News Analysis: Behind Slowdown in Russia's Economy

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Last updated at: (Beijing Time) Monday, July 22, 2002

News Analysis: Behind Slowdown in Russia's Economy

Russia registered a slowdown in economic growth in the first half of 2002, forcing the government to revise down its growth predictions for the whole year.

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Russia registered a slowdown in economic growth in the first half of 2002, forcing the government to revise down its growth predictions for the whole year.

According to official statistics released this week, Russia's Gross Domestic Product (GDP) grew by 3.8 percent and industrial production up by 3.2 percent in the first six months of this year,much lower than last year's 5.4 percent and 5.5 percent, respectively.

After the outbreak of the economic crisis in 1998, Russia had enjoyed a rapid and sustainable economic recovery, with an averagegrowth rate of as high as 6.5 percent during 1999-2001. Then why the economy has begun to slow down?

Russia's Economic Development and Trade Minister German Gref pointed out that the country's economy "was likely to be affected by an even minor change from outside."

In the first half of this year, Russia's export, regarded as the pillar of the country's petrodollar economy, fell by 7 percent,in sharp contrast to the upsurge recorded in the past several years.

Bowing to pressure from the Organization of Petroleum ExportingCountries (OPEC) to limit oil production so as to prevent a price plunge in the world oil market, Russia slashed its oil export by 150,000 barrels per day at the beginning of this year.

Among Russia's other main export products, steel exports nose-dived after many countries introduced new anti-dumping measures while the export of nonferrous metals also shrank considerably dueto weaker market demand. The production of raw materials, whose exports usually account for a large part of Russia's "petrodollar economy," was badly hit, having a negative impact on other relatedindustries.

Russia's industrial production has also been slowing down sincethe end of last year. Experts usually cite two main reasons for the contraction: one is the hike in utility and transport fares aswell as in employees' salaries and the other is a 7 percent rise in import, which further upset the already mired national industry.In addition, despite a rise in salaries, productivity remains at acomparatively low level.

In an effort to boost the national economy, the government has decided to cancel preferential taxes on investments from this year. However, investment in fixed assets only inched up by 1.8 percent in the first six months, much lower than expected.

In Russia, a country without a mature monetary market, 70 to 80percent of the investments in fixed assets come from enterprises themselves. Facing a general decline in production profits, businesses can spare little in renovating equipment and achieving expanded reproduction, despite the fact that some 70 to 75 percentof their equipment is becoming obsolete. Economic analysts have also expressed concerns about Russia's investment structure.

The Russian government has introduced measures to improve the country's investment environment, but so far to little avail. Somenew problems have begun to crop up when the tax reform aimed at spurring economic growth is being implemented. The reduction in income tax for enterprises from 35 percent to 24 percent has caused a plunge in state revenues, forcing the government to resort to financial reserves originally set for next year's debt payment. The simplification and cancellation of some taxes also dented regional revenues.

However, it is widely believed that the Russian economy is expected to score a better performance for the rest of the year due to an improving world economy and the full resumption of oil exports.

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