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Russia’s New Growth Drivers

Russia’s New Growth DriversRussia’s New Growth Drivers

With none of the fanfare that greeted Saudi Arabia’s plan for the post-oil era, the Russian economy is quietly getting its biggest makeover under President Vladimir Putin. A trail left by crude’s collapse has turned up some unlikely survivors and even industries that found a way to prosper as the broader economy burned.

“New drivers for growth have already appeared in the economy—agriculture, chemicals, the food industry, domestic tourism,” Deputy Finance Minister Maxim Oreshkin said in an interview. “They haven’t yet made up for a drop in non-tradable sectors, which was a one-off and structural.”

Russia’s famously boom-and-bust economy is already turning heads. A contraction in the first quarter was smaller than all but one forecast in a Bloomberg survey, meaning the nation’s longest recession in two decades may end as soon as next quarter. The 1.2% drop in gross domestic product from a year earlier was the smallest since the decline began at the start of 2015.

While some of the shock therapy was self-inflicted, including a decision in late 2014 to shift to a free-floating exchange rate, much of it came from a bruising standoff with the West over Ukraine and turmoil in the energy markets. Tables were turned on consumer industries that took off as a $2.1 trillion energy windfall that powered domestic demand for more than a decade.

Rubble Recovering Losses

That came to an end with the decision to loosen the reins on the currency, with the central bank pulling the trigger ahead of schedule to protect its reserves as oil prices plunged. The ruble has since racked up losses against the dollar that reached 44% in 2014 and 20% in 2015, before recouping some of its decline this year with a gain of 14%.

To measure the vital signs of the economy, look to industries including agriculture, whose share in GDP last year rose to 4.4%, the highest since 2003. The success of farmers—boosted by a weaker ruble and tit-for-tat sanctions over the conflict in Ukraine—was one reason last year’s economic contraction of 3.7% was less than half the decline during the last recession, in 2009.

But lack of investment is crimping Russia’s economic growth potential, Finance Minister Anton Siluanov said Tuesday, Nasdaq reported.

Speaking on Russian state TV, Siluanov said that the economy may return to growth by the end of the year.

After growing by 7% a year an average in 2000s, Russia’s gross domestic product shrank by 3.7% in 2015 and has continued to contract, the result of low oil prices and western sanctions. Analysts’ views on exactly how the economy is set to perform this year differ, but the consensus is that lower consumer demand, inflation, a weak ruble, and falling capital investment are taking their toll.

Financialtribune.com