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Monday, July 28, 2008

The Russian Economy, Teetering at the Abyss

Paul Goble reports:

Although Moscow and its boosters in the West continue to speak of a Russian economy “swimming in cash” from the sale of oil and gas abroad, Russian government officials this week released data showing that the broader economy in that country is now in serious trouble.According to an article in "Gazeta" today, “industrial production has already fallen and now investment is slowing as well,” trends that in the opinion of the Moscow paper are an indication that “the golden age of the Russian economy is approaching its end” however much people do not want to acknowledge that fact.

After falling over the last few years, inflation and especially producer inflation are rising again. The growth of investment in industry is much lower than a year ago. And there was an “absolute decline” in industrial production between May and June – something the writers concede may be a one-time result of Russian attention to international soccer matches! (For an explanation of the way in which Russian interest in soccer may have had that effect and also for a selection of the latest Rosstat economic statistics which provide even more support for the dire conclusions offered by “Gazeta,” see here).

Moreover, the paper reports, Russian industry has been losing its competitive advantage in many sectors. Over the 12 months, “Gazeta” says, the producer price index has risen 28.1 percent, compared to a 12.7 percent rise over a similar period in 2007. And this increase is “eating into the incomes of the population,” absolutely and relative to inflation.One of the reasons for these rises, Russian business leaders say, is the way in which high salaries in the oil and gas sector, salaries needed to attract and hold key personnel, are forcing others to raise salaries faster than productivity gains, a pattern that points to more problems ahead and one that suggests the country’s oil and gas wealth may have yet another downside.

But at least some observers say that there are other, more benign reasons for what is happening and thus urge that the Kremlin continue on course. On the one hand, Troika Dialog economist Yevgeniy Gavrilenkov points out that the Russian economy is now much larger and more mature making these changes less disturbing than they would have been earlier. And on the other, he argues, the changes in the economy have been so dramatic that the Russian statistical agencies have changed some of the methods they use to calculate such numbers. In other words, that the figures “Gazeta” and other business people are concerned about are a statistical fluke.As long as Russia’s earnings from the sale of oil and gas remain high, few in Moscow or in the West are likely to be too concerned with these latest statistics showing trouble ahead. But to the extent such figures are ignored now, the problems they point to will be even more difficult to correct in the future.

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