- Russia was strongly hit by the financial crisis which is clearly seen in its GDP contraction of nearly 9% on a year-over-year basis. A “V-shaped” recovery is not expected for 2010, although the country’s main macroeconomic indicators suggest that the recession is over.
- Russia’s international reserves reached USD 450 billion in December 2009 and are expected to grow next year as result of rising commodity prices.
- A struggling labor market has seen real wages drop and led to a negative impact on domestic consumption. The key economic driver, however, is led by foreign demand which rose in the third quarter of 2009 and is expected to boost Russia’s GDP to 3% in 2010 and 4% in 2011.
2009 was a bleak economic year in Russia and one of the toughest years on record in the post-Soviet period. While attracting high levels of capital inflows related to the oil boom in 2009, Russia, at the same time, experienced a sharp devaluation in the ruble.
The value of the ruble is considered to be one of Russia’s most pressing threats to economic stability and growth. The global financial crisis also impacted domestic liquidity and access to credit, although local banks and companies were able to borrow in foreign currency resulting in significant growth in net borrowings.
A positive current account and gradual strengthening of private capital flows during 2009 significantly increased the level of foreign currency supply while relatively high commodity prices kept the current account healthy resulting in an increase in international reserves at the end of 2009. Since commodity prices are forecasted to increase in 2010, which in turn will boost Russia’s international reserves further, although the level of USD 600 billion as of August 2008 is unlikely to be reached in 2010. The graphs below clearly demonstrate the positive correlation between commodity prices and the levels of international reserves.
The Labor Market, Sluggish Demand And The Rebound Of Exports
Although the country’s official unemployment level reached 8%, which is low compared to the US, the figure is not comparable. The reason for a relatively low level of unemployment in Russia are measures undertaken by companies such as a shift from full-time to part-time employment with reduced wages and forced unpaid vocational leaves. The overall impact is negative, since real wages sharply decreased, resulting in negative demand and a lower level of imports.
The lack of domestic demand and difficult loan conditions are expected to have a negative impact on overall investment growth. Since state-sponsored investments dropped sharply, industrial capacity utilization reached 2003 levels - which were at 60% - compared to 74% in 2008.
Despite expected improvement in international reserves, state investment is expected to decline further this year, while budget expenditures will drop from 38% of GDP as of 2009 to 33% of GDP in 2010. Further cuts are expected in federally targeted programs which already decreased by 15% on a year over year basis and now account for approximately 2% of GDP. Accordingly, state-sponsored investment growth is expected to reach a meager 2.5% recovering from a 17% drop in 2009.
For 2009, the Russian federal budget deficit was expected to reach 8% as a result of lower tax revenues. The Ministry of Finance confirmed that the actual level was lower than anticipated. Russia’s trade balance will remain stable while exports will likely shift from Europe to commodity hungry countries such as China. Although the domestic demand of a population of 150 million people is an important component of the Russian economy, external demand however will continue to be the main driver behind economic growth. Net exports, strengthened by stable oil prices and restored demand, had already picked up in the 3rd quarter of 2009 resulting increase in25% export revenues on a quarter over quarter basis. This trend is expected to continue as net exports will remain one of the most important sources of revenue for the country in 2010.
In conclusion, following a strong contraction in output in 2009, GDP is unlikely to reach 5-6% growth as predicted by some international think tanks due to continuing sluggish domestic demand. Faster than expected emerging market recovery forecasted by IMF in January 2010 along with the strong demand for commodities, particularly from China, will boost Russia’s output to 3% in 2010 and 4% in 2011, clearly signaling that the recession is over. The process to fully restore Russia to its overall pre-crisis levels, however, will be gradual and will likely not occur in until the first half of 2012.
A sharp decrease in capital inflows in 2008, accompanied by plummeting commodity prices, resulted in the fall of fixed investments, private sector profits (necessitating the squeeze on labor costs) and productivity. This is reflected in Russia’s output, which contracted by almost 10% compared to the same period in 2008.
Some recovery was observed in the second quarter of 2009 where the industrial growth rate improved to -1% from -40% in the beginning of 2009 and exchange rates started to recover in 3rd quarter of 2009.
Although commodity prices are believed to have the most significant impact on Russia’s economy in 2009, it is important to mention that the downturn in output occurred despite relatively high commodity prices which were approximately on the pre-crisis level.
The question that arises is what are the major causes of such a sharp downturn in the economy which has shown steady growth for most of the last decade? One of the problems was the late response from Central Bank of Russia to implement the necessary measures such as monetary easing to stem the financial crisis.
While the European Central Bank (ECB) and U.S. Federal Reserve (FED) lowered their interest rates to historical levels and employed strong quantitative easing programs to boost the fragile economy, the Central Bank of Russia (CBR) decided to take the opposite direction by tightening its monetary policy and raising interest rates.
This move was seen as a measure designed to stabilize the ruble and avoid capital flight. The ruble is now expected to be relatively strong in 2010 based on the assumption that the US Dollar will strengthen only later in the year once the FED implements its exit strategy (if the dollar strengthens as the FED unwinds liquidity programs and raises rates, this could put downward pressure on the ruble).
Russia’s International Reserves
Based on plummeting Russian exports for most of 09, overall exports for the year decreased by 35% compared to 2008. As a result, many international think tanks and investment banks predicted a bleak outlook for the country’s trade balance – ie, a deficit balance. This, however, turned out to be the opposite due to an even greater decrease of imports year over year as result of a weak ruble and an increasing number of non-performing loans which in turn decreased the availably of loans in the second half of 2009 and the ability to fund trade flows. The country’s trade balance was a positive USD 110 billion in 2009 although down from USD 180 billion in 2008.
Some recovery was observed in the second quarter of 2009 where the industrial growth rate improved to -1% from -40% in the beginning of 2009 and exchange rates started to recover in 3rd quarter of 2009.
Although commodity prices are believed to have the most significant impact on Russia’s economy in 2009, it is important to mention that the downturn in output occurred despite relatively high commodity prices which were approximately on the pre-crisis level.
The question that arises is what are the major causes of such a sharp downturn in the economy which has shown steady growth for most of the last decade? One of the problems was the late response from Central Bank of Russia to implement the necessary measures such as monetary easing to stem the financial crisis.
While the European Central Bank (ECB) and U.S. Federal Reserve (FED) lowered their interest rates to historical levels and employed strong quantitative easing programs to boost the fragile economy, the Central Bank of Russia (CBR) decided to take the opposite direction by tightening its monetary policy and raising interest rates.
This move was seen as a measure designed to stabilize the ruble and avoid capital flight. The ruble is now expected to be relatively strong in 2010 based on the assumption that the US Dollar will strengthen only later in the year once the FED implements its exit strategy (if the dollar strengthens as the FED unwinds liquidity programs and raises rates, this could put downward pressure on the ruble).
Russia’s International Reserves
Based on plummeting Russian exports for most of 09, overall exports for the year decreased by 35% compared to 2008. As a result, many international think tanks and investment banks predicted a bleak outlook for the country’s trade balance – ie, a deficit balance. This, however, turned out to be the opposite due to an even greater decrease of imports year over year as result of a weak ruble and an increasing number of non-performing loans which in turn decreased the availably of loans in the second half of 2009 and the ability to fund trade flows. The country’s trade balance was a positive USD 110 billion in 2009 although down from USD 180 billion in 2008.
A positive current account and gradual strengthening of private capital flows during 2009 significantly increased the level of foreign currency supply while relatively high commodity prices kept the current account healthy resulting in an increase in international reserves at the end of 2009. Since commodity prices are forecasted to increase in 2010, which in turn will boost Russia’s international reserves further, although the level of USD 600 billion as of August 2008 is unlikely to be reached in 2010. The graphs below clearly demonstrate the positive correlation between commodity prices and the levels of international reserves.
The expectation is that despite a stronger ruble outlook for 2010, this will not hurt exports as Russia
Accumulated international reserves provided Russia with more room to maneuver, allowing the Central Bank of Russia to intervene to either strengthen the ruble or to mitigate excessive appreciation. The process was observed in spring 2009 when the CBR first let the ruble strengthen and then started to purchase foreign currencies in order to prevent the further appreciation of the ruble. Building up international reserves is seen as a major source for bolstering Russia’s monetary base. During the financial crisis, the Central Bank of Russia, as a lender of last resort, started to provide loans to the country’s commercial banks and financing the budget deficit from its Reserve Fund.
The Labor Market, Sluggish Demand And The Rebound Of Exports
Although the country’s official unemployment level reached 8%, which is low compared to the US, the figure is not comparable. The reason for a relatively low level of unemployment in Russia are measures undertaken by companies such as a shift from full-time to part-time employment with reduced wages and forced unpaid vocational leaves. The overall impact is negative, since real wages sharply decreased, resulting in negative demand and a lower level of imports.
The lack of domestic demand and difficult loan conditions are expected to have a negative impact on overall investment growth. Since state-sponsored investments dropped sharply, industrial capacity utilization reached 2003 levels - which were at 60% - compared to 74% in 2008.
For 2009, the Russian federal budget deficit was expected to reach 8% as a result of lower tax revenues. The Ministry of Finance confirmed that the actual level was lower than anticipated. Russia’s trade balance will remain stable while exports will likely shift from Europe to commodity hungry countries such as China. Although the domestic demand of a population of 150 million people is an important component of the Russian economy, external demand however will continue to be the main driver behind economic growth. Net exports, strengthened by stable oil prices and restored demand, had already picked up in the 3rd quarter of 2009 resulting increase in25% export revenues on a quarter over quarter basis. This trend is expected to continue as net exports will remain one of the most important sources of revenue for the country in 2010.
In conclusion, following a strong contraction in output in 2009, GDP is unlikely to reach 5-6% growth as predicted by some international think tanks due to continuing sluggish domestic demand. Faster than expected emerging market recovery forecasted by IMF in January 2010 along with the strong demand for commodities, particularly from China, will boost Russia’s output to 3% in 2010 and 4% in 2011, clearly signaling that the recession is over. The process to fully restore Russia to its overall pre-crisis levels, however, will be gradual and will likely not occur in until the first half of 2012.
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