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Thursday, April 06, 2006

Russian GDP in Freefall

As reported by [ Reuters ] , German Gref has recognized the disastrous consequences of Russia's recent GDP statistics, which show industrial growth nearly in recession and overall growth half what it was last year, despite the roaring market for Russian crude oil. If Russia is doing this badly with the price of oil through the roof, what will happen when the price bottoms out (or, shudder, when this exhaustible fossil fuel is gone)?

Economic growth may slow unless Russia boosts productivity and investment, Economic Development and Trade Minister German Gref told a Cabinet meeting Thursday that ended in a dispute over natural monopolies' tariffs.The country's gross domestic product grew by 4.1 percent in January and February in year-on-year terms, Gref said, adding that full-year growth could slow to 5.0 percent or below in 2007-09.The New Year's slowdown, when industry was hit by severely cold temperatures, compared with a full-year GDP figure of 6.4 percent in 2005 and an Economic Development and Trade Ministry forecast for 2006 of 6.0 percent.

Russia's GDP grew 4.1% and industrial output was up 2.7% in the first two months of 2006, the economic development and trade minister said Thursday. German Gref told a government session that the gap between growth in GDP and industrial output had been increasing in recent months. The gap was about 2.5 percentage points in 2005, against 1.1 in 2004.

"The only source of future growth in Russia is an increase in labor productivity," Gref told ministers, who discussed a three-year economic strategy paper.Gref said a strong ruble, a slowdown in the oil and gas industry, rising demand for imports and capacity constraints were the key factors behind the economic slowdown.Central Bank Chairman Sergei Ignatyev told the Cabinet he expected the ruble to rise by 2.0 percent in nominal effective terms for the whole of this year.The ruble is getting stronger amid an influx of easy petrodollars, but Gref said energy could not be counted on to drive growth."Oil and gas used to be the main engines of Russia's economy, but not any longer," Gref told ministers. "Growth in this industry has fallen to 1.5 to 2 percent, and we expect it to stay at this level in the medium term."He said monthly inflation would slow to 0.6 percent in March, from 2.4 percent in January and 1.7 percent in February.The medium-term plan envisages annual inflation falling further to 6 to 7.5 percent in 2007, 4 to 5.5 percent in 2008 and 4 to 5 percent in 2009. Year-on-year inflation was 11.2 percent in February.Consumer prices spiked at the start of the year as a result of rising fees for household utilities and food prices.The Cabinet aims to keep power tariff rises in line with inflation, while capping gas price rises at 11 percent in 2006, 8 percent in 2007 and 7 percent in 2008.But providers like state-controlled gas monopoly Gazprom or electricity monopoly Unified Energy Systems pushed for bigger rises.Anatoly Chubais, who heads UES, said the government's tariff policy was "unprofessional" and blamed rapid growth in the money supply and lax state spending for fueling inflation."If you want to keep inflation in check, you shouldn't try to fight the consequences; you should deal with the causes," Chubais said at the meeting. "To say that tariffs spark high inflation is like medieval palm-reading."UES wants electricity prices to rise by 11 to 13 percent in 2007, almost double the official inflation target. The government on Thursday approved a strategy document but said it would return to the tariffs issue.

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