Thursday, May 3, 2012

Oil growth eases Putin presidency....

Oil growth eases Putin presidency....

By Robert M Cutler

MONTREAL - Vladimir Putin returns to the Russian presidency on Monday with the prospect of improved growth in the economy, yet he will be aware that the 4% expansion recently forecast by the International Monetary Fund (IMF) rests on two very fragile legs - continued high oil prices and the European Union's ability to stave off a deepening crisis.

Putin headed his last cabinet meeting as premier on Wednesday, when ministers approved tax increases on natural gas production, top-end motor cars and up-market housing. The same day, he said Russia needed to bolster foreign direct investment in the country.

The IMF last month upgraded its estimate of Russia's economic growth for 2012 to 4% from 3.3%, bringing its forecast closer to
its view of last September (4.1%), which it modified three-and-a-half months ago in light of the global slowdown. That is more optimistic than estimates from within Russia itself, which tend to be under 3.5% and sometimes closer to 3%. The World Bank last month forecast a decline in growth to 3.5% from last year's 4%.

The IMF's optimism is based principally on its anticipation of continued strength in the world price of oil, with low inflation from good harvests also helping. Besides dependence on the world price of oil, the other significant risk to growth in Russia is an exacerbation of the crisis in the euro area.

If European countries suffer worse than they already are, then Russian energy sales to Europe would fall, possibly bringing about a renewal of the recession there.

Russia recently agreed to contribute US$10 billion to the IMF for help to bail out the European countries affected by the crisis. IMF managing director Christine Lagarde notes that overall commitments from IMF states should amount to $430 billion with the European Union contributing nearly half that amount.

Russia has failed to moderate its dependence on hydrocarbon exports, which now account for two-thirds of all export revenue and nearly half the federal budget. Oil and gas exports as a proportion of gross domestic product (GDP) rose in 2011 to 19% from 17% in 2010, while as a proportion of total exports they are around 20%, up from 15% at the turn of the century.

Russian manufacturing grew in April at the fastest pace in more than a year as output and employment rose and new orders accelerated, HSBC Holdings said this week. Even so, March's year-on-year growth in industrial production overall fell to 2% from 6.5% in February, and growth in electricity and utilities is also weak. That means household spending, up 5.1% year-on-year in the first quarter of 2012, leading a 4.1% advance in year-on-year GDP, is upholding the Russian economy.

Yet even household spending is showing weakness, as the year-on-year increase in March was down from 7.9% in February to 7.4%. Unemployment for March was steady at the first-quarter average of 6.5%, nevertheless higher than the 6.3% for the past three months of 2011.

This whole perspective confirms that the main problem of the Russian economy is underinvestment, an affliction that has characterized it for years, although last year, US$52 billion worth of direct investment came into Russia from abroad, nearly back to the pre-financial crisis $55 billion it attracted in 2007.

The reforms announced three years ago by outgoing President Dmitry Medvedev and his then-finance minister Alexei Kudrin are still to be set into final form and given a legal basis for implementation; they have also been watered down by endless discussions within the bureaucracy.

The position is reminiscent of the fate of Soviet prime minister Alexei Kosygin's much more modest proposed reforms of the Soviet system in the mid- and late 1960s before the Communist Party general secretary Leonid Brezhnev seized political primacy in the early 1970s from what, up until then was characteristically referred to as the "Brezhnev-Kosygin regime".

Those reforms, too, were batted around the bureaucracy and diluted as a supposed consensus-building process ending by sapping all progressive momentum from the initial effort. Thus the interests of personnel surrounding Putin, on whom he must depend, complicate any moves in directions of reform that he may seek to make.

Even if Putin succeeds in ensuring long-term macroeconomic stability, the recent institutional history of the Russian political elite does not augur well efforts to decentralize regulatory power to regional and municipal authorities, and still less for any effort to reform the central bureaucracy or make it more efficient.

Such fairly common-sense measures were advocated by Kudrin before he was sacked by Medvedev last September.

Kudrin also urged government stimulation of investment and growth; a reduced state role in the economy and increased competition; improved transport and other infrastructure; reduced barriers to flows of goods and capital; higher spending on healthcare and education; and modernizing the labor market, with increased labor productivity.

Putin's decision, announced last week, to quit leadership of the United Russia party no doubt indicates not just a lassitude with the daily political grind but also a wish to portray himself as above politics - just as the Russian president is, according to the Russian constitution, actually above and separate from the three branches of government.

Unfortunately, the Russia economy's increasing dependence on energy exports continues to distort the sectoral structure of its economy and capital flows, complicating optimal investment policy.

It will not help Putin that the institutions of governance on which he would depend to "routinize charisma" and implement any economic "reform" policies that he might actually wish to seek, have their own claims to bureaucratic legitimacy, and even have them potentially against him.

Dr Robert M Cutler (, educated at the Massachusetts Institute of Technology and The University of Michigan.

No comments:

Post a Comment