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Russia hangs on to recovery

The difference of emphasis between Russian President Dmitry Medvedev, whose public statements more and more underline the need for economic rationality and transparency, and Prime Minster Vladimir Putin, who takes a different tack, remains in evidence as the economy recovers from precipitous decline.

In this connection, it is to Medvedev's advantage that First Deputy Prime Minister Igor Shuvalov has said, following on US President Barack Obama's reversal of the George W Bush-era decision to install missile defense in Poland and the Czech Republic, that Moscow has received indications from the US that its accession to the World Trade Organization may come as early as 2010. Outstanding issues include intellectual property rights and embargoes of strategic items such as cryptographic equipment and barriers to US agricultural foodstuffs.

This development may encourage whoever looks to the longer term, but it will do little for the domestic economy for some time, other than perhaps give Moscow's equity markets a short-term boost. This they could use, having stalled for the past two weeks while other world stock markets have continued to rise.

Two weeks ago, the dollar-denominated RTS index passed its June 2 short-term high of 1,180 in the course of a short-term rally that began on September 4 from a level of 1,064; over the following 10 days, it rose no less than 17.5% to 1,247. Since then it has struggled to make further progress, closing on Tuesday at 1,249.

Its sister index, the rouble-denominated MICEX, has neither done so well nor confirmed this move. On Tuesday, it closed at 1,203, still a few points below its June 1 high. By contrast, the MICEX has rallied significantly through its 1,150 level of September 23, 2008, which marked the last short-term recovery before its precipitous drop to 514 at the end of October, while the RTS has yet to penetrate its congruent short-term top at 1,305.

Short-term technical indicators remain favorable on balance, and the overall charts point to continued strength. Indeed, Bloomberg News reports that analysts at UBS, Goldman Sachs and JP Morgan Chase all foresee strong growth in the Russian equity markets over the next year.

The broader economy does not look like sharing that prosperity, at least for a while. Also according to Bloomberg News, the country's August gross domestic product (GDP) fell 3.9% from August last year, down from 6.4% in July. It was down 10.9% year-on-year in the second quarter, with manufacturing and investment being the hardest hit sectors: the other big economic drivers are construction, consumption and energy and raw materials.

Russia's GDP for 2009 is now projected to fall by up to 8% from last year, a worsening of earlier estimates that saw a decline of only 6-7%. The World Bank foresees unemployment at 13% and 6.2 million people leaving the middle class for lower social strata. The consensus outlook for 2010 expects little or no overall economic growth.

External demand will continue to support exports, but domestic demand remains under pressure, both from knock-on effects of the weak labor market and from an end to industrial restocking. Undoubtedly for such reasons, Shuvalov said in a recent statement to the Duma (parliament) that the government's stimulus spending would continue for the foreseeable future.

Reserves from the state oil fund have obviated the more difficult choices that the state would otherwise have had to make, but the incipient recovery remains hostage to the world price for oil and raw materials. If these falter, then the government may be forced onto the world capital markets to seek loans.

The rouble has faced pressure to appreciate with the rise in oil prices, following the January 2009 decision of the Russian Central Bank to widen the band within which the currency is permitted to move. (See Rouble joins Russia's pointers to decline, 4 December 2008.)

At the same time, the continuing elevation of world market prices for oil and materials could reduce the imperative for necessary structural reform in the economy, aiding Putin as against Medvedev and militating against longer-term growth prospects. Meanwhile, the country's banking crisis has eased but remains a weak point that could sabotage all present and future progress.

But the more things change, the more they stay the same. The new trial against former Yukos chief Mikhail Khodorkovsky, designed to avoid his release from jail, continues, while IKEA's travails with institutionalized corruption in Moscow recently made the front page of the New York Times business section.

The newly announced decision of St Petersburg governor Valentina Matviyenko to give an exemption from zoning laws will permit the construction of the 400-meter Okhta Center, planned to be the headquarters of the Gazprom oil unit Gazprom Neft. That skyscraper would become Europe's tallest building and could lead to the delisting of the city's center as a United Nations Educational, Scientific and Cultural Organization World Heritage Site.

Already, local activists have started to call it "Putin's Needle" by invidious comparison with "Ulbricht's Needle", after the long-time head of East Germany's Socialist Unity Party, the moniker given during the Cold War to a skyscraper overlooking the Berlin Wall in East Berlin surmounted by a rotating restaurant.

Meanwhile, Putin has publicly and unilaterally assured the Russian public that any differences in view between himself and Medvedev will be resolved by the time of the next presidential election in 2012 and that they will decide together who will stand as candidate.

First published in Asia Times Online, 24 September 2009.

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This page contains a single entry from the blog posted on September 24, 2009 3:58 AM.

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