By Catherine Lafferty Goldman Sachs is positive on the long term prospects for Russia but is cautio...
By Catherine Lafferty
Goldman Sachs is positive on the long term prospects for Russia but is cautious as continued growth in the economy depends heavily on planned government reforms.
Russia has achieved a remarkable turnaround in economic performance, according to Al Breach, international economist at Goldman Sachs. Real GDP growth is expected to be 7% for 2000, with investment growth of 18%.
Over the past year the economy has been bolstered by the high price of oil as well as positive investor sentiment created by President Putin's reforms and policies.
Breach said that while the high oil price has benefited the country, a large fall would not have a huge impact on the economy. However, if Putin's policy reforms founder then economic recovery in the country could be threatened.
He said: "That Putin can so quickly have achieved this position of being critical to continued good performance is a measure of the extent to which he and his administration have impressed on the economic front.
"For the strong performance to continue for longer than two or three years will require structural reform with prudent fiscal and monetary policies.
"The banking system is now liquid but it is almost devoid of trust. Rebuilding that will take many years, even if the right set of policies is rigorously pursued. The probability of Russia experiencing exaggerated boom-bust cycles is quite high.
"Poor policy would mean it never experiences such a problem but succumbs to stagnation or bust. Good policy could avoid this."
Breach said there are not many blots on the positive picture for Russia in the coming two to three years.
He said: "Russia continues to have a competitive exchange rate. One way of seeing this competitiveness is in wages. Average wages remain at less than half of their pre-crash (1998) level in dollar terms but wages are being paid and mostly in cash rather than barter. Wage arrears are being paid as well."
"There is still substantial spare capacity, with the county's capital stock in good order, with space for two years of strong increases in production without reaching capacity limits or causing inflationary pressures.
"Russian industry looks set to grow almost wholly from its own funds, with some limited help from the international capital markets and next to none from household savings."
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