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Russia's Economy in 2006
9 January 2007
Russia's Economy in 2006

Russia’s Economy in 2006

MOSCOW. (Igor Nikolayev for RIA Novosti) - The year 2006 has been better for the Russian economy than was predicted, with the last months of the year witnessing the most good news.

According to data from the Ministry of Economic Development and Trade, Russia's GDP growth in October alone was 8.2% higher than in October 2005.

However, this is not the only reason for optimism. Also in October, total investment in the Russian economy increased by 19.1% over the same month in 2005. The 2006 annual indicator may be 13.2% higher than the 2005 figure. Does this mean that we can look forward to an economic boom?

Completion of Russia's Transition to a Market Economy

Russia's GDP growth last year was 6.8-6.9%. This is a respectable indicator and higher than expected: the forecast was 6%. Over the course of the year, this figure was revised upwards, but the final result exceeded the boldest of predictions.

Russia's economic indicators for last year are good not only because they exceeded the forecast. An increase of less than one percentage point is not in itself a great achievement. The main reason to celebrate is that the trend towards a slowdown in economic growth that has persisted over the past several years has been reversed. In 2003, Russia's GDP grew by 7.3%, in 2004 by 7.2%, and in 2005 by 6.4%.

Of course, only this year's performance will show whether the year 2006 has signaled a turning point or not. However, it is obvious that Russia's economic performance last year has proven to be better than the year before in terms of the key macroeconomic indicator - GDP growth.

The dynamics of Russia's economic development in 2006 have led to another significant conclusion. Based on last year's results, we can state with confidence that the country's deepest economic recession of its transition to a market economy has been completely overcome.

Note that by 1998, Russia's GDP had fallen by nearly 40% from the 1991 level (as you may remember, economic reforms in Russia were launched in January 1992). Thus the Russian economy hit rock bottom in 1998. The decline lasted for seven years after the start of reforms, and in 1999 Russia's economy began to slowly grow again. It took eight years of growth, including last year, for Russia's GDP to fully recover. The 2006 figure means that Russia's transition to a market economy is complete. The economy has been fully restored to its pre-reform level.

Surely, one indicator is not enough to draw such a serious conclusion. Do not forget, however, that GDP is the key macroeconomic indicator. Such conclusions, therefore, can be made, though with some reservations.

Other Economic Indicators

Inflation last year was about 9%, its lowest level in 15 years. It is also significant that for the first time in the past several years inflation is no longer recorded in double digits (in 2005, Russia's annual inflation was 10.9%).

Note that the initial forecast for inflation last year was 7-8.5%, which means that the planned targets had not been met. Nevertheless, the year-end results are respectable. Russia's lasting economic growth has served as the foundation for achieving the level of inflation in 2006. The government's efforts to restrict the money supply and the Stabilization Fund's efforts to sterilize it have also had a positive effect. However, there are still reserves left for curbing inflation in 2007. Russian commodity producers' competitive potential has not been fully taken advantage of.

Foreign investment is a major indicator of investment activity in general. A total of $130 billion in foreign capital had accumulated in the Russian economy by late September of last year. In January-September, the Russian economy received $35.3 billion in foreign investment, or 31.7% more than in the same period in 2005. It is interesting that Russian investment abroad amounted to nearly the same sum, $34.6 billion, registering a 51.4% increase over the previous year's figure. There is little doubt that the total figure for 2006 will be even higher. However, Russian investment abroad will still nearly equal foreign investment in Russia.

How should we react to this? On the one hand, it is not so bad that Russian investment abroad is growing. On the other hand, this growth far outpaces the growth of investment in Russia. This means that in the near future Russian investment abroad will exceed foreign investment in the Russian economy. Russia is becoming a kind of global donor.

It is good that Russia has money to invest, but it is also clear that it desperately needs investment itself. The task of making Russia more attractive to investors is still before us, and the above-mentioned trends confirm this.

What Are the Reasons Behind Fast Economic Growth?

It might seem paradoxical, but the government cannot find a proper answer to this important question. However, that does not matter much. It would be worse the other way round if, in the absence of any economic growth, the government could clearly see the reasons for the country's stagnation.

In spite of the lack of an explanation, the government can certainly come up with replies to the question of economic growth. For instance, it has credited customs and amortization policies.

Moreover, Russia's Finance Ministry says that the decision to reimburse the value-added tax as soon as possible has served as an economic accelerator in general. Apart from this, the government has explained the surge in economic activity by the launch of the Investment Fund.

This is all correct, but it is not enough to fully explain the developments under way.

No doubt, the reasons behind the rapid economic growth will soon be clear. We need this clarity in order for economic growth stop being a pleasant surprise. Only then will we clearly understand what must be done in the future.

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