The Russian Economy: Its Serious Recovery Depends on Domestic and Foreign Investment

|Russia

The condition of the Russian economy has been positive. In 1999 the Russian economy greatly recovered; GDP grew by 3.2% and the mining and manufacturing industries grew by 8.1%. The economy has maintained its positive condition in the first half of the year 2000. The mining and manufacturing industries increased by 10.3% between January and April compared with the same period of the previous year; agricultural production recorded a 1.2% increase and investment experienced a sharp increase of 13.1% in the same period. As a reflection of the bright economic conditions, transportation volume increased 6.5% and retail volume increased 7.6%. Inflation, over which there was great concern, continued to increase of a rate of 5.0%. It is forecast to be less than 12% for whole year.

New President Vladimir Putin, who won the presidential election by a landslide in March 2000, was officially appointed in May. His fresh, active and sharp activities have raised confidence in the nation, and political stabilization that was desired earnestly has begun to be realized. Therefore, the Russian economy now has promising prospects for the future. The pessimism which covered Russian society by the Spring of 1999, after the devaluation of the Ruble in August 1998 and the beginning of financial crisis, faded away.

It is forecast that economic growth (GDP growth) will be 4~5% in 2000 (by Andrei Illarionov, Presidential Advisor), the inflation rate will be less than 12% (by Alexey Kudrin, Minister of Finance), average economic growth during 10 years between 2000 and 2010 will be 5% (by the Center for Strategic Developments, a think-tank directly under presidential control). The economic forecast has become very optimistic.

The factors causing this recovery of the Russian economy are as follows: (1) the positive effect of the devaluation of the Ruble, i.e. increasing competitiveness of export products in the international market; (2) the steep rise in international oil prices and improved trade balance; (3) the increase in currency supply; (4) the efforts of enterprises to improve management; (5) the increase in investment; and (6) citizens living a restrained life, etc. In particular, the devaluation of the Ruble and the rising international oil price had a great impact.

Large increases in production in the mining and manufacturing industries in 1999 and the first half of 2000, however, were brought about by the excessive full operation of existing obsolete equipment and facilities, which did not improve because of continuous decreases in investment from 1992 – 1998. Such an increase cannot be continued. New equipment investment is crucial in production fields for the serious recovery of the Russian economy. The expectation for foreign capital is huge.

President Putin and other important people in his new government request direct foreign investment in Russia at many opportunities and promise to urgently realize the necessary legal environment for the introduction of foreign capital. This is because they fully recognize the reality mentioned above.

Investment from Europe and North America has begun to increase due to the feeling of political stabilization and economic recovery in the early days of the Putin government. It exceeded US$10 billion only between January and May 2000. George Soros, an international investor leading a US large hedgefund, met with Prime Minister Kasyanov at the beginning of June 2000. At the press conference after the meeting, he emphasized that the Russian economy is in very good condition, and it is enjoying real growth, but Russia has been suffering from capital shortage and he was ready for the investment (reported in “Asahi Shimbun,” June 10, 2000, evening edition).

Great changes are occurring in foreign investment in Russia. Although more than 60% of total foreign investment was concentrated in Moscow by 1998, 24% of direct investment, which is US$1.02 billion, was invested in the Sakhalin Region in 1999. As a result, the Sakhalin Region became the biggest recipient of foreign investment in Russia, much bigger than Moscow in second place (US$790 million).

The extent of Japan’s investment in Russia is small and far behind European and North American countries. It is necessary to consider active measures.

[Translated by ERINA]