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Analysis & Opinion
27.10.11 Slow Traffic Ahead
By Tai Adelaja

Russia is edging toward stagnation and consequent massive devaluation of its national currency, with the prospect of slipping into a double-dip recession remaining a real possibility, a new report says. There is no "source for decent economic growth in Russia" and the country cannot sustain the four-percent economic growth predicted by the country's Ministry of Economic Development, according to researchers from the Higher School of Economics' Center for Development, who prepared the report.

The report contrasts sharply with the government’s own revised growth outlook for 2011 to 2014 based on higher oil prices but a slower global growth rate. While the oil price forecast has been upgraded to $108 per barrel in 2011, $100 in 2012 and $97 in 2013, GDP growth is not expected to receive a boost, according to a forecast released by the Ministry of Economic Development in August. The ministry predicted an increase from 4.5 percent to 5.4 percent in retail trade in 2012 while cutting the investment growth forecast from 8.8 percent to 7.8 percent.

However, researchers said the Economic Ministry’s expectation that domestic production could spur expansion in the domestic consumer goods market is baseless. Over the past three years, domestic demand for domestically produced goods has actually declined, the researchers said. They also described as "wishful thinking" the Economic Development Ministry's baseline scenario of 7.2 percent to 7.8 percent growth in investment, as well as forecasts of growth in the production sectors of the economy.

The researchers presented three scenarios for the coming years based on the assumption that the weak growth seen in 2011 will continue in 2012 through at least 2014. Under the first, or optimistic, scenario, which assumes an oil price of $100 per barrel and relatively favorable external conditions, they predicted a 3.1 percent GDP growth in 2012, but said the figure could drop to 1.1 percent and 1.7 percent in 2013 and 2014 respectively.

In the second and third scenarios, the economists based their assessment of the Russian economy on a hypothetical case of a "second wave of recession," which could see crude prices down at $60 per barrel and a simultaneous increase in capital outflows. Under these scenarios, the GDP could fall by 3.2 percent in 2012 and drop further by 1.3 percent and 3.4 percent in 2013 and 2014 respectively.

The economists also said the average ruble exchange rate would be 34.7 at best, and depreciate to 46.6 ruble to the dollar in the worst-case scenario. The Economy Ministry had predicted that the ruble exchange rate would decline slightly to 30.1 to the dollar in 2013 while the current account will turn negative.

The Russian ruble headed rapidly south against the greenback earlier this month, as Russian markets tracked the downward plunges of global stocks in August and September. The Russian Central Bank spent $14 billion to prop up and “sterilize” the weakening ruble in September and early October, Central Bank First Deputy Chairman Alexei Ulyukayev said last week. The "gradual ruble devaluation," Ulyukayev said, could mean the bank would have to revise its projections for the country's foreign reserves.

The latest findings are in sync with current prognoses by Capital Economics, which said it expects a slowdown in Russia's economic growth to three percent next year. "That would not necessarily be a disaster, given the dire outlook for the developed world," Neil Shearing, chief emerging markets economist at Capital Economics, told Reuters. "But since the economy has only just returned to pre-crisis levels of output, it would certainly be disappointing."

The report, which was published on Wednesday, came on the heel of another upbeat report released by the Economy Ministry on Tuesday. Deputy Economy Minister Andrei Klepach told journalists that there has been a 5.1 percent growth in Russia's GDP in the third quarter, prompting analysts to suggest that economic expansion has indeed gained speed in recent months. In September, the GDP grew 5.7 percent year-on-year on the back of a 5.2 percent rise in August, said the report.

A recent survey of economists conducted by Reuters showed that experts generally expected Russia’s third-quarter economic expansion to reach 5.1 percent in annual terms, putting the country on track to achieve official forecasts of 4.1 percent GDP growth this year. Other economists said, however, that there is little cause for celebration in the Economic Development Ministry’s new figures. "Taken in the context of slowing export demand and stagnation in Russian industry and accounting for the rising risks for the global economy, we believe that the respective numbers for fourth quarter 2011 and 2012 will be weaker than the September peak," Alexander Morozov, the chief economist at HSBC in Moscow, said in a note.
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