‘Russia Growth Impressive, but Too Reliant on Oil’

MOSCOW, 21 August 2003 — Five years after Russia’s economic collapse, the country’s impressive recovery figures still rely too heavily on fickle international oil prices, the World Bank warned yesterday. “Russia’s economic performance once again exceeded even the most optimistic expectations” in the first half of 2003, the World Bank said in a quarterly report released in Moscow.

But though “looking back in time, the economy is in better shape than at any other time since the beginning of reform ... growth remains vulnerable.

“Neither domestic consumption nor domestic investment are yet strong enough to guarantee a self-sustained recovery,” the report said. The Russian economy has bounced back with a vengeance following the August 1998 financial implosion that saw many people’s life saving’s wiped out and foreign investors bitterly counting their losses following a debt default and ruble devaluation.

But the World Bank stressed that much of the recent recovery has been due to a rising price of Russia’s main export oil - with energy prices soaring due to continuing instability in the Middle East - and not to structural changes to the economy.

“The economy is in better shape than it has ever been since the beginning of reforms,” Christof Ruehl, the World Bank’s chief economist in Russia, told reporters.

He reported that Russia’s gross domestic product (GDP) grew 7.2 percent in the first six months of this year compared with 4.3 percent over the same period in 2002. But according to World Bank calculations, Russia’s GDP would have grown by only 4.2 percent had oil prices not climbed on concerns about the war in Iraq, Ruehl warned.

And despite a raft of other positive figures for Russia’s economy for the first half of this year, much of the investment to Russia was made into the burgeoning oil sector rather than small private businesses, Ruehl said.

Investment in Russia grew by 11.9 percent compared with an annualized 5.9-percent investment growth figure in the same period in 2002. Russian’s real income grew 15.2 percent compared with 10.1 percent a year earlier. And inflation slowed to 7.9 percent from 9.0 percent.

But Ruehl warned that much of this growth must be attributed to a 28-percent increase in global oil prices in the first six months of this year from a year earlier. “The dependence (on oil) has so far not diminished,” he said. “Investment in Russia increased quite dramatically... and direct investment on oil has not increased compared to 2002.” This week’s report comes almost five years to the day that a financial crisis brought Russia’s nascent market economy to a screeching halt. But today investors are back and the stock market is growing at a pace Wall Street can only envy. The main RTS index has been flirting with post-1998 highs for weeks.

Meanwhile, record-high reserves have filled government coffers and the nation’s ratio of debt to GDP is better than that of European powerhouse Germany, Ruehl said. But he also warned that Russian President Vladimir Putin’s goal of doubling growth figures over the next 10 years is unattainable unless serious structural economic reforms are achieved.