Information on Russia
| Area: | 17,075,200 sq km |
| Population: | 141,377,752 (July 2007 est.) |
| Capital: | Moscow |
| Language: | Russian |
| Religion: | Russian Orthodox 15-20%, Muslim 10-15%, other Christian 2% (2006 est.) |
| Government: | Federation |
| Currency: | Ruble |
| Real GDP growth (%) | 7.2 (est. 2007) |
| Export commodities: | petroleum products, natural gas, wood products, metals, chemicals, civilian and military manufactures |
| Import commodities: | machinery and equipment, consumer goods, medicines, meat, sugar, semi finished metal products |
Recent Economic Developments
Russian economic performance remains robust. Having grown by 7.9 percent (year on year) in the first half of the year, Russia is likely to post full-year GDP growth of over 7 percent in 2007. Output growth was driven by rising domestic demand, in particular, buoyant household consumption and business investment. On the supply side, sectors servicing the domestic demand (construction and retail trade) continued to boom. Manufacturing growth remains solid but is tapering off. The negative contribution of net exports to GDP growth is explained by the real appreciation of the ruble, which is making Russia’s exports more expensive abroad and imports less expensive to domestic consumers.
In a context of an economy growing close to potential, with high energy prices and large capital inflows, Russia faces two main challenges: inflationary pressures and rapid appreciation of the exchange rate. The most notable monetary development in 2007 is the surge in inflation. While it remained under control in the first quarter, inflation kept gaining momentum in the remainder of the year. Inflation rose since April 2007 and by October 2007 inflation reached 9.3 percent (for the first 10 months of 2007). Most likely, end-of-year inflation will reach 11 percent (Dec/Dec) compared to 9 percent in 2006 over the same period. The surge in inflation is explained by rising world food prices and by monetary factors. Large capital inflows pushed the balance of payment surplus to record highs and are becoming an important source of reserve accumulation ($450bn). However, unlike oil revenues, capital inflows are not absorbed by the Stabilization Fund, driving money expansion and exerting upward pressures on the ruble. Given limited monetary instruments for sterilization and the current stance of monetary policy (that limits the pace of nominal exchange appreciation), reducing inflationary pressures is becoming exceedingly a difficult task.
The Russian government continued to enjoy fiscal surpluses. The federal budget surplus reached 7.1 percent of GDP over the first nine months of 2007. But the approved 3-year budget entails a fiscal relaxation that under the current oil price outlook would reduce the overall budgetary surplus to 0.2 percent of GDP by 2008. The amendments introduced to the budget 2007 law entail an increase in non-interest expenditure that would bring the budget surplus down from 4.8 to 2.8 percent at the end of 2007. These amendments aim at increasing public investments in priority infrastructure and social sectors with a view of boosting growth. However, raising public investments might not be enough to close Russia’s infrastructure gap and drive sustained economic growth. Keeping up private investments and improving the efficiency of investments will be as important.
Foreign Trade Conditions
The condition of Russia’s foreign trade continues to decline. In January – February 2007 the growth of exports, as estimated by Ministry of Economic Development amounted only to 0.3%. Experts of Ministry of Economic Development explain this deceleration of exports by the tendency which started in the fourth quarter of 2006. Export is slowed down by a decrease of its share in the amount of joint products, as well as by the decline of free market prices of oil. Experts are all in agreement: the coming months and years will not bring any positive trends.
However, the main threat comes from imports. In January – February 2007 the growth of import amounted to 33.1%, and for the first quarter 36.8%. The Bank of Russia offered even higher rate for January – February – 52.5% of growth, comparing to 30.3% for the same period of last year. Starting with the second half of 2006, import is gaining momentum on account of growing investment activity (revealed in growing share of investment goods in structure of imports). Also, the growth of imports will be stimulated by continuous increase of real ruble rate.
According to preliminary data, during January – April 2007 imports from outside of the CIS in value terms amounted to 43.3 billion dollars and, comparing to the same period of 2006, increased by 55.2%. Moreover, this trend is growing.
Imports of mechanical engineering products increased by 71.6%, food imports – by 51%, chemical industry imports – by 25.5%, imports of textile products and footwear – by 93.7%. Car imports increased due to the growing rate of purchases of means of ground transportation 2.1 times. At the same time purchase of mechanical equipment increased 1.8 times, of instruments and optical equipment – by 58.2%, electrical equipment – by 38.6%. Procurement of alcohol and non-alcoholic products increased 4.9 times, of fish – 2 times, vegetables, fruits and nuts – 1.8 times, meat and organ meats – by 52.4%.
In April 2007 the value import volume of goods from outside of CIS reached 12.34 billion dollars and, in comparison with April 2006, increased by 59.9%.
Explosive growth of imports may possibly be good in the state of structural reorganization and modernization of already developed and some developing nations, but for Russia it is truly dangerous. It stops not only the development and normal import substitution, but also inflow of capital into noncompetitive industry sectors, such as machine-engineering complex, national research-and-development activity and innovations, technological underdevelopment of designing and engineering industry base, including strategic sectors.
