Russia Economy May Stagnate, Sapping Government Popularity, Tsyvinski Says

Russia is facing a “significant” slowdown in economic growth, which will strip away the government’s popularity, said Aleh Tsyvinski, co-director of the macroeconomics program at Yale University’s Cowles Foundation.

“There will be a significant slowdown in growth,” he said today in an interview in Moscow. “This is fraught with serious political and economic problems. It’s no secret that the popularity of the people in power greatly hinges on the big increase in the standard of living of average Russians.”

Russia’s average monthly wage, adjusted for inflation, rose an average of 14 percent annually from 1999 through 2007, a period in which economic expansion averaged 8 percent a year, according to the Federal Statistics Service.

Annual growth may slow to 2 percent in 2011-2013 if prices for oil and gas, Russia’s chief export earners, fall, Deputy Economy Minister Andrei Klepach said today at an investment conference in Moscow. The ministry forecasts growth of 3.9 percent to 4.5 percent in the next three years, although Russia will need to “fight” to achieve it, Klepach said.

Russia’s economy will “face stagnation” similar to that experienced during the reign of Leonid Brezhnev, who led the Soviet Union from 1964-1982, if oil prices remain around $70 to $80 a barrel, said Tsyvinski, 32, who is a professor at Yale in New Haven, Connecticut, and Moscow’s New Economic School.

Tighter Regulation

For Russia, economic expansion of around 3 percent constitutes stagnation and is comparable to the U.S. economy contracting 1 percent, he said.

“When oil prices were increasing and investors were expecting significant growth, Russia was an interesting country for them,” Tsyvinski said. “With oil prices between $70 and $80 a barrel, Russia becomes a lot less attractive.”

There will be tighter financial regulation after the global economic crisis, so less money will flow to emerging markets, Tsyvinski said. Russia will have to compete against Brazil and China for investment and it’s looking less attractive, he said.

Foreign direct investment into Russia, the world’s biggest energy exporter, fell an annual 11 percent to $5.4 billion in the first half, according to the Federal Statistics Service.

The Russian government estimates 2010 economic growth of 4 percent following last year’s 7.9 percent contraction, the deepest on record. Russia’s gross domestic product grows by about half a percentage point for every $10 increase in the price of a barrel of oil, according to Klepach.

‘New Quality of Growth’

Urals, Russia’s export blend of crude, reached a low for the year at $67.42 on May 25, climbing back up to $83.94 a barrel today, according to Bloomberg data. This compares with a low of $32.34 a barrel in December of 2008, the first year Russia’s economy contracted after nine consecutive years of expansion.

“We need a new quality of growth,” Andrei Kostin, chief executive officer of VTB Group, Russia’s second-biggest lender, said in an interview with Bloomberg Television yesterday. “We need a restructuring of the economy if we want to avoid the situation which we faced during the crisis.”

Overall capital investment in Russia accounts for 20 percent of GDP and one third of that investment goes to the energy sector, according to Klepach.

“The need for Russia to diversify away from energy is stronger than ever,” Ruchir Sharma, head of emerging markets at Morgan Stanley said yesterday.

To contact the reporter on this story: Maria Levitov in Moscow at mlevitov@bloomberg.net

To contact the editor responsible for this story: Willy Morris at wmorris@bloomberg.net

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