Oct 11, 2009

Russian Economy ‘Sunk’ Below Forecasts

By Maria Ermakova and Anna Shiryaevskaya

Oct. 12 (Bloomberg) -- Russia will need as long as 15 years to free itself of its reliance on raw materials and become a modern economy, President Dmitry Medvedev said.

“That is a perfectly plausible time frame in which to create a new economy, an economy that will be competitive with other major world economies,” Medvedev said in a television interview last night. “Once a significant portion of our revenue is generated by something other than energy exports, let’s say at least 30 or 40 percent of it, then we would already be living in a different economy and a different country.”

Russia entered the credit crisis with its budget and current account in surplus and with the government assuming the world’s third-biggest currency reserves would shield it from the worst of the global recession. Slumping commodity prices shattered that assumption and helped plunge the economy into its worst decline for a decade, forcing the central bank to manage a 35 percent ruble decline in the six months through January.

“I must admit that we sank below our lowest expectations,” Medvedev aid. “The real damage to our economy was far greater than anything predicted by ourselves, the World Bank, and other expert organizations.”

Volatile commodity prices have continued to undermine stability in the world’s biggest energy exporter. Urals crude oil, Russia’s main export blend, fell $100 a barrel between its peak in July last year and the beginning of 2009.

‘Everything Was OK’

Energy, including oil and natural gas, accounted for 69.1 percent of exports to countries outside the former Soviet Union and the Baltic states in the first seven months, according to the Federal Customs Service. About 30 percent of Russian gross domestic product comes from oil and gas, the government says.

“Everything was okay as long as prices for energy and raw materials were high,” Medvedev said. “Then those prices fell. Our economy was hit hard. Our citizens were hit hard.”

Russia should pursue energy efficiency, including creation of new fuels and energy saving, develop nuclear power, information infrastructure, and produce its own medicines, the president said.

Medvedev, who has called Russia’s raw material dependency “humiliating” and “primitive,” said the economy will contract a “very serious” 7.5 percent this year, compared with an official government forecast for an 8.5 percent decline.

The government predicted last month that the economy will return to growth in 2010.


The central bank has cut its key interest rates seven times since April, when it started to ease policy, bringing the benchmark refinancing rate to 10 percent in an effort to buoy demand after output contracted a record 10.9 percent in the second quarter.

The bank, which uses policy to steer the ruble, says it wants to move to an inflation target by 2011.

Russia aims to bring down inflation, which was “rampant in this country,” to a range between 5 percent and 7 percent or less, according to the president.

“Then we will be able to lend at normal rates,” he said. “Then our citizens will be able to obtain mortgages and consumer loans at reasonable rates.”

The annual inflation rate fell to 10.7 percent last month from 11.6 percent in August, according to the Federal Statistics Service. Inflation has averaged more than 14 percent a year since 1998.

‘Clear Challenge’

Unemployment remains “very high,” making it “a clear challenge for the president, the Cabinet and other government authorities,” Medvedev said.

The jobless rate fell to 7.8 percent in August, lower than previously estimated, from 8.3 percent in July on rising seasonal demand for agriculture and construction. The number of unemployed was 6 million, the Federal Statistics Service said.

Russia’s goal is “to achieve a balanced budget or a budget with a minimal deficit within a year,” Medvedev said. “‘All the government’s efforts and decisions should be directed toward this end.”

The deficit held steady at 4.7 percent of gross domestic product in the year through September as the government spent 1.35 trillion rubles ($43.9 billion) more than it collected, the Finance Ministry reported Oct. 9.