Russian economy declines quicker than expected
Today, the Institute for the Economy in Transition, headed by the first Russian reformer Yegor Gaidar and the World Bank, refuted the numerous statements of Russian politicians and mass media that Russia’s economy keeps on growing and is rapidly developing despite the worldwide economic slowdown. As it turns out, Russia is in for very unhappy prospects. Unlike developed countries with strong safety nets, Russia may greatly suffer from the setback in production.
The Russian press is probably so optimistic about Russia’s economy because of the affirmations made by Finance Minister Alexey Kudrin, Prime Minister Mikhail Kasyanov, and other government officials. They reported figures and evidence of the Russian economy’s steady and progressive growth every day before adoption of the budget for the next year. And that was done despite warnings made by Russia’s leading economists about alarming tendencies in the domestic economy. The mass PR-campaign was supplied with information provided by the RF Statistics Committee and popular analytical centers. And even the forecasts made by the Institute for the Economy in Transition were quite different at that time. Now, although the budget for 2003 has been adopted, the economic problem still remains. However, objectives are currently quite different. Now, the Russian people must be ready for the forthcoming shock. As is known, when forthcoming troubles are actively discussed, the very coming of these troubles is taken easier.
The slowdown of production growth, successive recession, mass outflow of foreign and domestic currency, production cutbacks, massive layoffs, and unchecked unemployment growth are the forecasts of the Institute for the Economy in Transition .
The institute issues a monthly bulletin of conjuncture inquiries. The results of a poll held among directors of Russian industrial enterprises was recently published in the bulletin. The conclusions of the poll are not comforting: against the background of still increasing demand, leaders of industrial enterprises are in the fatal grip of absolute slowdown of sales and profits.
Until October 2002, Russian companies still hoped to stop the decline of their own profits, and the decline itself became slower. However, today, it’s obvious that following the reduction of sales, profits are falling as well. The chemical and petrochemical, non-ferrous metallurgy, and the timber industries are experiencing the greatest negative profits. Only power engineering, mechanical engineering, and the food industry anticipate an effective increase in demand. And this very fact is substantiated with the fact that earlier gained profits still remain.
It is quite natural that people won’t live without food and electricity, which is why food and electricity producers expect that people will pay their last money for these everyday products. However, the optimism of engineering workers is dubious to some extent, especially against the background of the declining import substitution in the sphere.
In this connection, Russian producers are seriously pondering production reduction, while some production increase still remains. It is expected that production will considerably reduce in non-ferrous metallurgy, chemical, and petrochemical industries, as well as in construction by the end of the year.
PRAVDA.Ru has reported about the desire of the Russian automobile industry to cut production and provoke an artificial deficit of its products on the Russian market. The suspension of car production at the Russian automobile giants VAZ and GAZ is a good example . In addition to the suspension, VAZ is also going to partially reduce its staff. GAZ says it won’t resort to this measure so far, but it is clear they will soon have to. No matter how the low wages of the workers at the automobile giants are, the management won’t suffer even the slightest losses to maintain their workers in expectation of larger demand for their products.
Forecasts of the Institute for the Economy in Transition concerning employment in Russian industries are the worst since the 1998 crisis: the majority of workers in the country will be obviously unnecessary. At least, most industries are certain that they don’t need additional manpower. The timber complex is the only sphere where extra manpower will probably be in demand.
The Moscow department of the World Bank delivered its report on the Russian economy over the nine months of 2002. Conclusions made by foreign bankers are far from optimistic as well. If the amount of investments in the Russian economy remains at today’s level, in 2003-2010, Russia won’t be able to reach the forecasted GDP growth rate of 5-6% per year.
According to World Bank analysts, the GDP growth rate won’t exceed 4% in 2002. Russian Prime Minister Mikhail Kasyanov actively stood behind for this very figure in the public polemics with President Putin, who, in his turn, blamed the prime minister for lack of economic ambition. The prime minister obviously knows what he is saying. However, the World Bank is sure that the growth rate will be even lower in the coming years. To prevent it, the growth rate of investments in Russia has to exceed 2.5% per year. However, to tell the truth, the needed conditions for this growth aren’t in Russia.
World Bank analysts say that the average growth of investments in permanent assets of Russian enterprises wasn’t higher than 2.5% this year (the figure made up 7.5% last year). The bank also reports that the total level of investments in Russia won’t be higher than 2.5%; as a result, the reduction of investments will cause a decline of economic growth.
In other words, even the high prices of oil and gas won’t save Russia in this situation. Laws of the market economy are such that, when production becomes unprofitable, capital is withdrawn. It will be possible to attract capital only when production becomes profitable again.
Until now, there were some stipulations for these economic laws to work in Russia, as the government subsidized transportation, energy, social programs, housing, and other fields. However, the government cannot follow this policy any longer. For this very reason, the above-mentioned industries undergo reforms. It is difficult to imagine how the Russian economy might change after these reforms are carried through. However, under the conditions of scanty investments, decline in production, and rising unemployment, we can suggest that the Russian economy will remain unattractive for foreign investors for several years. It is obvious that no considerable results can be achieved in the economy without foreign investments.
Dmitry Slobodanuk PRAVDA.Ru
Translated by Maria Gousseva
Read the original in Russian: http://economics.pravda.ru/economics/2002/7/21/64/2143_economics.html
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