Russia's Economy Remains Vulnerable

Highly dependent on oil prices, Russia was extremely vulnerable during the recent global economic downturn.  In fact, the Russian Federation went through its worst recession in 15 years, shrinking almost 8% in 2009. Yet, the recent surge in energy price, various stimulus programs and low interest rates made Russia grew 2.9% in the first quarter of 2010. But will Russia be able to sustain this expansion in the long run?
Anna Fedec, 5/15/2010 7:21:46 PM

Indeed, the rise in oil prices has been a significant factor in Russia's recovery. It is estimated that an 88% surge in Urals crude prices last year made the government to increase spending by 27% in 2009 thus supporting broad economic growth. Moreover, this year's planned significant increase in pensions, the car disposal program and the recovery in real wages will likely support consumption and boost industrial production going forward. Adding to that historically low interest rates (over the past year, the central bank has cut the refinancing rate by 500 basis points to 8%) and Russia should not worry about its long term growth prospects.

However, nothing is as promising as it looks like, special in Russia where the barrier between government and  private companies is very thin. Although consumer prices continue to slow down, heavy government spending and wage growth may boost inflation within the next few months and force the government to increase rates. And there is also another danger by the corner. The appreciation of the ruble caused by an increase in oil prices has been diminishing profit margins of commodity exporters and lowering the government income. It is also making imports cheaper and more attractive, thus lowering the trade surplus and diminishing its impact on growth.