Page 9 - IFR Opportunities in Russian capital markets

CHAPTER 01
ifrintelligence reports/Opportunities in: Russian Capital Markets
Figure 1.1: Growth of Russian GDP, 2001-10F (US$bn, %)
US$bn Russian nominal GDP
% growth, yoy 30
25 20 15 10 5
2,000 1,600 1,200
800 400
Real GDP % change
00
2001 2002 2003 2004 2005 2006E 2007F 2008F 2009F 2010F
Source: Business Monitor International, RosStat
Russian GDP growth for 2006 was a slight disappointment. Economists were predicting 7% growth for the full year 2006, but the final result, released in February, came in at 6.8% – still better than the 6.4% for 2005.
Analysts say that even this good result is less than Russia is capable of, as red tape and state inter- ference is still cutting some 3–4% off growth rates. For its part the Kremlin seems happy with the trade-off between control and growth.
The reason is that Russia enjoys a significant ‘comfort factor’ in the form of oil revenues. Putin got lucky with the oil prices – which averaged over US$67 a barrel in 2006 – that fuelled a boom from about 2000 and lifted the economy out of the abyss it fell into during the 1998 financial crisis. But, despite the growth, the economy is not yet diverse enough to repeat the performance should the price of a barrel of oil tank in 2007.
According to the Ministry of Economic Development and Trade, Russia's economy should grow by 7.5% in 2007, driven by oil prices, consumer spending and increasing domestic investment.
UBS Brunswick said in its 2007 strategy paper: "We see real GDP growth accelerating slightly to 7.5% from 2006 estimated growth of 7%, driven by investment and construction as, flush with cash, Russia becomes one big building site."
Economic drivers of growth
There is an unresolved debate among economists covering Russia as to the contribution of consumption to growth, against that of oil.
When Putin took over in 2000, the initial rapid growth – GDP expanded 10% in 2000, the biggest gain on record – was driven by oil prices that recovered from a low of US$10 a barrel to about US$25 and "primed the pump" for growth in the following years by providing badly needed liquidity, according to the World Bank.
However, in the last few years, domestic consumption has played a growing role in economic growth. What is not clear is the relative importance to the economy of consumer spending opposed to oil prices.
Oil
After the fast growth in the first years of the new century, oil sector production slowed and output only increased by 2.5% in 2006. Actual oil production rose 2.1%, after turning in double- digit returns for most of the first years of Putin's rule.
Alfa Bank's chief economist, Natalia Orlova, argues that all this growth is being fuelled by the liquidity flowing into the economy from the oil and gas sector, and estimates that oil revenues indirectly accounted for 63% of the value of the economy in 2006. However, consumer spending is clearly driving the recovery and investment is increasing in large swathes – especially in light industry.
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