Russia continues to be of interest to many companies doing business there. Read on for a new regional report from our sister agency in Russia, Mikhailov & Partners
Russia struggling to maintain its ‘island of stability’ status
– Anastasia Taratina, Mikhailov & Partners
Compared to the other G8 members and a majority of the developed countries currently on the brink of bankruptcies, Russia’s future economic prospects are rather bright, with the GDP growth expected to clock 7.3% in 2008 and 5.7% in 2009, according to the Finance Ministry’s data. Besides, the three-year budget with surpluses for 2009-11 adopted by the State Duma at the peak of the crisis in November is supposed to buttress the government’s belief in its efforts not only to weather the financial storms unscathed, but also to emerge from the global crunch in a new status as one of the key players in the post-crisis global economy. “Russia has all the resources to achieve all these ambitious goals,” State Duma Speaker Boris Gryzlov said. As an example, Gryzlov and other officials have cited the Stabilization Fund, which current holds over 3.5trln.rubs, as capable of ensuring a problems-free life for Russia for many years to come. “Even if we have to spend about 500bln.rubs annually from this fund, it will last at least seven years,” Finance Minister Alexei Kudrim said. “In other words, this fund gives Russia 7-20 years of problems-free existence, depending on the real economic growth rates and how the government balances its budgets over this period.”
However, the IMF and WB’s forecasts for Russia for 2008-09 are not so optimistic. Thus, according to IMF, Russia’s GDP will only grow by 7% in 2008 and then fall to 5.5% in 2009, while WB put the real per-capita GDP in Russia at 6.5% in 2008 and 3.5% in 2009. Inflation, the bane of the Russian economy for the past decades, will also remain untamed in 2008-09, with the IMF giving the worst prognosis: 14% in 2008, and not less than 12% in 2009. Indeed, Russia has so far not suffered as much as other G8 members and several other countries, whose aggregated losses from the crisis are now being measured in trillions of dollars, and still rising. However, despite the relative soundness of its economy, Russia has so far also failed to remain the ‘promised island of stability’ that could provide the local and international investors a safer haven to wait out the raging financial storms. And, according to local and international experts, it is unlikely that Russia, given the unprecedented scale of the current the crisis, will now be able to remain completely immune to the increasing volatilities on the global markets.
Russia’s economic performance eclipsed by crisis
According to experts, Russia, just like the rest of the world, is entering an era of expensive finances that will be characterized by rising costs of credits, increasingly difficult access to funding on the capital markets and falling prices on raw materials and energy. “For Russia, the latter factor will impact most negatively on the oil companies in particular and the federal budget in general,” said Alexei Vyazovsky, the PR-director of Kalita-Finance, a key player on the local and international forex markets. “Lower oil and gas prices will lead to a drastic decrease in government’s balance of payment, while the ruble will continue to smoothly devalue against the other currencies on the background of increasing capital flight from the country.”
Against this bleak background, the largely ‘success story’ of the Russian economy – which has become the ‘poster phenomenon’ for the emerging countries for its rapid rise from its severe financial debacle of 1998 and ‘the envy of other G8 members’ for its robust year-on-year growth over the past decade, when other key economies were on downward growth trajectories – has now been obliterated by the current crisis. Now, under direct threats are all the key economic sectors of the local economy, where forced stoppages of production and mass layoffs are imminent. These negative trends will surely impact negatively on different aspects of societal life.
It, therefore, was not surprising, when, speaking at the State Council in Izhevsk in November, President Dmitry Medvedev noted the hugs size of the forced expenditures that the government had so far incurred due to the crisis, promising that more financial resources, if and when needed, will be routed to protect the economy from the increasing negative impacts from the global economic mess. Indeed, in reality, more signs are indicating that Russia is being drawn deeper into the global crisis, a trend evident in the over 5trln.rubs (about $185bln) that the government has already pumped into the stabilization of the financial sector and recapitalization of the domestic stock market, both of which have lost between 50-75% of their pre-crisis values. Indeed, the government’s bailout reduced the country’s forex reserves, the world’s third largest, by $97.6bln going into propping up the ruble’s value against other major currencies. According to Central Bank Chairman Sergei Ignatiev, the volume of the forex reserves on November 1 totaled $484.6bln, and this means a drastic reduction from the record level of $597.5bln on August 8, just before the crisis took a more radical negative turn.
Being closely tied to the global economy, mainly through the ‘energy umbilical cord,’ and also recklessly exposed to all the volatilities on the international capital markets through the overzealousness of Russian private companies that took cheap foreign loans with both hands from global financial institutions, the Russian economy could not help falling a victim to the financial meltdown in the world’s largest economies. Such is the price for being a part of the global economic family, the negative results of globalization, when ‘exogenic’ negative market factors – in this case, the U.S. sublime crisis and its poor market regulations, which had ignited the current ‘financial tsunamis’ were not limited to its national boundaries – but spilled easily across borders, bringing down other national economies and transnational financial institutions.
According to the Russian Economic Ministry, the drop in the GDP growth forecast for 2008, from 7.8% to 7.3% in the best case scenario, is due to the general downward economic dynamics in both internal and external demand as well as the drastic reductions in industrial outputs in key sectors of the local and foreign economies. The negative consequences of the raging global crisis on the Russian economy are, indeed, colossal. Thus, according to the WB’s Report on the Russian Economy, which was released in November, the aggregated loss in the market value of the Russian stock market between May 19 and November 7 totaled $1trln, or about 85% of the nation’s GDP in 2007. Broken down, about $300bln of this sum came from the losses of the richest Russians, mainly from the drastic falls in the values of their stock stakes, while at rest, about $700bln, were lost by large state-owned energy corporations and individual citizens, mainly from the middle-class, who have also lost some of their equities due to the plunges on the stock markets “These losses are enormous, and, consequently, will impact negatively on the rate of consumption, especially given the additional problems caused by stiffening the loan conditions and increasing difficulties in gaining accesses to cheap financial resources,” the WB said.
Another negative aspect of the crisis is volume of capital flight from the country that has now assumed threatening proportions. Indeed, faced by acute credit crunch at home, most international investors and companies operating in Russia were forced to retract their multimillion investments from Russia and the domestic stock market. Similarly, Russian companies that were ‘necks deep’ in foreign debts were also forced to reroute some of their finances to repay debts, especially those called prematurely by their cash-starved creditors. Indeed, the situation with foreign corporate loans was so critical that Russian government had to disburse over 500bln.rubs to help the worst-hit companies to meet their foreign debt obligations and stave off defaults and their consequent negative impacts for such worsened in the summer, or an average weekly exit rate of $3-7bln. Talking about the future of the Russian economy, Sergei Borisov, president of OPORA Rossli, the business organization that protects the interests of SMEs, noted that all depends on the behaviors of the government and businesses during the crisis and the measures taken to develop the economy further. “This, first of all, envisages the provision of support for businesses,” he said. “The integration of the SMEs into key industries and innovations is one of the key factors that will help diversify the economy and boost its competitiveness.”
Crisis impacting negatively on the social sphere
Though the Russian government has repeatedly said that all previously approved social programs will be executed, measures seen as PR-moves against social unrest, some people in certain social strata are, however, already experiencing problems arising from the crisis-borne difficulties in the economy and the society as a whole. As already noted, several companies plan to stop production and lay off thousands of workers. If that is not bad enough, some business associations notably, the RSPP, whose member companies employ the largest number of workers in the country, have proposed to revoke the job-termination packages guaranty in the Labor Code, which requires employers to pay two month’s wages to employees sacked against their consents.
Another negative fallout from the crisis is the exponential increase in wage delays. For instance, the volume of wage arrears stood at just 2.1% of the gross salary fund in September, but rose over 16 times to peg at 33.4% in October. In other words, the wage arrears increased by 1.01bln.rubs to 4.02bln.rubs as on November 1, according to Rosstat. The November and December data are also expected to maintain this negative dynamics. All these factors, along with the rising inflation, mean a drastic reduction in people’s purchasing power and disposable incomes, and hence their overall social status. It, therefore, goes without saying that the poverty index in Russia is sure to rise in the coming years.
Both government and private business representatives have conceded that the coming new year will be unprecedentedly tough for both the national economy and companies. “The year 2009 will be a big trial for companies and economy,” Harro van Graafeiland, CEO of TNT Express Russia, said. “Crisis is, of course, a serious shock for a stable economic system, and overcoming it is also one of the most difficult tasks for any CEO,” he noted. “However, the CEOs that are able to execute the best and most effective anti-crisis strategies will overcome the crisis with huge competitive advantages.
Political Results
Politically, the year 2008 was exceptionally good for Russia, and for several reasons. First of all, the nation saw the first change of president on May 7, when Dmitry Medvedev voted landslide in the March election, replaced Vladimir Putin in the Kremlin. Though some experts, especially Western governments and analysts, have called the whole process ‘a managed democracy’ and the power transfer itself ‘a political show orchestrated by the Kremlim,’ the larger global community has, however, accepted the results of the transition in the Kremlin as a specific manifestation of the Russia’s interpretation of contemporary democracy. The differences in views notwithstanding, the May inauguration of Medvedev as the third president of post-Communist Russia was the first official democratic power transfer in the history of this great nation. The transfer of powers from Yeltsin to Putin in 1999, for obvious reasons, could not be called “democratic.”
Another historic milestone was the appointment of Putin the nation’s prime minister, a move, which, given the special ‘biochemistry’ between the new president and the prime minister, and the high-public approval ratings of the latter in the society, offers Russia the most stable political leadership in centuries. There other pluses from this political tandem: first of all, for the first time, a former Russian leader was not publicly humiliated and/or relegated to the sidelines of political and societal life. Secondly, the Russian premiership has not only ceased to be just a nominal figurehead, rubberstamping all decisions from the Kremlin, but has become a real and effective constitutional institution, capable of having its own voice and vision on key policies and other issues of national and global importance.
This new political tandem readily paid off during the Georgia’s U.S.-backed aggression against South Ossetia in summer, when the Russian top leadership exhibited unprecedented unity in repelling the Georgians from the breakaway republic through a brief, but resolute military operation, and then going ahead to recognize the battered republic and Abkhazia as sovereign states. Similarly, the two leaders also acted (and still acting) as a unified front against the U.S. and NATO-led international attempts to force Russia to back off from defending its lawful interests from the Caucasian Region with its increasing geopolitical significance.
Indeed, the results of the five-day Caucasian war re-catapulted Russia back to the global geopolitical and military arena. Undeniably, the fact that the EU, which had reacted bizarrely to the Georgia crisis by halting the talks on a new Cooperation Pact with Russia, has now agreed to come back to the negotiation tables without any precondition, and that NATO members are also backing off from their ‘no-business-as-usual-with-Moscow policy after the Georgia affair’ to engaging with the Kremlin on a number of continental and international issues, all mean resounding diplomatic and military victories for Russia on the geopolitical arena. Any unbiased observer will agree that for an absolutely bad year, such far-reaching geopolitical achievements are spectacular indeed.
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