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  • The Path of Recovery for the Russian Economy: From the Perspective of a Comparison with the 1998 Crisis

The Path of Recovery for the Russian Economy: From the Perspective of a Comparison with the 1998 Crisis

|Russia

The Russian economy at present has entered a recessionary phase, and the real GDP growth rate (compared to the same period in the previous year) for the second quarter of 2009 (April to June) was —10.9%. In this paper, I will attempt to estimate the future direction regarding the economic crisis which is now hitting Russia, while continuously drawing comparison with the economic crisis of 1998.

At the time of the previous crisis (of 1998), an import substitution occurred via the devaluation of the ruble, the leading to the revival of domestic manufacturing industry also paid off, and as early as the following year of 1999 the real GDP growth rate had moved to a positive one (from -5.3% in 1998 to +6.4% in 1999). The author for his part considers, however, that the current crisis differs from the previous one, and may not get back on the track to recovery easily. I will state the reasons for this in broad outline, as below.

At the time of the previous crisis, as the qualitative level of demand of Russian consumers (individuals and enterprises) was not that high, the facts that the signal in the area of prices of the fall in the relative price of domestically-produced goods accompanying the straight-off devaluation of the ruble was viewed seriously, and that the return of demand for domestically-produced goods accompanying the import substitution occurred extensively, led to the rapid economic recovery.

In the current crisis, however, for Russian consumers, against the backdrop of the economic growth accompanying the high crude oil price up to summer last year, tastes have become sophisticated, and the qualitative level of demand for manufactured goods has risen. Moreover, because of the appreciation of the ruble having progressed from 2003 on (from a level of 31.5—32 rubles to the US dollar at the beginning of 2003 to a level of 23—23.5 rubles to the US dollar in summer 2008), added to the constant inflation, regarding domestically-produced goods, during this period the sense of their being relatively expensive increased and demand decreased, the improvement of quality did not take place to any great degree, and in the area of quality the disparity with foreign products has opened up. Therefore, regarding the return of demand for domestically-produced goods via import substitution, there has also been a change in the preferences of consumers, and it can be said that it is in a difficult situation.

Thus in the current crisis, although there is the following wind of a rising sense of the relative cheapness of domestically-produced goods, grounded by the weak ruble, it is considered that the possibility of the phenomenon of the “post-economic-crisis revival of domestic manufacturing industry” occurring, continuing on from the previous crisis, is not that high. Rather, via the same growth structure as that up to immediately before the current crisis—of growth being led via the increase in the trade surplus accompanying a renewed upturn in the price of crude oil—won’t the possibility be high for a “recovery without a revival of domestic manufacturing industry” to proceed?

However, a great differences exists between the previous and current crises as to whether the crisis measures of the government after the eruption of the economic crisis—which extend to the two aspects of finance and substance—will be actively developed. In the current crisis, the Russian government has put together a package of crisis measures coming to a total of more than two trillion rubles, and within that energy is also being put into measures for the promotion of manufacturing industry, in particular the automobile industry. As a result, if these policies bear fruit, the possibility also remains for the “post-economic-crisis revival of domestic manufacturing industry” to occur.

Taking a look here at the government’s promotion measures vis-à-vis the automobile industry, they include: 1) with an aim of increasing the demand for new vehicles in domestically-produced passenger cars, a sharp raising of import tariffs on automobiles with the intention to squeeze out the import of mostly secondhand cars; 2) subsidizing1 the interest on bank loans at the time of purchase of designated car models; 3) giving a subsidy of 50,000 rubles when disposing of a secondhand car which is over ten years old and purchasing a new domestically-produced car; and 4) subsidizing the transportation costs of domestically-produced cars to the Russian Far East.

Moreover, regarding Opel, a subsidiary of GM, negotiations are in progress for the state-owned Sberbank, which is Russia’s largest bank—together with Magna, a Canadian auto-component manufacturer—to acquire Opel; after the acquisition the transfer of technology to the Russian automobile manufacturer GAZ is envisaged, and designating it as a government-led measure for the promotion of the automobile industry is possible. In addition, moves have also been reported that they will newly establish a state-owned holding company, have the three Russian automobile manufacturers of AvtoVAZ, KamAZ and Avtodiesel hold shares, and aim for the advantages of consolidation.2

Perhaps an effect of the aforementioned policies, the Russians investigating the purchase of passenger cars have increased in the period from February to July. According to the opinion poll which the All-Russia Public Opinion Research Center conducted on 4—5 July,3 the percentage of those who answered that they intended to purchase a passenger car was 11% as of February, but as of July had grown to 19%.4 Broken down by the object of purchase, foreign-model new cars5 grew from 24% to 28%, but foreign-model secondhand cars6 decreased from 25% to 23%. Meanwhile, domestic-model new cars increased sharply from 12% to 22%, and domestic-model secondhand cars slightly increased as well, from 10% to 11%.

Next, looking at the actual sales trends in passenger cars by model using the data on sales volumes in July 2009 alone, of the top ten makes of car five were models made by Russia’s largest automobile manufacturer AvtoVAZ.7 Regarding this manufacturer’s “Lada 4×4” from among these, whilst the sales volumes of the overseas makes were across the board around 60% down on the same month in the previous year,8 it recorded an increase of 4%.

For the sales of passenger cars produced by AvtoVAZ, there has not only been the relative price-rise for imported cars via the depreciation of the ruble, but regarding the support too via the active assistance measures by the government, it is proceeding as has already been pointed out.

Henceforth the focus of attention in Russia will be whether a government-led “post-economic-crisis revival of domestic manufacturing industry” is realized.

  1. According to the edition of The Moscow Times newspaper dated 26 August 2009, the number of loans where interest subsidies were extended was 26,845 as of 20 August. In addition, according to the statement of a senior official of the Ministry of Industry and Trade whom the newspaper quoted, for the interest subsidy it is a matter of “90% being directed at AvtoVAZ”.
  2. According to the edition of The Moscow Times newspaper dated 24 August 2009, a holding company by the name of “Avtoinvest” has been newly established as a subsidiary of the state corporation Rostekhnologii—a strategic state-owned industry—and state-held shares in the corresponding automobile manufacturers are to be transferred there.
  3. All-Russia Public Opinion Research Center (VCIOM) press release dated 25 August 2009.
  4. By time of planned purchase, purchase within one month went from 0% as of February 2009 to 1% as of July 2009, and for those same months purchase within six months went from 1% to 2%, purchase within one year went from 2% to 3%, and purchase within 2–3 years went from 8% to 13%.
  5. Here denotes vehicles manufactured from 2006 on.
  6. Here denotes vehicles manufactured up to and including 2005.
  7. Kommersant newspaper dated 11 August 2009.
  8. For example, the Mitsubishi “Lancer X” was down 65% and the Toyota “Corolla” down 80% (for both, the percentage change in sales volume compared with the same month of the previous year).

 [Translated by ERINA]