World Bank promises Russia a bright future

The World Bank, which criticized Russia for its weak financial and investment policies in the 90s, its first decade of economic reforms, published new views on June 6 in the Russian Economic Report #14.

According to the report, sky-high oil prices will keep pumping dollars into the Russian economy, spurring its GDP growth. However, the influx of petrodollars and foreign investment will prevent the Russian government from keeping inflation within the projected limits, according to the World Bank.

“Russian investment growth has mushroomed into a genuine boom in early 2007,” the report says, forecasting that this growth would break the 2000 record of 17.4%. In other words, Russia’s GDP will continue to grow at a fast pace. Chief Economist for Russia John Litwack said GDP would grow by more than 7% in 2007, which is considerably higher than
the government’s forecast of 6.5%.

The commodities sector and metallurgy remain the most profitable investment sectors in Russia, along with the booming domestic market, which has been growing rapidly thanks to rising purchasing power. The report notes “exceptionally high growth” in Russia’s manufacturing in early 2007, which came as a complete surprise to the Russian government. World Bank experts attributed the increase to seasonal factors, such as “an unusually warm winter” and “a low base in 2006.”
They also said: “A good part of this demand might be associated with large state companies, including the electricity giant, RAO UES.”

According to the Bank, economic growth also facilitated an increase in wages: “Current trends in wage growth, together with the continued real appreciation of the ruble, suggest that the average monthly dollar wage in Russia for 2007 should exceed $500.”

A substantial part of Russia’s population could only dream about such a wage 10 years ago, when the ruble was losing value compared with the dollar. But now that the American currency costs only 25.8 rubles per $1, $500 dollars equal 12,900 rubles, which is only slightly more than the latest official data on wages and salaries provided by the State Statistics Committee.

In the current situation, Russians would like their wages to grow
faster than inflation, which went up to 4.7% in January-May, according to the Russian government. The World Bank reported that official estimates placed wage growth at 18.5% in January-April.

“Almost all sectors of the economy reported wage growth above 15%. Wage growth was the highest in the public sector, trade, and construction (about 22%-23%),” the report reads.

It is interesting that wage growth was among the highest in the public sector, which is “part of the economy concerned with providing basic government services” and therefore does not produce new value.

Growing prices will neutralize a substantial part of rising incomes in the other sectors where wage growth is slower. “Given mounting balance of payments inflows and limited monetary instruments for sterilization, keeping inflation in check promises to be a difficult task for the Russian government and Central Bank,” the World Bank report says.

In previous years, the Russian authorities sterilized the excessive money supply by accumulating it in the Stabilization Fund. But petrodollars have now been complemented with a powerful inflow of foreign investment, which cannot be sterilized in this way. Therefore, “the most obvious policy response would be to allow a more rapid nominal appreciation of the ruble.” Russians should be prepared to see the dollar take another plunge.

Unemployment, which has become chronic, is one more problem of the Russian economy to which the Bank’s experts have pointed.

According to them, despite high and increasing demand for labor in Russia and negligible growth in the working population, the rate of unemployment (ILO definition) has remained quite stable in the range of 7.2%-7.6% since 2005.

Unemployment in Russia is particularly concentrated in the poorer agriculturally oriented republics of the Southern Federal District, where it is roughly three times as high on average as in the Central, Northwestern, or Volga districts, and about twice as high as in Siberia and the Far East.

On the whole, the report concludes that Russia’s economic achievements rest on favorable external factors, mainly high commodities (oil) prices. Indeed, oil now costs $70 per barrel on global markets, and nobody wants to remember the late 1990s, when the price was $10-$12.
The Russian government could not even dream about ruble appreciation, a budget surplus, or a Stabilization Fund then.

Experts say commodities prices will remain high for a long time, which means that Russia is facing an even brighter economic future.
Source: RIA Novosti (Economic commentator, Oleg Mityayev)

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