BUSINESS OPINION

Troika’s Top Economist on What to Expect in 2010

By Olga Kalashnikova

The St. Petersburg Times

For The St. Petersburg Times Yevgeny Gavrilenkov, managing director and chief economist of Troika Dialog, predicts inflation could fall to 4 to 6 percent this year.

With 2009 — a year of fluctuating currency rates, sagging stock markets and virtually non-existent credit — safely behind us, financial analysts are making predictions for 2010 and even finding a silver lining in the cloud of the global economic crisis. Yevgeny Gavrilenkov, managing director and chief economist of Troika Dialog, the oldest and largest private investment bank in the CIS, talked to The St. Petersburg Times during a recent visit to the city about economic trends, the areas that have suffered the most from the crisis, and whether it is in fact really a crisis.

How do you rate the way in which Russia has dealt with the economic crisis?

I always say it was not a crisis; it was a healthy correction. Everything that we had observed during previous years — volumes of consumption, growth rate — was artificially inflated by loans. The production of construction materials and cars, the demand for which was supported by readily available loans — all these areas plummeted. But, for example, nothing happened to the production of basic food products. People continue to eat, and the food industry has even gained during the crisis. The amount of imported foods has decreased and been replaced by domestic production. So, first of all, the crisis affected those areas and companies in which demand for their products had been artificially inflated by loans.

What is your opinion on the anti-crisis measures taken?

The situation in Russia was aggravated by the slow devaluation of the ruble controlled by the authorities. Six months passed from the emergence of the problem on Sept. 15 2008, when the global financial services firm Lehman Brothers Holdings filed for bankruptcy and the crisis entered a critical stage, until the devaluation was complete. During the first two months nothing was done, the authorities simply watched everything plunge. There were only discussions on how to survive. The main problem in my opinion is that reality changes far more rapidly than can be comprehended — not only by the authorities, but also by people and the market. The slow devaluation led to the rapid increase of interest rates, credit dried up and currency speculation became the only point of business. As soon as the devaluation was complete and the intervention on the currency market stopped, everything began to recover, the ruble mass began to grow — during the devaluation rubles were exchanged for other currencies — and it became an indicator of the resumption of economic activity.

Is it possible to talk about the return of pre-crisis economic growth?

No, it is not pre-crisis growth. The crisis has taken us into a calmer trajectory. Before the crisis, the economy was accelerating rapidly. Just take the last 10 years — after the 1998 default, export became the locomotive of the economy. Then free production capacity disappeared and as a result export stopped. Nowadays there cannot be such a capital inflow and there is no free capacity, so we are looking for another model that will be more balanced. It is one of the main consequences of the crisis. Money is regaining its normal value. Many things were being produced that were not absolutely necessary. For example, we produced 20 percent more cars annually. I am not sure it was a good idea, especially when they were bought on credit. I do not think people should change their car every two years. Another positive consequence is low inflation. It is the first time a low level of inflation has been possible for the coming year. And following that, interest rates will decline, and that makes credit more accessible. There will be natural economic growth.

Is there any risk of the emergence of a bubble in the economy — when businesses grow very fast, the price of shares and homes rises and employment increases — as was the case from 2005 to 2008?

Bubbles will always exist; it is the nature of the market, of the economy. Mini-bubbles are normal, and mega-bubbles, like the last one, emerge when it is easy to make money. I hope there will not be another on such a scale. Financial policy should return to a normal basis.

Last year, inflation averaged 8.4 percent. Can we sum up the results of 2009? How has inflation been characterized? What forecasts can be made for this year?

Inflation turned out to be lower than predicted. According to government data, it was expected to reach up to 13 to 14 percent. It was so high before because everything in Russia was growing by 30 to 40 percent per year — salaries and loans. But manufacturing cannot grow at such a speed. All of this pushed up inflation. Now there are no such rates. Salaries are growing by 5 to 8 percent. The only thing that continues to increase is budget expenses. And the next year will be the first when those expenses are not increased. So there will be no free budget money in the economy, and there is a chance that inflation this year will be 4 to 6 percent.

Which sectors are the most profitable right now?

This year, it will be the stock market — choosing which shares to buy, sell or hold and when. It does not depend on the sector. We are expecting low inflation, so it will be impossible to make a profit by increasing prices. People should look at those companies that would be able to provide growth in manufacturing volumes. This could be both importers and companies oriented on the local market. The main thing is the potential of volumes to increase.

What other consequences will low inflation have?

When inflation was high, it was more profitable for people to consume than to invest. Moreover, it was a time of constant loss of money and distrust of banks. Many of them disappeared or became insolvent. And when inflation comes down, interest rates become higher and people start saving up money. I would not be surprised if even pensioners start saving money. It brings the financial system into a normal state of affairs. But it cannot happen soon; years will pass before we start saving money.

What is the most profitable sector for investments? Do people feel confident dealing in securities?

As most people still do not save money, only a small proportion of people are ready to invest in securities. In my opinion, the most interesting area now is bonds. This market is expanding now, and the stock market is limited by the number of shares.

Is it fair to say that the crisis revealed the low level of financial competence of people in Russia?

We have consumer competence. People behave intuitively in the right way — if they have money, they need to spend it. They cannot save when interest rates are lower than inflation. People felt this, and behaved accordingly.

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