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19.02.08
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Feast Or Famine?
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By Graham Stack
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With Russia in political transition, Alexei Kudrin, Russia’s authoritative and long-serving finance minister, made a splash commenting on the country’s future foreign policy. At a conference organized by investment bank Troika Dialog, Kudrin argued in his usual oblique style that "we should adjust our foreign policy goals in the nearest future to guarantee stable investment."
A little later at the same conference, Anatoly Chubais, head of United Energy Systems and Kudrin’s colleague and ally of 20 years, seemed to explicate his friend’s remarks while substituting his own brash flair for Kudrin’s bureaucratese: Russia’s trade surplus would soon disappear and then Russia will depend on attracting enough capital inflow to balance this trade deficit. “We might be able to afford now to fight against the British Council,” he said sarcastically, “but sometime we’ll have to ask ourselves what such a policy could cost us.”
Considering that Russia ran a trade surplus of $129 billion in 2007, compared with $20 billion in 2002, it may be difficult to believe that the current account surplus is about to evaporate. But a Renaissance Capital report released Feb. 7 backs up Kudrin’s words.
Seven years of fat
The Renaissance Capital study finds that Russia’s seven fat years in terms of trade surplus starting 2002 will come to an abrupt end in 2009.
Renaissance analysts found that between 2002 and 2006, a dramatic increase in the prices of Russia’s main export items – crude oil, gas and metals - fueled a trade surplus that soared to $139 billion in 2006 from $46 billion in 2002.
But in 2007, import growth accelerated to 37 percent year on year, while the growth in export prices slowed down abruptly, causing Russia’s trade surplus to slip to $129 billion in 2007, with the overall current account surplus dropping to an estimated $77 billion from $95 billion in 2006.
Renaissance Capital’s Yelena Sharipova predicts that this trend will continue: “In 2008, we expect a further decrease in the export growth rate to 11 percent (compared with 17 percent growth in 2007 and 25 percent growth in 2006) and a still-high import growth rate of 30 percent (compared with 36 percent in 2007 and 31 percent in 2006). These factors will lead to a further decline in the trade balance to $101 billion in 2008.”
Renaissance thus forecasts that the current account will hit zero by the end of 2009.
Seven years of lean…
But this is only half the story. While Sharipova thinks that exports will remain flat, she also sees imports continuing to grow– leading to a sustained current account deficit leveling out at 6 percent of GDP by 2011.
The reason for this is the direct effect changing oil prices have on export figures. A hike in the price of oil immediately leads to a spike in the current account surplus.
Imports also positively correlate with oil price developments, because higher oil prices boost domestic demand and support currency appreciation. “Increased oil revenues boost foreign currency inflows into Russia and cause exchange rate appreciation, leading to greater demand for imports,” said Sharipova.
The crucial point, however, is that this effect kicks in only after a significant amount of time has gone by. “The effect of increased oil prices on real income and real growth is indirect and longer term in nature,” Sharipova continued. While a drop in oil prices leads directly to a drop in the value of exports, as commodities still dominate the export structure, continued high economic growth translating into spiraling domestic demand, keeps on pushing import growth rates.
So, because these two effects are out of sync, a drop in oil prices, irrespective of the actual price level, quickly causes the current account to drop into deficit.
The hope, however, is that capital inflows into Russia will compensate for the current account deficit. Only a few years ago, the very idea of net capital inflows into Russia would have caused most observers to burst out laughing: capital was hemorrhaging from the country at a rate of around $20 billion per year. At his first meeting with Vladimir Putin in Ljubljana in 2001, George W. Bush commented sarcastically that Russia could hardly expect U.S. investors to be interested in Russia, as Russian businessmen were moving their money out of the country at such a rate.
But a lot has changed since then.
Capital flight has decreased year by year, and by 2006, capital inflow amounted to over $20 billion. In 2007, the amount of inflow more than doubled to reach a phenomenal – for Russian standards - $47 billion. According to Sharipova, “This trend leads Russia into uncharted territory with regard to its economic development.”
“We believe the current account deficit will be financed by growing inflows of capital,” said Shapirova boldly. “We expect net capital inflows to the private sector in 2008 to slightly increase to $86 billion and gradually grow to $140 billion by 2015.”
This will amount to 7 percent of GDP capital account surplus – enough to balance the 6 percent current account deficit.
Russia’s friendliness deficit
However, to secure such capital inflow, closer international economic integration is vital, including, as Kudrin underlined, membership in the World Trade Organization (WTO).
This week, Russia watched the WTO bring Ukraine into the fold, while its own bid seems to have stalled and will now likely be complicated by claims Ukraine will raise.
Awareness of Russia’s need for an upgrade in its international standing seems to have even percolated through to the higher echelons of power: in his first major speech as the Kremlin’s candidate for president at the Russian Civic Forum on Jan. 22, First Deputy Prime Minister Dmitry Medvedev said Russia needed to seek “more friends” internationally.
Retaining Kudrin in a top role would be a good way to start.
Praying that an inveterate Russia-hater such as the U.S. Republican presidential candidate John McCain doesn’t win the U.S. election might also help.
At the same conference, Kudrin argued in favor of expanding the G8 to include some of the largest emerging markets such as India and Brazil. The idea that McCain also supports in a newspaper article published in Germany’s Sueddeutsche Zeitung, with one significant difference: he demands Russia’s exclusion from the G8, expanded or not. |
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