A New Dimension in Russian Economic Trends?

|Russia

This year, Moscow is experiencing an unusually warm winter. This is the 11th winter that I have spent in Moscow, but this is the warmest winter I have ever experienced; there is hardly any snow in the city and the Moskva River has not frozen. Usually, the temperature falls on sunny days because of radiation cooling, but yesterday was a fine, spring-like day of the kind that we have had often recently.

Moving on to the topic at hand, the Russian economy continued to experience high growth in 2004. I do not yet have the economic performance figures for 2004 published by the government, but according to an interview I conducted at the Ministry of Economic Development and Trade at the end of last year, the real GDP growth rate was 6.8%. This was the sixth successive year of positive growth. This growth was driven by exports, consumer spending and capital investment. Imports also continued to surge, in response to expanding domestic demand (see the appended table).

Due to the runaway growth in the export price of crude oil, the current account balance recorded a surplus of $56.8 billion. Foreign currency and gold reserves built up from $77.1 billion at the beginning of the year to $124.5 billion at the end. There was also an increase in the balance of the stabilization fund, which sets aside increases in income from oil exports within the national accounts, rising to 522.3 billion rubles (about $18.8 billion) from 106 billion rubles (about $3.7 billion) at the beginning of the year.

The huge level of consumer spending is clear for all to see. For example, with regard to cars, according to the trade press here, the number of big-name foreign brand cars sold in 2004 rose by approximately 80% compared with the previous year, increasing to almost 400,000. GM-AvtoVAZ of the US sold around 55,000 cars (an increase of 218% on the previous year), while Hyundai of the ROK sold around 51,000 (a 348% increase), crossing the 50,000 mark for the number of cars sold by a single manufacturer. Incidentally, both these companies assemble cars within Russia.

However, even though the Russian economy is experiencing a visible boom and is continuing to do well against the background of an increase in resource export earnings, a new dimension has emerged since the latter half of last year. Although the export price of oil is continuing to soar, something of a shadow has appeared on the horizon with regard to the economic growth rate. The full year economic growth rate for 2004, which was projected at 6.9% as of September 2004, was revised downwards to 6.8%. The growth in capital investment began to flag and, although this was not the sole reason, domestic production growth was lower than had been expected. On the other hand, in addition to exports, consumer spending continued to grow, while imports increased significantly, in order to fulfill domestic demand.

With regard to this new trend, President Putin said at his year-end press conference on 23rd December that, “the sluggish growth rate was the common denominator throughout Russia’s national economy during the latter half of this year. We should be concerned about this and pay special attention to the problem.”

Forming the background to this are such developments as the authoritarian suppression of some conglomerates, as symbolized by the Yukos affair, which could be seen as overkill by the Putin administration, as well as moves that seem to suggest a retreat from democracy, such as the abolition of the system of direct elections for the governors of federal administrative divisions in response to the series of terrorist incidents that occurred last summer and autumn. In addition, differences in position between Russia and the west were revealed as a result of the Ukranian presidential campaign. All these developments have led to Russian investors becoming reluctant to invest in their own country.

If one asks economic experts close to the government about the future prospects relating to these matters, they respond that, “It is a temporary pullback from investment resulting from transient shifts in systems and the political mood; once these shifts are resolved and the new business environment becomes apparent to investors, investment will recover within a few months. It is important for the government to put in place an environment in which it is easy to invest, through the promotion of such policies as tax reductions and the relaxation of regulations.” On the other hand, experts who have maintained a distance from the Putin administration say that, “Investors have written off the Putin administration’s tendency towards authoritarianism and to resolve matters behind closed doors, so investment will not return for some time.”

It is hard for me to assess whether or not this new dimension that has been seen since the latter half of last year is a temporary phenomenon, without gathering around three months’ worth of data and looking at the course of events.

However, what I can feel, here in Moscow, is the increased interest in expanding into the Russian market on the part of Japanese companies. In particular, the recent enquiries that I have received from Japanese companies have not simply included those such as “We want to sell our company’s products in the Russian market”; there has been an increase in enquiries with an awareness of the issues, such as the following: “In supplying goods to the Russian market, we want to reposition Russia in the world. We want to look at the potential for local production or research and development. We want to consider approaches to collaboration with product manufacturing companies that would become suppliers of our components within Russia. We want to reconsider Russia and the CIS, looking at those areas not only as a sales market, but as production sites located close to a stable source of materials.”

If moves towards expanding into Russia were to emerge among Japanese companies, in the form of inserting Russia into the business process of research and development – component sourcing – production – sales and service that they have built up over many years as a global network, it would mean that Japanese companies had begun to accept Russia as a “normal country”, like the countries of Asia and Europe. Accordingly, we could say that it is precisely this that would, in essence, represent the process of the Russian economy becoming integrated into the global economy.

I am delighted to be in Moscow and to have the opportunity to encounter such fortuitous omens, and I believe that it is important to do one’s utmost to encourage such developments.

[Translated by ERINA]