Betting on Russia is still leap of faith

Nov 02, 2001 01:00 AM

Optimism is running high in Moscow, with the World Economic Forum banging its familiar gong for economic progress. But despite the admittedly healthy numbers, betting on Russia is still a leap of faith -- in its reforms, in its political and social stability, and most of all, in the volatile price of oil.
Geopolitically, Russia is closer to the West than it has been in years, with some observers pointing out that Moscow is working militarily with the US in a way that hasn't been seen since World War II. Internal political developments promise much for foreign business investors. Far-reaching and ambitious reforms are simultaneously dismantling the natural resources monopolies and attempting an overhaul of the judicial, banking, education and corporate governance systems.

And economically, Russia -- unlike much of the rest of the world -- is booming. Gross domestic product grew 8.8 % last year, according to the State Statistics Committee, Goskomstat. Forecasts pin this year's growth at another 5.5 %. The World Economic Forum -- whose annual meeting in the Swiss mountain resort of Davos brings together invited VIPs from the world of big business and politics, met in Moscow over two days to spread the good news.
President Vladimir Putin trumpeted his country's 13 % personal tax rate -- the lowest in Europe. He vowed to further integrate Russia into the world economy. Russia has made a firm decision to join the World Trade Organization, he declared. The numbers actually do look good.
Not only is GDP up, but the country is saving. Russia put aside 36 % of its GDP into savings last year, and has vowed to pay off debt. Putin is committed, it seems, to a balanced budget and regular debt servicing.
Monthly household income rose about 25 % during the first half of the year compared with last year, and labour productivity is up 20 %. It's a picture of financial rectitude that presents the starkest contrast with the upheavals of 1998 and it not only seems sincere but well underpinned economically. But good intentions are not enough.

The strong economy has benefited enormously from recent strength in oil prices, though as global conditions worsen, oil has fallen back once more. That's not good for Russia, the world's second-largest oil producer. It sounds promising that oil companies, by some forecasts, could their double production during the next five to eight years. But with his own promises of sound economic stewardship, Putin is playing for high stakes. The country's reliance on oil could prove to be its Achilles heel.
According to calculations by Brunswick UBS Warburg, if the price of oil stays between $ 15 and $ 20, Russia can continue to grow. But if it falls below $ 15 for a barrel of Brent crude, the country is in trouble. There could be as much as a $ 10 bn financing gap in the budget and the rouble will likely depreciate by around 25 %.
So betting on Russia is a wager that oil prices won't fall, and that those embryonic reforms of the judicial, banking and natural monopolies will actually happen. It's also a bet that the financial conservatism of the past two years is a lasting change, and that the Kremlin can sweep away the corruption and inefficiency for ever.

In the midst of the WEF cheerleading, there are some ugly realities -- reminders of just how much Russia still has to overcome. First Deputy Prosecutor General Yuri Biryukov told parliament that around $ 20 bn is siphoned out of the country every year by criminals. "The criminal situation has remained difficult," Biryukov said. "There are no grounds for an optimistic forecast."

Source: Dow Jones
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