Signs are multiplying that the Russian economy will not die a painful death, but is just taking some long-overdue strong medicine. The country posted unexpected growth in the fourth quarter of 2014, and it can now look beyond oil for drivers of recovery.
The Federal Statistics Service said the Russian economy expanded 0.4 percent in the final three months of last year, while economists expected zero growth. This could be what traders call a dead cat bounce: At the end of last year, as the ruble took a plunge in line with the sinking oil price, Russians were hoarding imported electronics and buying expensive cars they didn’t need, expecting a price hike, Bloomberg reported.
Another reason growth continued in that dark, panicky quarter was that “the Russian government and Central Bank were able to respond swiftly with policy responses that successfully stabilized the economy,” says Birgit Hansl, the World Bank’s lead economist for Russia.
In her latest Russia Economic Report, presented in Moscow, Hansl is bearish on further growth prospects. The baseline scenario is a 3.8 percent contraction this year and a further 0.3 percent drop in 2016. Hansl and her team believe that Russia hasn’t yet fully absorbed the impact from lower oil prices, and they expect drops in incomes and consumption because of high inflation (16.5 percent on average this year) and decreased availability of consumer credit.
Investment demand will also fall off sharply, according to the World Bank, though Hansl and her colleagues concede that “the weaker ruble could create incentives for small-scale expansions in some tradable industries, financed by profits.”
Non-Oil-Based Expansion
Skeptics, however, are likely to be wrong about the scale of the non-oil-based expansion. In a research note, Ivan Tchakarov, chief economist at the Moscow branch of Citigroup, said it might herald a recovery “similar in nature, but not in magnitude, to the one after 1998.”
That year, Russia defaulted on its domestic debt, sharply devalued the ruble and introduced capital controls — to disastrous effect. Imports became even less accessible than they are now. Gross domestic product dropped 5.3 percent. The following year, it rebounded by 6.4 percent — mainly because local producers and foreign investors saw the opportunity of filling the lacunas left by ebbing imports in the domestic Russian market.
Tchakarov describes this in more technical terms. In 1999, he explains, the ruble’s real effective exchange rate aligned itself with the difference in labor productivity between Russia and its trading partners, making Russian-produced goods more competitive. That growth was not hydrocarbon-driven, and it fuelled the emergence of successful Russian companies, especially in the food industry and agriculture.
In the years that followed, rising oil prices made the ruble appreciate faster than the productivity differential improved:
That was Russia’s “Dutch disease.” It became more profitable to import than to produce locally again. “Russia should have been about 30 percent more productive relative to its trading partners to keep its external competitiveness at the same level as that in 1999,” Tchakarov wrote.
Free Capacity
Russia’s current account surplus shrank from 20 percent of GDP in 2000 to 3 percent now. The country approached the new oil slump relatively unprepared. It does, however, still have the built-in spring that uncoiled in 1999.
Tchakarov argues Russia will probably also have enough free capacity, in terms of both industrial equipment and labor, to start filling the consumption gap left by imports.
Russia is a country with a large domestic market that has just seen a sharp decline in imports. Last time that happened, in the late 1990s, corporate Russia, still young and inexperienced, rose to the challenge.
Today, economic conditions inside Russia are just as oppressive as they were then, but entrepreneurs are more experienced and have more resources: The hundreds of billions of dollars that capital flight has taken out of Russia can be reinvested, and given current interest rates in Europe, Asia and the US, Russia may well be the best place for it.
