2011: Russian economy overview
Today we’d like to talk in more detail about the performance of Russia’s economy in 2011. The country’s top officials describe stable growth as one of the most important achievements of this year. Some sectors, such as agriculture, have even reached pre-crisis levels. Annual economic growth should be around 4.2%, outperforming the majority of developed countries. Just to mention a few, the EU sees a 1% increase, while the US demonstrates a slightly better result with a 1.8% rise.
Russia demonstrated solid economic fundamentals throughout the year, including a modest budget deficit and the lowest inflation rate in the country’s history. Thanks to external factors - especially the Arab spring - oil prices stayed at high levels over the course of the 2011. Russia, among other commodity-based economies, reaped the biggest benefit on this unexpected development. Oil prices above 100 dollar per barrel helped the country to fill its coffers, and to see a balanced budget this year. Russia’s financial authorities are holding their grip tight on inflation, raising interest rates twice during 2011.
As a result, the country demonstrated decent economic results, however still saw a continuing capital outflow. The latest estimates show that the trend intensified in recent months. In December Finance Minister Anton Siluanov raised the figures of capital outflow to 85 billion dollars in 2011. Previously the officials said that the scope shouldn’t exceed 80 billion dollars.
The country has been seeing a deteriorating domestic political situation which was largely ignored by investors in the first half of this year. The Wall Street Journal writes that “a weak showing by United Russia in parliamentary elections in early December heightens political uncertainty”, raising economic risks. Previously officials explained large scale capital flight from the country by external factors including the debt crisis in the EU and absence of a clear solution for the future of the euro. All the while internal macroeconomic fundamentals in Russia looked more solid than in the majority of developed countries. Now investors are watching the internal situation more closely in light of an ongoing governmental shake-up.
Russia’s economy has been largely driven by a substantial rise in oil prices this year. The country’s budget is strongly linked to the revenues it receives from commodities export. Consequently, although the Russian government had to finance very costly projects including the Sochi Olympics in 2014, the authorities had substantial reserves to cover those expenditures without hurting the economy.
Apart from the energy sector, retail and agriculture have contributed substantially. The country’s retail market grew by nearly 13% to 543 billion dollars this year. The food and non-food segments of the sector contributed equally, with the general share of retail in the GDP amounting to 6.5%. RBC Market Research says that the Russian food retail market has overcome a negative decline after the 2008 economic downturn. However, it outlines that in many cases the growth is largely based on a significant increase in food prices rather than anything else.
In terms of agriculture, the country expects a total of 95 million tones of crops, compared to 60 million in 2010. This result helps Russia to restore its position on the global market after a decline in harvests and exports last year. Russian officials said that the country has overcome the agricultural recession and hoped that the figures would rise in 2012.
This year is also marked by Russia’s entry to the WTO. Some experts, including Ivan Chakarov, Chief Economist for Russia and CIS at Renaissance Capital, believe that the accession will improve the investment climate in Russia. “I think that the most important benefit for Russia will be the fact that it will need to import certain rules and regulations that in my mind will address the very concerns that normally foreign investors have about Russia like corruption, like the protection of minority shareholders, like independence of the judiciary,” Chakarov says.
On the other hand, the country will have to cut import tariffs in line with WTO practices. Some sectors of the economy will be significantly hurt by the new rules. For instance, Russian farmers will see a reduction over 5% in tariffs, which means that they will have less protection from competitive foreign companies.