Russia Economy - OCT 11

Source: OPEC 10/20/2011, Location: Asia

The Russian economy grew by 3.4% on an annual basis in 2Q11, down from 4.1% in 1Q11. The slowdown has been attributed to the global financial turmoil. Although industrial output growth has also declined to 4.2% in the same period (compared with 5.9% in 1Q), the Russian current account has strengthened significantly in the first half of 2011, due to the favourable oil and gas prices. However, political uncertainty ahead of parliamentary and presidential elections has led to capital outflows weakening the prospects for economic growth in 2012. Although political uncertainty has diminished in recent weeks, fiscal risks remain in place, particularly considering the fact that the Russian Finance Minister was dismissed in late September because of a public conflict with president Medvedev. As the creator of the Russian Reserve Fund, he is known as an advocate for a disciplined fiscal stance and his departure reduces chances for a balanced fiscal spending amid growing demand for government finance ahead of elections.

Industrial output growth lost momentum in July, largely as a result of slowing manufacturing activity. Overall, the industrial sector expanded by 5.2% y-o-y, down from 5.7% in June. Oil and gas industries showed an increase in output, mainly to meet growing domestic demand. Domestic demand appears to remain strong, perhaps due to the falling net savings rate. Credit expansion and growing expectations for the devaluation of the ruble might have contributed to the increase in durable purchases in August. Other contributors to the ongoing strength of domestic demand are low unemployment rate (6.6 % in August) and increases in real wages (by 0.9% on monthly basis).

The Central Bank of Russian Federation (CBR) has forecast a 7% inflation rate by the end of 2011, the lowest rate seen in post-Soviet era. The central bank in its recent meeting has stated that concerns about high inflation are now overshadowed by worries about economic growth slowdown. Inflation was 0.2 pp lower in August, as a good harvest eased the cost of crops and energy prices moderated. This follows a decline in consumer price inflation in July for a second straight month. Meanwhile, many analysts predict lower-than-expected economic growth for 4Q of 2011 and 2012 for Russia. The CBR intervened frequently in foreign exchange markets in July to prevent excessive volatility of the rouble, which is left to float within the floating corridor.

The Russian budget currently looks on track with government targets. Helped by the rising tax revenue and higher oil returns, the budget in January-July turned to a surplus of 2.5% of GDP from a deficit of 2.2%. A more detailed presentation of the 2012-14 budget proposals by the Ministry of Finance shows a change in the pattern of government expenditure in 2012. With total expenditure planned to rise by 10.7% on an annual basis, spending on defense and national security, which account for 29% of total budget, will grow significantly faster, at over 27% y-o-y. The government revised privatization plans announced in August imply full privatization of a number of large companies, including some shipping firms and airports. If the plans are implemented, the proceeds could prove a significant source of budget financing but some of the companies have been proposed before with no clear results.

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