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2007 was Russia’s eighth consecutive year of strong economic growth, with estimated GDP growth at 8.1%. Consumption and investment remain the main drivers of growth. The investment boom has continued, with Russia’s market opportunities apparently outweighing the poor business environment. Inflation reached 11.9% in 2007 and became a major challenge for the government, leading to introduction of price controls on some food products. The political succession arrangements after President Putin steps down have become clearer, with Putin endorsing First Deputy Prime Minister Dmitry Medvedev’s candidacy and looking likely to take the post of Prime Minister himself. This was welcomed by business representatives as providing more certainty to Russia’s investment climate.
In 2007 Russia experienced its eighth consecutive year of economic growth, with initial estimates for 2007 GDP growth at 8.1%. The highest growth continued to be registered in the construction (18% over the year to December) and retail sales (15%) sectors. Good growth in industrial production (6%), led by 9% growth in manufacturing, suggests some success in gradual diversification of the economy. Growth in fixed capital investment remained strong, bringing investment growth up to 21% for the year. Mineral extraction industries (including oil and gas) saw growth slow slightly to below 2 % (compared to slightly above 2% in 2006), and agricultural growth stalled at about 3 %.
The current account surplus for 2007 was US$77 billion according to preliminary estimates, down about 20% from 2006. This reduction was a reflection of import growth (37%) outstripping export growth (16%). Although oil export prices have increased compared to 2006, energy export volumes are growing weakly, and buoyant investment and consumption continue to push up imports. (Oil, oil products and gas represent 61% of Russian goods exports)
The financial account showed record capital inflows into Russia, mainly due to borrowing by the private sector, although inflows slowed in the second half of the year. Net capital inflows reached US$82.3bn over 2007, with about half going to the banking sector.
The rouble's real effective (trade-weighted) exchange rate strengthened 5.3% over 2007 (compared to 7.4% in 2006), sustained by increased export earnings from high oil prices as well as rapid growth in capital inflows into Russia. It appreciated 5.7% against the Euro and 14.8% against the US dollar. The nominal effective exchange rate of the rouble remained almost unchanged with a 1% increase, as the Russian Central Bank (RCB) has sought to keep the nominal effective exchange rate stable in order to prevent erosion of the competitiveness of Russian producers. This approach has competed with another goal of the RCB, containing inflation (see below).top of page
Annual inflation for 2007 was 11.9% (compared to 9% in 2006), overshooting the Government's target of 8%. Inflation was driven up by increases in food prices (15.6%), in line with world trends, and record foreign currency inflows from soaring oil prices and increased foreign investment.
The timing of this inflation surge was unfavourable for the government, with Duma (parliamentary) elections on December 2 and presidential elections scheduled for March 2008. Unfortunately, Russian authorities’ options to contain price growth are limited, with the RCB reluctant to use the main monetary lever (allowing rouble to appreciate) in order to protect the competitiveness of Russia’s non-energy sectors.
Instead, the government turned to administrative price-control measures. These included the introduction of a price-freeze on some 'essential' foodstuffs in October 2007. Agricultural producers and most large retailers agreed a partial price freeze on products such as certain dairy products, eggs, vegetable oil, and bread initially until the end of January 2008 (at the time of writing, a slightly adjusted price freeze had just been extended to May 2008). The administrative measures are expected to be largely ineffective by most observers. They are likely to simply delay the impact of higher inflation, rather than eliminate it.
Other anti-inflation measures included the introduction of export tariffs on grain and the reduction of import tariffs on certain dairy products (milk, cottage cheese and hard cheese).
Inflationary pressures were exacerbated by a loosening of fiscal policy in the final quarter of 2007, clearly influenced by the election cycle. A supplementary budget introduced in late October increased federal budget spending by 20% from the original budget. The additional spending went to social services (including an across the board increase in pensions) and financing of new state development organisations such as the Russian Development Bank, the state investment fund and the state nanotechnology corporation. The budget surplus for 2007 was officially forecast to decline in 2007 to 2.8% of GDP, down from an original forecast of approximately 5% of GDP and a figure of 7.4% of GDP in 2006. The increased spending led the IMF to voice its concern about Russian fiscal policy, given the mounting inflationary pressures.top of page
The precise impact on Russia of the global credit crunch (sparked by the US sub-prime mortgage crisis) remains unclear. Thus far, Russia has been affected less than many observers had expected. This was due to the reforms of the banking system undertaken since the 1998 financial crisis, timely intervention by the Central Bank to increase liquidity, and the presence of well-managed foreign banks in Russia’s financial sector.
As regards future effects, many analysts consider that Russia’s energy-driven economy, with relatively low exports to the United States, will protect it to an extent. The Russian government also has large foreign currency reserves at its disposal, should the liquidity situation deteriorate further. These reserves are now the third largest in world after China and Japan, thanks to record oil prices. By the end of 2007, foreign currency reserves stood at US$480 bn, nearly 60% more than a year ago. About US$157 bn is set aside in the stabilisation fund, which collects federal budget surpluses and a part of production taxes and export tariffs on oil and gas.
Commentators have noted, however, that Russia’s stockmarket has suffered and its international borrowing costs are rising. The ongoing increased cost of credit may moderate growth by slowing domestic demand and investment. The expected slowdown, however, could provide some welcome relief from the inflationary pressures Russia is now experiencing.
By November 2007 the average Russian monthly wage had risen to 14,400 roubles (approx. US$580), up 15% in real terms from a year earlier. In Russia wage income accounts for slightly over two thirds of total income, the rest coming from sources such as small side businesses, capital earnings and social payments. About half the population has incomes that are only two-thirds of the average income, and nearly 13% of the population lives on less than US$150 a month. According to the Russian Statistics Service, Russia's Gini coefficient (a measure of income disparity, with 0 meaning no inequity and 1 - all income goes to the richest) was 0.41 at the end of 2006. This puts income distribution in Russia at slightly worse than in any EU country, although incomes are still distributed more evenly than in the US or China. Russia's Gini coefficient was 0.29 when the Soviet Union collapsed; it reached 0.40 in 2000 and has only increased slightly since.
In November, Russia’s Finance Ministry announced that it was prepared to pay back early most of its World Bank loans and that it might cease borrowing from the World Bank altogether. Russia's World Bank borrowings currently amount to US$4.4 bn, and extensive negotiations would be necessary for payment of the debt. Over the last two years, Russia has paid down prematurely all of its debts to the IMF and Paris Club, and has seen a corresponding boost in its international credit-worthiness. Russia has an extremely low degree of indebtedness by international standards. The ratio of public foreign debt to GDP is under 4%.
Elections for the Russian lower house of parliament (the Duma) were held on December 2. The United Russia Party, endorsed by President Putin, got 64.3 percent of the vote and over two thirds of the seats in the Duma, giving it a constitutional majority. Later in December, Putin gave his support to the plan of several political parties to put First Deputy Prime Minister Dmitry Medvedev forward as their common candidate in the presidential election in March 2008. Several days later, Putin stated that he would accept the post of prime minister if Medvedev become president. The Russian stock market rallied with these developments, and a number of business representatives (for example, from Renaissance Capital, a Russian investment bank) welcomed the news as providing greater political certainty and continuity which would benefit Russia ’s investment climate. Many observers consider Medvedev more liberal than the other figures who were considered potential candidates (First Deputy Prime Minister Ivanov, Prime Minister Zubkov).
