December 1, 2004｜Russia
Guest Professor, Institute of Economic Research, Hitotsubashi University
Russia, which is blessed with abundant resources and has achieved a V-shaped economic recovery and sustained high growth since the financial crisis in 1998, is becoming the focus of attention from countries around the world, due to such factors as its status as one of the BRIC alliance. Japanese enterprises, which had been cautious about business with Russia during the 1990s, when the political and economic situation was chaotic, are now intensifying their activities. The volume of trade between Japan and Russia reached $5.9 billion in 2003, the highest level since the birth of the newly emerged Russia; trade has continued to do well in 2004 and is expected to surpass $9 billion. Besides oil and gas, investment in other resources is being considered, including coal, demand for which has been tight due to the mushrooming growth of the Chinese economy. Moreover, attention has not been confined to resources: investment in the manufacturing sector, which had been poor, has begun to develop, as can be seen from Toyota Motor Corporation’s announcement of its intention to undertake local production. According to the 2004 edition of the survey on foreign investment conducted annually by the Japan Bank for International Cooperation, interest on the part of Japanese companies has been increasing rapidly, as can be seen from the fact that Russia was ranked sixth after the US (having been placed 10th in 2003 and 16th in 2002) as a destination for direct investment whose prospects for the next three years looked promising.
However, looking at recent major economic indicators, the momentum of Russia’s economic growth has begun to decline and the positive correlation between oil prices and economic growth has weakened. On the contrary, although the price of oil has increased, GDP growth has slowed down since September. As a result, it is forecast that economic growth this year will fall to 6.5-6.9 % from last year’s figure of 7.3% and will decline further to 5-6% next year. The major reasons why growth is stagnating are as follows: 1) the rise in investment in the manufacturing sector has slowed down because of the sluggish growth of profits in oil companies due to increases in capital outflow as part of the fallout from the Yukos incident ($3 billion in 2003 and expected to be more than $12 billion in 2004), as well as increases in oil export tax; 2) the amount of crude oil exported cannot be increased, because existing oil pipelines and shipping facilities are running at full capacity; 3) international competitiveness has decreased due to the acceleration of inflation attributable to runaway growth in domestic energy prices and the appreciation of the ruble as a result of the massive current account surplus; and 4) cash flow in the construction industry has deteriorated and the growth of the sector has slowed due to the effects of the mini-financial crisis that occurred in mid-2004.
German Gref, Minister for Economic Development and Trade has been among those who have started to warn that, given the slowdown in economic growth, economic and structural reform must be accelerated in order to achieve high development. It is more likely that the country has reached a turning point that marks the end of the period of “easy high economic development” led by high oil prices, when it will be difficult to return to the high growth enjoyed in recent years without the implementation of appropriate political and economic policy by the Russian government. The political system, including the system for appointing regional governors, will change in the near future, but it is not clear how this will affect business and the economy. Given the current wrangling within the group that supports Putin, concerning the course of the economy, it is questionable whether the country will be able to accelerate economic reform, develop business infrastructure and the investment environment, and escape from an economic structure that has been excessively dependent on energy.
Nevertheless, it is not necessary to be overly wary. Due to a surge in the price of oil, Russia’s foreign currency exchange reserves exceeded $100 billion for the first time at the end of October 2004, equivalent to 14 months’ worth of imports. Moreover, the fiscal revenue and expenditure surplus has made good progress and the stabilization fund, which functions as a reserve fund, has stacked up faster than was expected, while Russia’s ability to repay its foreign debts is now impeccable. In addition, oil prices seem likely to remain high for a while to come, so it is unlikely that Russia’s economy will deteriorate rapidly and be hit by a crisis. However, since there is a risk that the business environment, which has been strong for the last few years, may change, we need to pay greater attention than before to the country’s economic and political trends, viewing both risks and chances from a multifaceted perspective.
[Translated by ERINA]