Russian economy is markedly slowing down

You might think that Russia's economic performance in the last 12 months would be a cause for celebration. According to preliminary figures, Russian GDP growth was 7.6 % in 2000 -- more than twice as much as in 1999, and a triumph for a country that has seen little but economic red ink in the last decade. Industrial production was up 9.2 %, the once-lamentable rouble held steady, and export performance was so dynamic that the country's trade surplus is pushing $ 63 bn.
So why all the long faces? In the last few days, some of Russia's most respected policymakers have poured cold water on any sense of euphoria. At the head of the doom-mongers has been Andrei Illarionov, President Vladimir Putin's chief economic adviser and an outspoken critic of the policies pursued by the cabinet of Mikhail Kasyanov, the prime minister.
On January 17, Illarionov gave an unprecedentedly gloomy speech, in which he accused the government of being overly sanguine in its economic forecasts. His views were publicly supported on January 18 by Pyotr Aven and Mikhail Fridman, founders of Alfa Group, Russia's most successful financial empire. Viktor Geraschenko, head of Russia's central bank, and Yegor Stroyev, speaker of the parliamentary upper house, have also criticized government economic policy.

Look more closely at Russia's 2000 performance, and the cracks start to appear. The Russian economy is markedly slowing down: by the end of last year, month-on-month industrial output growth was negative for the first time since the 1998 financial crisis. Nitty-gritty microeconomic indicators such as industrial orders and construction activity started to turn sag by year-end.
While exports are surging, imports have fallen sharply, indicating that neither Russian firms nor consumers feel in a spending mood. And unemployment, traditionally extremely low in Russia, is growing fast -- more than 200,000 Russians lost their jobs in November 2000, and many companies are planning lay-off programs.
Some of this has to do with factors beyond Russia's control. According to Illarionov, high oil prices last year brought Russia an unexpected windfall of $ 35 bn. But Brent crude, which traded as high as $ 38 per barrel in September, is now barely $ 25. And the prolonged strength of the rouble, especially against the euro, has eaten into Russian firms' international competitiveness.
But Illarionov and others argue that the government has exacerbated matters. Kasyanov has spent most of the last year trying to claim credit for Russia's booming economy; meanwhile, vital reforms have been ignored or postponed. The government has tweaked the tax regime, and has begun moves towards the sort of legislation that will entice foreign money into the oil sector.

But almost nothing has been done about the shambolic banking sector, nor the crippling and wasteful "natural monopolies" -- gas, electricity, railroads and so on -- that employ millions but destroy economic value. And there has been a series of public blunders -- most recently a needlessly confrontational threat to halt repayments of Paris Club debt.
This has caused something of a crisis of confidence. Foreign investors are pulling back: the Russian stock market has lost nearly one-third of its value since the end of August. And capital flight, the curse of Russia in the wobbly mid-1990s, has accelerated: last year, Russians took more than $ 25 bn out of the country.
What's really worrying in all this is the strong parallel with early 1998, the point at which fizzy optimism tipped over into panic. In 1997, the buzz was fuelled by a bubble of speculative foreign capital targeted at the government bond market - capital that vanished when investors lost faith in Russia's ability to service its debt. This time, there's no government bond market to speak of. But the $ 35 bn or so in extra oil revenue is a suitable proxy for speculative portfolio investment -- and is just as likely to disappear overnight.

Just as in 1998, Russian money supply growth is now sharply outpacing inflation, which suggests that the rouble may sooner or later come under severe pressure. In 1998, the atmosphere of panic was whipped up by an ailing president, who sacked a series of prime ministers. This time around, politics are completely different. Or are they?
Moscow conspiracy-theorists reckon that Illarionov's attacks may be the precursor to Kasyanov's dismissal, or at least a thorough presidential shake-up of the cabinet of ministers. Although no one thinks Kasyanov is a great genius, any high-profile dismissals would send out nasty signals to a financial community already feeling nervy. Just watch.