Russian GDP is forecast to grow strongly this year, investment spending and oil prices have been str...
Russian GDP is forecast to grow strongly this year, investment spending and oil prices have been strong and consumer demand and wage growth have been increasing.
Rosy as this picture looks, Russia is not without its problems. The divide between the rich and the poor is increasing, there are concerns over inflation and the banking system is in need of development.
But as ever, it is politics which provides both the biggest opportunities and the worst threats to the country's future. In particular, there are concerns over the sluggishness of President Putin's political reform programme; more conspiratorially, there is mistrust of the political intentions of the powerful oil giants.
Dimitri Chatzoudis, portfolio manager at ABN Amro, says: 'The Russian economy is having one of its best years with GDP growth expected to be around 6% this year.
'The important factor has been the strong oil price. Business confidence has improved and companies are starting to re-invest back into the country. Capital expenditure looks strong, which has mainly been in resources such as oil and mining, but it is starting to filter down to other areas such as manufacturing.'
According to Christopher Fitzwilliam-Lay, marketing manager at Charlemagne Capital, the Russian economy will double over the next 10 years due to higher oil prices and improved efficiencies in getting oil out of the ground. The extraction costs for obtaining oil from the ground has got cheaper and has gone down from $20 to $15.
'The government has also $70bn in reserves to enact economic changes for investment in infrastructure. This has been raised from the taxation of income from oil corporates, for spending on roads, railways, industries, utilities,' he says.
Chatzoudis expects over the next few months investment spending to continue because companies are feeling more positive about the future. He thinks capital expenditure by companies will move into other areas besides oil.
However, Fitzwilliam-Lay believes investment spending by companies outside the oil industry is non-existent, with the exception of telecoms. This is because there is not an adequate fixed line telephone system outside of Russia and there has been an increase in the use of mobile phones.
A problem for companies in Russia has been to raise capital. Russian banks are not very sophisticated and do not have an adequate loan system for companies to borrow money to undertake investment spending. The government still has a lot of work to do in developing thebanking system.
Fitzwilliam-Lay says: 'The banking system is not properly established yet. The government is trying to set up a pension system and have investment credits being given to companies.'
Putin's reform processes have been slow to implement. According to Chatzoudis, the reform process in the housing and social sectors has been postponed until after elections.
Fitzwilliam-Lay warns there are also political concerns over the power of the oil owners and whether they are using their economic strengths in an attempt to gain political power. He says the reform process is not going quickly as hoped.
For example, chief of Yukos, Mikhail Khodorkovsky is believed to harbour political ambitions. He has indicated in the interim to bankroll some of the splinter groups within the Russian national parliament, the Duma, in an attempt to forge a stronger opposition movement in Russia.
This has created havoc in the Kremlin, who do not wish to put in jeopardy their control of the Duma and ability to push through structural reforms. There are also concerns over inflation. Although Chatzoudis does not consider this a problem, he says one of Putin's focuses should be on bringing this down to a single digit level.
According to Chatzoudis, there is strong consumer demand due to wage growth and a stronger rouble. However, there are regional differences between countries. In the industrialised areas, unemployment has decreased, while in the rural areas unemployment is increasing.
'A divide has come between the rich and the poor. Moscow is a separate entity from the rest of Russia and most people that live outside of the major cities do not have money. There are some concerns about inflation, people's wages and whether or not the quality of life will become an issue,' says Fitzwilliam-Lay.
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