Structural Decline or Cyclical Trough?
Published: October 16, 2013 (Issue # 1782)
Contrary to earlier expectations, the Russian economy has been a surprising disappointment in terms of growth so far this year. The numbers are by now well-known. Growth has decelerated steadily from 2.9 percent in the third quarter of last year, to 2.1 percent in the fourth quarter, and then to 1.6 percent this year in the first quarter and down to 1.2 percent in the second.
We don't know the outcome of the quarter ending in September, and while some modest pick-up would be expected, it can hardly be assumed. For the year as a whole, a few weeks ago the Economy Ministry cut its growth forecast for 2013 to 1.8 percent from 2.4 percent last April.
And this deterioration follows a seeming trend of decline in Russia's economic dynamism in recent years from 4.5 percent growth in 2010, to 4.3 percent in 2011, and down to 3.4 percent last year.
As we can appreciate, Kremlin officials are beginning to feel a sense of panic. After all, it is not as if there is an obvious reason, external or internal, to explain this unexpected development. In fact, the sense of foreboding is greater because it seems to come as a surprise to analysts who projected growth of about 4 percent or so until recently.
For instance the International Monetary Fund in its latest world economic outlook issued last week now projects real growth in 2013 for Russia at a feeble 1.5 percent. Exactly two years ago it was projecting 4.0 percent. Even as recently as April 2013, the IMF still foresaw a 3.4 percent annual growth rate. For many, including me, this sudden weakening of the Russian economy through the first half of this year is a puzzle.
What is clear is that initially staid but steady expectations of reasonable economic growth have been confounded. The economy just keeps disappointing. Many analysts fear for the worst, pondering whether Russia may already be in recession.
On the one hand, it is contended, including by many in the Kremlin, that there is simply no margin left to squeeze growth out of the status quo economic structure. In their view, shared by many external observers, Russia is finally facing a long-term secular decline after many years of living well on high energy prices and Soviet era investments while avoiding any serious structural reform.
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