Economic Performance

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Economic Performance Overview

The Russian Federation has come a long way in terms of its national economy in the past 10 years. With the end of the country’s financial crisis in 1998, it has made large strides in improvement through macroeconomic policies. In addition, the reforms in fiscal and banking sectors in the Russian economy have made it one of the largest economic recovery projects in recent years.

The financial crisis of 1998 left the world in shock and the Russian Federation crumbled. “The crisis, which involved a default on domestic public debt and a devaluation of the ruble, was a massive shock to the system and a considerable surprise to both Russians and foreign investors.” 23 Currently, Russia has been growing at rapid rates, and seeks to continue to do so. International investors continue to show interest in Russian industry, especially regarding energy resources such as oil, natural gas, and diamond mining. In addition, monetary and fiscal policy is being shaped to benefit the Russian society which in turn is keeping inflation from taking off, and thus keeping Russia from entering another downfall.

Economic Performance in 2004

Russian growth in the year 2004 was steady overall, but the greatest growth occurred in areas other than the resource sectors. Due to this shift, the standard of living amongst Russian citizens has improved and poverty continues to decline. GDP in the first half of 2004 grew by 7.4% in comparison to that in 2003. As well, output of the main sectors of the economy increased by an estimated 7.9% during the first half of 2004, but dialed back in the third quarter of 2004, which caused the final numbers to rest at 5.4 percent24. In addition, Russian exports have increased by 26.6 billion dollars from 2003 to 2004, as imports have done the same by 14.4 billion dollars. It is important to note that Russia exported 50.5 billion dollars more than it imported in 2004. This shows that Russia is experiencing a trade surplus thanks to the relative price of Russian goods produced being less expensive than those in other countries. In 2003 Russia started a number of structural reforms in the areas of government administration, state budgeting, interbudgetary relations, the banking sector, and the re-structuring of the electricity industry25. See Chart 1 for a more detailed breakdown of the banking system.

With regard to the banking sector, growth in Russian banking is rising faster than growth in GDP. From the financial crisis of 1998 to year 2003 “aggregate commercial bank assets increased from 31.5 to 42.2 % of GDP” 26. This substantial growth in assets shows good investment perception of Russia and should continue to grow. Due to higher amounts of investment in Russian banks, Russia has decided to incorporate a Deposit Insurance which is the crux of its banking reform. This deposit insurance will allow better expectations of investors in Russia and will act like the FDIC in the United States. As well, the deposit insurance will force Russia to reform other banking systems such as accounting, bank monitoring, and procedures in bank resolution; all helping the Russian banking system progress in the future27.

Economic Performance in 2005

From 2004 to 2005 Russia’s economy continued to show favorable growth. In 2005, economic growth and expansion stemmed from three primary factors: “a continuing rapid expansion of domestic incomes and demand, improvements in the expectations of investors, and growing competitive pressures from the real appreciation of the ruble.” 28

The growth of GDP in Russia is still growing but has slowed down in comparison to 2004. GDP growth in the first quarter of 2005 was 5.2% in comparison with 7.7% in the first quarter of 2004. This can be credited to overall growth rates in the main sectors of production having calmed down due to the higher PPI (producer price index) brought about by real appreciation of the ruble 29. Due to this, Russia is losing its competitive advantage in producing goods because the ruble has appreciated by 7.3 % in the first ¾ of 2005. Because of this appreciation, it now costs Russian companies more money to produce the same amount of goods that in previous years would have cost them less. This results in a reduction on the planed expenditures curve therefore reducing GDP.

Economic Performance in 2006

From 2005 to 2006, the Russian Economy was on the up and up. Due to a decrease in output in the early months of 2006, there was room for the economy to expand in the latter parts of the year. GDP growth in Russia had an estimated growth of 6.6% compared to 6.4% in 2005. This particularly has to do with the growth in production of non-tradable goods. The brunt of the growth in GDP came from trade and construction which totals fifty percent of its growth30. Growth in main industry sectors has also risen which indicates more output, thus effecting GDP.

Russia has been trying to increase capital investment, which they are doing successfully. The growth in this part of the economy increased from 9.6% in 2005 to 12.6% in 200631. The increase in direct foreign investment has helped to raise numbers in capital investment. This comes from a bullish energy market and a strong ruble which is making private investors attracted to the Russian economy. Overall the Economic outlook on Russia is becoming increasingly strong, which will lead to growth in GDP for the years to come. See chart 3 for figure summarizations of the current economic situation.