Is Russia Already in Recession?
Russia's economy, long one of the drivers of growth in the developing world, might already be in recession. Worse, the country's leaders are offering no indication that they're prepared to combat it.
Identifying recessions can be difficult in Russia. The typical definition is two quarters of declining gross domestic product, adjusted for inflation, but government statistics agency Rosstat provides only year-over-year data for international comparison.
With a bit of interpolation, economists are able to estimate the quarterly numbers. The picture isn't pretty: Sergei Alexashenko, director of macroeconomic studies at Moscow's prestigious Higher School of Economics, wrotein the newspaper Vedomosti that the Russian economy contracted at an annualized rate of between 0.1 percent and 0.3 percent in both the first and second quarters of 2013. A drop in the first three months of the year is traditional for Russia, but a decline in the second quarter would be out of the ordinary.
Even these numbers are boosted by huge construction projects related to the 2014 Winter Olympics in Sochi, expected to cost some $50 billion -- a temporary stimulus that will disappear when the games are over. Private investment by large and medium-sized companies, by contrast, was down 6.3 percent in the first half of 2013 compared with the same period of 2012. The Economics Ministry estimates that private capital is fleeing the country at a rate of nearly $50 billion a year.
Weak global demand is taking a toll on the raw materials sector, traditionally Russia's growth engine. Aluminum producer Rusal announced last week that it would close down four of its factories until the price of aluminum rises above $2,400 per ton, from the current level of less than $1,900. Steel and coal producers are making similar cuts, and fertilizer producers are bracing for the potential effects of a developing global potash price war.
Prices are holding up for the oil and gas producers that provide half of Russia's export revenues. But natural gas monopoly Gazprom faces legal battles across Europe as its clients demand that it uncouple its prices from those of oil -- a development that could drive down Gazprom's export income. The German energy company RWE has wona ruling against the oil-indexing practice in a Vienna arbitration tribunal.
Russian authorities seem oblivious to the signs of recession. The central bank has kept interest rates largely unchanged, and the Kremlin is largely deaf to calls to improve the country's stifling business climate. An effort to free some of the estimated 300,000 business people serving time in Russian prisons for commercial transgressions resulted in an amnesty that might affect only 10,000.
With President Vladimir Putin firmly in power at least until the end of his term in 2018, nothing short of an economic collapse could force a policy change. For now, data indicating a recession are swept under the rug, and the fundamental problems causing the slump are allowed to fester.
Corrects date of end of Putin's term in final paragraph.
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Leonid Bershidsky at email@example.com