Page 8 - IFR Opportunities in Russian capital markets

CHAPTER THE RUSSIAN MACROECONOMIC 01 SITUATION
Introduction
Russia is a country in transition and so the macroeconomic environment directly impacts both investors and domestic businessmen's lives.
Having been in serious trouble for most of the 1990s, the Russian economy is now in the rudest health, which in turn has inspired confidence among domestic businessmen, who are returning flight capital home to capitalise on ballistic rates of growth.
Russia boasts some of the best macroeconomic fundamentals of any country in the world. It is now the third richest country in the world in terms of gross hard currency reserves, which are enough to pay for more than a year of imports. The government regularly runs a 7% budget surplus, while tax revenues continue to rise. Foreign debt has fallen from around 90% of GDP in 1997 to less than 6% by the start of 2007, making it the least indebted country of any industri- alised nation, while inflation fell to single figures in 2006 for the first time in modern history, ending the year inside the government's self imposed target of 9%.
But the most important change has been that the life of the average Russian has become more predictable. After seeing their life savings hyper-inflated away in the early 1990s and then losing them again in two bank crises and several currency reforms, since President Vladimir Putin took office in 2000 average incomes have octupled to about US$400 a month by the start of 2007 and continue to rise at about 10% a year in real terms.
Consumer spending accelerated with the advent of consumer credit in 2001 and life has become noticeably better for most people. The ‘feel good factor’ is feeding through to booming consumer spending, investment, increased small business activity, the appearance of financial products such as mutual funds, a slow recovery in birth rates and political stability, which is what most businessmen that lived through the Yeltsin-years still crave.
However, not all is perfect. The Central Bank of Russia (CBR) is still struggling to contain inflation and prevent the ruble from appreciating too fast on the back of the flood of petrodollars, but lacks the tools to carry out an effective monetary policy. At the same time, while fixed investment is growing, economists say it is not growing fast enough. Unless the government can continue its reforms to the financial system and make Russian banks more efficient as financial intermediates, the current economic growth will stall and Russia could go the way of Latin America in the 1970s and 1980s.
Economic indicators
Rates of growth
In 2007, Russia entered its seventh year of strong growth, with an economy worth more than US$1trn – if the (rapidly shrinking) share of the grey economy is taken into account – up from US$196bn at the end of 1999. GDP growth has surprised on the upside almost every year since Putin took power in 2000. GDP growth has averaged at least 6% since 2000 and the economy has tripled in size in dollar terms since Putin took the helm (see Figure 1.1).
Analysts have consistently under-estimated the rate of Russia's growth, partly because they have under-estimated the progress of reforms put in place by the Kremlin. While politically motivated attacks on companies such as Yukos catch the headlines, the bulk of the economy is allowed to operate without any state interference and the extremely open trade regime means Russian companies have to compete on more or less even terms with foreign competition, which has also been driving reforms and restructuring.
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