Russia, Bringing up the Rear

In the rearguard of the former USSR

Mikhail Sergeyev

Nezavisimaya Gazeta

August 6, 2009

Translated from the Russian by The Other Russia

Russia has shown some of the worst results in economic decline, inflation rate, and income decline among the CIS countries

The statistical data of the country’s socioeconomic development for the first half of the year looks gloomy. The domestic economy is experiencing shocks much worse than those of developing countries, i.e. members of the BRIC (Brazil, Russia, India, and China), and neighboring CIS countries.

Statistical offices of the CIS countries have recently published data on the development of national economies for the first half of the year. They could not withstand delivering a blow to the Russian ego. The largest economy in the post-soviet territory had once again, just as in the last quarter of 2008, displayed some of the worst results in the key indicators – the severity of GDP decline, rate of inflation, and income trends. The only results that were worse were those of the second largest economic power in post-soviet territory – Ukraine. Excessive dependency on foreign capital and monopolization of the economy are some of the reasons listed by experts for the domestic misfortunes.

On Tuesday, Russia’s Federal State Statistics Service (Rosstat) suddenly announced that in July, contrary to the initial calculations made by the officials, the consumer market inflation rate surpassed last year’s indicator making it 0.6% versus 0.5%. As a result, since the beginning of the year, prices increased by 8.1%.

Compared to last year’s indicators, one tenth of a percent difference, at first glance, does not seem significant. However, what’s more important is the fact that the summer inflation slowdown anticipated by the authorities did not occur. In the beginning of July, Deputy Chairman of Russia’s Central Bank Aleksey Ulyukaev said that, according to July’s results, a zero inflation rate could be fixed in the country, and in August – deflation (fall of prices). Deputy Prime Minister and Minister of Finance Aleksey Kudrin shared similar hopes of an inflation rate decrease. In the beginning of July, he proudly reported on the fall of price rate increase. “In annual terms, by March, inflation was about 14%, by June – compared to 2008 – it was slightly below 12%. We are already living with the inflation rate of less than 12%,” emphasized the finance minister.

However, Kudrin’s optimism was premature. According to the Statistical Committee of the CIS, in Russia, in the first half of the year, comparing to the same period in 2008, price increases amounted to 13.1%, which became one of the worst indicators among the countries of the CIS. The annual rate of price increase greater than that of Russia was found only in Belarus (14.6%) and Ukraine (17.6%). Above all, in other countries that depend on exports of raw materials, inflation was several times lower. For example, in Azerbaijan and Kazakhstan, the annual inflation rate was only 3.7% and 8.5% respectively.

Russia also markedly stands out from its neighbors in its industrial rate of decline. In Russia, industrial production fell by 14.8% in the first half of the year, but in Azerbaijan, for example, industrial production increased by 1%. In Kazakhstan it fell by 2.7%, and in Belarus – by 3.6%. Such modest decline rates seem unreachable for Russia, which was surpassed only by Ukraine where industrial production fell by 31.1% in the first half of the year, compared to last year’s figures.

Compared to other CIS countries, Russia also does not look so good in terms of the population’s real income rates, which, considering the current inflation rate, basically did not increase in the first half of the year. At the same time, in Azerbaijan, Belarus, and Kazakhstan, if one were to believe national statistics, real income increased by 12.5%, 6.6% and 5% respectively.

Experts provide several reasons for Russia’s poor figures in levels of decline, inflation rates, and decreased income levels among countries of the CIS. “The first reason – Russia’s openness of the economy in regards to trade as well as to financial markets. The second and most important reason is the highest level of dependency on commodity market conditions. Kazakhstan depends on oil prices no less than Russia does, and its borrowing as a percentage of GDP was even greater than in Russia. But that is exactly what led to Kazakhstan being hit by the crisis in the third quarter of 2007, when financial markets were closed,” notes the Head of the Economic Analysis Unit of the Eurasian Development Bank Yevgeny Vinokurov. By the end of 2008, Kazakhstan’s economy had a chance to adapt to the crisis, while Russia reached its peak in the fourth quarter of 2008.

“The lower rate of decline of industrial production in Kazakhstan and growth in Azerbaijan are related to the predominance of the industrial structure in the mining industry: production volumes continued to grow, albeit at a modest pace. With regard to Belarus, here, relative protection of the economic system of the country was an active factor,” considers Vinokurov. The cause for the collapse of industrial production in Ukraine, the expert attributed to political instability, which superimposed the crisis and made its effects more prominent.

Experts also explain the abnormally high rate of decline of the Russian economy, as compared to other CIS countries, by a dramatic change in terms of foreign lending. “In Russia, the industries that suffered from the crisis most were those that were developing most dynamically before the crisis in construction, the auto-industry, and the financial sector. Before the crisis, real estate prices were overvalued, whereas now, construction is not at all supported by financially reliable methods. The auto-industry is experiencing a similar situation due to a significant decline in auto loans, consumers are refusing to make purchases. The Russian financial sector was also severely inflated, and very dependent on Western money.” Believes Tamara Kasianova of 2K Audit – Business Consulting. The expert explained the reason for the high inflation rate against the backdrop of other CIS countries not only to the devaluation of the rouble, but also the systemic lack of competition. “Because small and medium sized businesses have not developed in Russia, large enterprises can dictate their prices and maintain their pre-crisis rate of return,” noted Kasianova.

The highest rates of decline are observed in sectors related to investment demand – the production of machinery, and equipment. The importance of these sectors in the industrial production structure largely determined the pace of industrial production decline in Russia, adds Olga Naidenova, Financial Corporation, Otrkitie analyst. She explains high inflation rates by lack of competition and a large tax component in the price structure. In addition, according to her, the combination of high shares of imports and devaluation of the rouble negatively impacted prices.

One response to “Russia, Bringing up the Rear

  1. Pingback: Russia, Bringing up the Rear « La Russophobe | Personal Finance Reference

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