Russian Government Is Not Without blame for the Recession

The Russian economy contracted by 9.8% yoy in the first three months of 2009, after a 1.2% GDP yoy growth in the last quarter of 2008. And although in May the pace of decline seemed to be slowing down, at Trading Economics we don’t expect Russia’s GDP to be back into positive territory any time soon.

Indeed, it is stunning how one of the most promising economies in the world with the third-largest foreign currency reserves and a stabilization fund worth more than $157bn dragged itself in the recession. Without any doubt, the blame should be put on the nation's government. Russian authorities have failed first in not diversifying the economy from exports of oil, gas and metals and second on allowing its companies to borrow cheaply abroad in order to finance long term investments. In fact, once the currency started depreciating in 20008, Russia got buried in debt and may run a current account deficit this year, the first since 1998.

Also, the government made a big mistake by wasting its currency reserves in a war to defend the value of the Ruble. Instead of allowing the Ruble to devaluate, the authorities had been using its currency reserves to inject liquidity into a select group of banks allowing them to speculate on the currency market instead of lending money into the real economy. It is estimated that after reaching a record high of $597.5 billion in early August 2008, reserves have declined by almost $200 billion this year. To make things even worst Russian banks had reduced their credit lines denominated in Rubles, preferring to lend in Dollars to avoid any further depreciation and making this way credit less available for Russian companies and investors.

Looking further, the gradual centralization of the economy connected with destruction of Russia’s institutions and democratic freedoms, makes Russia more risky to invest. It is estimated that in the second quarter to date, only $749m has flown to Russia, compared with $4.73bn to China and $2.53bn to Brazil. Moreover, bureaucracy and widespread corruption are discouraging foreign investors. For example, it takes six times longer to obtain construction permits in Russia as in Sweden and, despite cheaper labor and land, the cost of building a distribution centre is a third more expensive than in London.

Anna Fedec,
6/17/2009 2:42:28 PM