant

Experts are debating on the fact whether Russia’s economy has slipped into recession or whether it is “safely stagnant”. Although the difference between stagnation and recession is insignificant, it has become a subject of debate as Russia is the world’s sixth largest economy in the world and world’s biggest energy exporter thus becoming a driving force of the global economy. As a countermeasure the Russian Central Bank has been buying millions of dollars daily to prop up the currency and avoid a politically damaging slide. The London based Capital Economics consultancy noted that the rouble has fared better than the currencies of emerging markets in Asia mainly due to the high price on Russia’s oil and natural gas exports. Russia’s Economic Development Minister Alexei Ulyukayev said “There is no recession and there will be no recession. Stagnation is probably a better term. The growth rates are very low; this is an institutional, structural and macroeconomic factor which has to be dealt with for a very long time”. President Vladimir Putin has promised his “factory friendly” policies will create 25m of skilled jobs and revive the economy to a certain extent.  “Weak investment activity and a slow recovery in foreign demand indicate risks of a major economic slowdown, including the medium term” the central bank said in a statement. Economists feel that Russia can stage a recovery in the second quarter backed by domestic demand and creation of new jobs.

WTO Membership could spark revival

Prior to the 2007-08 financial crisis, Russian economy was growing at a rate of 7 percent annually, mainly from its oil and gas exports and providing enough reserves to finance its state expenditure. The country did not concentrate to expand its manufacturing sector and its non-energy sectors such as aerospace domain, industrial gear, pumps and compressors which had huge export potential.  However, the decision to enter WTO could give the country a fresh chance at industrial modernisation for a more diversified economy, Russia became the 156th member of WTO on August 22nd 2012, ending 19 years of negotiation. The statistics are however, not in favour of Russia at the moment with its trade shrinking at 0.7 percent in the first half of 2013, exports fell by 3.8 percent and imports increased by 4.4  percent. But experts feel that WTO membership is a “fruit to ripen”, the World Bank estimates that the membership would add an additional 3.3 percent to the nation’s GDP, or about $ 65 billion in the first three years and expected to rise to $ 220 billion within the next decade.

Chris Weafer, a senior partner with said “The weak global economy is a big part of Russia’s missed targets”. Rating agency Moody’s said Russian companies will not feel the effects of WTO membership until 2016, reaffirming the fact that it will provide a much needed impetus to the neglected sectors in Russia including military.

“The WTO is expected to give much needed synergy to the Russian economy. But synergy does not work in one year. Even a merger of companies starts working in three years. It will take longer for the state to get acquainted with all the rules and legal procedure that WTO provides for Russia” said Vladimir Chikin a partner at Goltsblat to Reuters.

Whether it is the membership of WTO, tapering of stimulus by U.S. Federal reserve or pro active measures by President Putin, it is to be seen if the world’s sixth largest economy will come out of its economic slump and provide an impetus to the recovering global economy.

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