Russia: one of the world's richest countries? - 2007

Russia: one of the world's richest countries?

The United States, Japan, China, Germany...Russia? Strange as it may seem, the world's largest country might soon also be one of its five biggest economies. On Tuesday, Russia's Economic Development and Trade Ministry submitted a remarkable document to the government - a plan for Russian social and economic development until the year 2020. With ambitious targets, it attracted the attention of experts even before its official publication. According to the forecast, if the country shifts its economic orientation from raw materials to innovation, its gross domestic product will grow by an average of 6.7% a year, putting the Russian economy into the world's top five. At that rate, the country's economy will grow two-and-a-half times by 2020, giving it an annual per capita GDP of $30,000 - no less than Western Europe and North America. Some experts smirk at the forecast for its starry-eyed idealism-but Russia's present-day and recent economic growth rates back it up. GDP has been adding almost 7% annually for the last eight years, exceeding the most optimistic projections of government experts and other analysts.

The Economic Development and Trade Ministry has forecast a 6.5% growth rate for this year. It will certainly be greater than that-the Kremlin and the Cabinet expect 7-8%. Russia's industrial development is on a par with the Asian Tigers'. Manufacturing and engineering picked up just as mining slowed down. The Federal State Statistics Service, or Rosstat, reported a 7.7% increase in industrial output in the first half of the year. The rate for manufacturing and engineering was 12.2%. The figures for June were even more impressive: 10.9% and 15.6%, respectively. So a majority of economists are not skeptical about the country's development strategy. According to experts at the Institute of National Economic Forecasting, affiliated with the Russian Academy of Sciences, pessimistic forecasts are based on an inertial model of development, which is outdated now that 15 years of reforms has given Russia a full-fledged market economy. Now, the targets will be hit. "It's hard to give advice to the government in the current situation. They're saying all the right things. They must act accordingly. That's what matters most," says Viktor Ivanter, the Institute's director. Academic economists are even more optimistic in their forecasts.

They expect GDP growth to stay within a range of 7.9-8.3% in 2007-30. They see only one drawback in the development strategy: it does not specify the factors that will bring about this huge economic growth. The Economic Development and Trade Ministry thinks they are finding fault. The strategy presents only its general opinion of Russia's economic future and the government's social targets, which are to raise living standards and reduce poverty. The ministry will be ready by December with a more detailed forecast for the country's development until 2020. The comprehensive study will specify all indices, with a thorough analysis of every economic sector, and distribute responsibilities among ministries and other central-government agencies.


Brazil, Russia, India and China Overtake USA

The largest threats to the American economic power have overtaken the domination of the USA in the global energy industry. Brazil, Russia, India and China – have taken over the domination of the USA in the global energy industry, shows the newest study by the investment bank, Goldman Sachs. The strengthening of the economic power of those four countries – new economic giants united under the name BRIC – is already obvious in the metal and mining sector, and it is slowly starting to be felt in the insurance and consumer industries, says Anthony Ling, the director of that investment bank. “For all companies that operate globally, the world is changing at an ever faster rate, bringing larger challenges than ever before – that is true globalization”, he said. One of the most important changes is the growth of the BRIC economies, he added. According to a Goldman Sachs study, at the end of the first Gulf War in 1991, of the 20 largest companies in the energy sector by market capitalization, 55 percent were American, and 45 percent European. However, in 2007, 35 percent of the largest energy companies come from BRIC countries, 35 percent European, and around 30 percent American, it says in the study. “The USA is now trailing behind, with the smallest percentage of energy companies in the world”, says Ling. “If we assume the global resources industry is a traditional leader as far as global trends are concerned, we will start to notice the same trend in the mining industry, where 20 percent of the top 20 companies are from BRIC countries”, he said. “We are convinced that the same form will happen in all other industries”. This form is already present in the insurance sector, in which the BRIC countries hold 10 percent of the top 20 companies. In the world industry of refreshing drinks, in which the new economic powers are just starting to be represented with a 5 percent share. Ling is predicting that BRIC will soon start to penetrate the food and pharmaceutical sectors. If investors and corporations do not take into account the growing strength of BRIC in the global economy, they will start to fall behind in the growth of investments, and lose their competitive advantage of their companies, warned Ling, talking at a press conference before the summit in Geneva on July 5-6, about the United Nations Global Compact initiative. An initiative that was stated in 2000 is in question. The aim of the initiative is connecting the business sectors with UN agencies, governments, and the civilian population, in supporting basic social values, which reflect the ten principles on which the initiative is based, which includes respecting human rights and fair work, responsible behaviour towards the environment, and anti-corruption measures. The Goldman Sachs study, which analyses the effect of those factors in a number of industry sectors, will be released on the 3rd of July.


Industrial Brute Strength: Six-Month Growth of Production in Russia Comparable to Asian Tiger Economies

Rosstat has reported that industrial production in Russia grew by 10.9% in June, on top of a 7.7% increase in the first half of 2007, and the manufacturing sector grew by 15.6% and 12.2% in those two periods, respectively. Such blistering rates of growth, which are comparable to the so-called "Asian tiger" economies, have never before been recorded in Russia. To explain this increase in production, economists point to a rise in consumer and investor demand, especially at the beginning of an investment program being launched by UES. They also cautiously suggest that Russian industry is adapting successfully to the expensive ruble, largely thanks to the investment boom. According to data published yesterday by the Russian governmental statistics agency, Rosstat, the Russian economy has set yet another record for growth. The growth rate of industrial production in June 2007 was 10.9%, the largest since August 2004. This is hardly an accident. For the first half of 2007, in comparison to the same period of 2006, the manufacturing index rose by an unusual 7.7%. Such six-month growth rates have not been seen in Russia for the entire period that Rosstat has been tracking the economy. Last year, production grew only half as fast: in comparison to data from 2005, production in 2006 increased by only 3.9%.

Monthly indicators have been surprising economists since the beginning of 2007, particularly since they are significantly higher than the official predications made by the Russian Trade and Economic Development Ministry (MERT). For 2007, the ministry predicted 4.3% growth, revised it to 4.7%, and then corrected it again to 5.2% after it became clear that investment in the Russian economy was growing faster than had been expected. Other economists also did not guess at what the future would bring. Most of their predictions were either just slightly higher than those made by MERT, or they were on the level of predictions for 2006. Deutsche UFG analyst Yaroslav Lisovolik emphasizes that such production growth is much more typical of the countries of Southeast Asia, the "Asian tigers," which have some of the highest production growth rates in the world. In China, for example, GDP is growing at more than 11%, and production growth exceeds 18%. The most striking aspect of the Russian boom is in the manufacturing industry: in June, it grew by a record 15.6%, and it grew by 12.2% over the first half of 2007. On one hand, consistent growth is being shown by the production of various construction materials and similar products destined for investment: cement, bricks, reinforced concrete. On the other hand, import substitution is continuing on a "wide front": the production of meat, printed goods, and especially household appliances is strongly outstripping average growth indicators.

The highest growth rates were posted by steam and hydraulic turbines: between January and June 2007, they produced 1.1 and 0.9 million kW of energy, respectively, 1.9 and 2.7 times more than in the same period of 2006. Experts interviewed by Kommersant directly linked this jump with the beginning of the realization of a large-scale investment program in electrical energy. Alexander Morozov of HSBC mentions that "until 2007, such massive investment in the retrofitting of electrical energy [equipment] had not been done." A representative of UES explained to Kommersant that in 2007 the company plans to invest 520.5 billion rubles, although since "contracts are constantly being signed," it is unknown how much of that has already been spent. Investment by players in the energy sector became apparent in the data on production on in June, but high indicators of industrial manufacturing have been being observed since the beginning of this year. As Kommersant has already mentioned several times and as all of the economists consulted yesterday emphasized, two main factors are evident. The first is consumer demand, which is based on increasing incomes and access to credit among the population. The second is an increase in investment demand, which is fueled both by government investment and by an influx of foreign capital.

However, economists are not rushing to correct their predictions for industrial growth for the whole of 2007. By way of an explanation, Alexander Morozov points to the "volatility of monthly figures": in 2006, for example, industrial growth in May was very rapid, but in June it slowed almost to zero. He is certain, however, that growth really will accelerate to a "very high" 6-7%. Vladimir Salnikov from TsMAKP says that it is difficult to predict growth, but he suggests that we can "hope for 6.5-7%," explaining that "the transportation and power engineering sectors are protected from imports." For his part, Yaroslav Lisovolik remembers the doubts that accompanied the strengthening of the ruble and the worries that it might hurt the competitive capacity of Russian industry. In 2007 alone, for example, such fears have been voiced several times by President Vladimir Putin. Now these fears should been diminished: it turns out that Russian industry is successfully adapting to the expensive ruble.


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