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Booming Russia and 'Regained' Prosperity For Russia	Bhuwan Thapaliya
04 Jul 2007
The result was not unexpected, but it was still spectacular. Russian economy once reassuringly unpredictable is becoming more and more stable. Inflation is low, the current account is in surplus, the financial system looks rigid, and the public finances are sound and solid. Russian economy is rising and many economists expect it to rise further. On June 14, RosStat, State statistics released full first quarter GDP data. The report revealed that Russian economic growth hit a six-year high of 7.9 percent year on year in the first quarter. "In the year-earlier period, GDP growth was 5 percent and in the fourth quarter of 2006 it was 7.8 percent," according to RosStat. What makes the Russian growth special this time around is this fact: Russian economy was propelled by strong growth in construction, manufacturing and trade. According to RosStat, The major causes behind the 7.9 percent growth figure were a 23.2 percent rise in construction, an 11.8 percent expansion in manufacturing and a 9.1 percent increase in trade. Apart from these three sectors, it has been stated by the RosStat that massive gains were also attained by hotels and restaurants (13.9 percent), the wholesale and retail trade (9.1 percent), financial intermediation (9.9 percent) and transport and communication (7.9 percent). The Russian economy is in its best shape and the bloom is being felt across much of the economy. It has entered consecutive years of growth with GDP rising fast, unemployment falling, inflation low, exports growing and the balance of payment healthy. The result is particularly impressive in light of the small contribution made by oil and gas sector; riding on whose wing Russia is soaring. "Although economic growth is likely to ease during the rest of the year, robust domestic demand may ensure that the full-year rate does not slow appreciably from the 6.7 percent outturn seen in 2006," according to the report published by the Economist. What more can Russia ask than this? Watching Russia closely is China, whose massive energy needs are fulfilled by Russia. And there is India, who too is hawk eyeing Russia's growth. Even so, Russia is everybody favorite place at the moment. It is the hub of the business world, it has the trendiest bars, the hottest clubs and it is, according to the world's lifestyle pages, hip, cool and happening. Businessmen think so. Russia is the best place to do business now. And this is furthermore exemplified by this fact. Investment is very strong and there is powering economic growth. Fixed capital investment soared by 20.1 percent in January-March 2007, according to estimates from the Ministry of Economic Development and Trade, compared with just 5.7 percent growth during the year-earlier period, as per the media reports. Another yard stick of measuring economic growth and its performance is from the consumption side of the economics, and in this matter too Russia stands tall. Household consumption is rising and it played a vigorous role than investment in the 11.6 percent increase in domestic demand in the first quarter of 2007. "With real disposable incomes up by 13 percent, private consumption rose by 12.7 percent year on year in January-March, the economic development ministry's estimates. This helped to fuel a 13.6 percent rise in retail sales and a 7.9 percent increase in the sales of services to the population," according to the Economist. Economics, they say, is all about supply and demand, and they are right. Strong domestic demand is also reflected in further rapid growth in imports of goods and services. These were up by 36.8 percent year on year in January-March 2007; exports, by contrast, rose by 5.3 percent, with energy exporters still struggling to increase production volumes, according to the report published by the Economist. On top of this, easy access to consumer credit is also soaring the Russian demand (Domestic credit rose by 46.4 percent year on year in 2006). Moreover, Russia's demand is domestic and this shows the purchasing capacity of its citizens. Strong domestic demand is proving a much needed stimulus for a number of manufacturing sectors. For the past few years, Russia has grown more rapidly and it looks like continuing to do so for the rest of the decade. The signs are there on the ground. But analysts worry that, with oil and gas industry struggling everything doesn't look rosy for Russia. "In the absence of a more vigorous performance from oil and gas, can this pace of GDP growth be sustained?" they are asking. However, it really needs to diversify more to sustain the growth in the long run. With a budget surplus of $18.2 billion in quarter one of 2007 and almost all the economic parameters doing well, the road ahead for Russia is not that bumpy. What is needed is more diversification of the economy at this stage if it is to achieve further growth. And analysts say, faster economic growth is unlikely while energy output remains sluggish. As a result, full-year GDP growth this year is likely to be within the official government forecast of 6.5-7 percent. Meanwhile, a range of other problems may further act obstacles in the path of Russian economy. But the more Russians care for Russia, the better it will be, and the more it will be worth caring for. Russia is celebrating the success so far, while being aware of the challenges still to be faced. Russia, today boasts an exciting business environment for the foreign investors. Embedded in the dynamic economic setting with its potential domestic market, Russia today and tomorrow offers profitable opportunities for farsighted international investors. And considering these most Western companies are already in Russia. A number of American companies such as Boeing to Procter and Gamble are ripping the benefit of rising income in Russia. International companies are lured by Russians spending power and their soaring demand. For example, in the year 2006, it was reported that a million cars were sold in India and two million in Russia. That's a lot of spending power and a lot of new demand. With its highly stable economic system, and abundance of skilled human resources, Russia is poised for a promising future of growth and prosperity. Where does all this leave Russia? And what is the outlook of the Russian Economy. The outlook is rosy for Russia because the Russian administration is prepared to meet the future economic shocks. "The Russian government, led by finance minister Alexei Kudrin, has constructed a fiscal regime intended to insulate the economy from any future shocks. That means large government reserves and an oil stabilization fund that together, today, exceed $600 billion. This gives Russia two or even three years of protection against a downturn," according to Dr. Daniel Yergin, CNBC global energy analyst & Chairman of CERA. Today Russia is a confident nation because of its economic achievement chiefly due to the high energy prices and soaring demand in the global market. And on the currency holdings too Russia is strong and is getting stronger all the time. Today, it holds world's third largest currency reserves and it alone commands 16 percent of the world's total gas reserves. Furthermore, Moscow is the most expensive city in the world, way ahead of New York and London, and analyst says, Russian economy will hold its grip in the future too because of the revival of the middle class and its booming stock which has been giving competition to the global financial centers. Furthermore, Russians are getting richer and Russians making it to the elite billionaire list is increasing fast. In the year 2006, 53 Russian billionaires made it to the Forbes rich list with a combined wealth of $282 billion, according to the media reports. However, there is a substantial risk that inequality between rich and poor will grow over the coming years, while poverty depends. But it need not be so if Russia chooses the right international and domestic policies. Nonetheless, on the industrial side too Russia had achieved a lot or regained its lost glory and now it is ranked second next only to Germany in Europe in the industrial output. And most importantly, the labor productivity rate too is rising and it's rising fast. This is a welcome boost for Russia as its labor productivity increased from 90 in 1998 to 150 in 2005. All these are signs of the nation that is slowly but surely all set to become the economic powerhouse of the world. Furthermore, Russia's development is market based. Market-based development encourages firms and workers to invest in physical capital, new technologies, and skills. And according to the experts, it is the best way to deliver growth and raise the living standard of the workers. Considering this at the moment, everything is going alright for Russia. Moreover, Russian companies are now key players in the global level and they are penetrating the market as anything. The evidence linking economic growth to investment is overwhelming. It has been reported that LUKoil, one of Russia's largest oil producers, sells its gasoline all over the United States through it's over 2,000 LUKoil branded service stations. Without doubt, Russia is making its presence felt yet again after the collapse of the Soviet Union. With massive nuclear resources, skilled human resources, natural gas reserves, and the rising affluence of its middle class, Russia is on the move. It's the tenth largest economy in the world, and economists are estimating that it will be the fifth by 2020 or before. For now, it seems the worst phase is over for Russia and Russians are enjoying their hard fought prosperity yet again after all these years.
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