Thursday, November 20, 2008

Russia's Economy: How Bad Will It Get?

Russias Economy: How Bad Will It Get?

There's no denying it any longer. Russia's long economic boom is finally over.

On Nov. 18 the World Bank became the latest organization to slash its forecast for Russia's gross domestic product growth next year, from 6.5% to just 3%. That came on the heels of the International Monetary Fund, which has also been scaling back its Russian GDP growth forecasts, most recently from 5.5% to 3.5%. Many experts are even gloomier, with some predicting that Russia's economy could actually go into recession next year.

"I see no way you can achieve 3% growth next year," says Anders Aslund, senior fellow at the Peterson Institute for International Economics in Washington. "We are seeing a rapid deterioration in everything: the banking system, real estate, construction, the metallurgical sector—and, of course, the oil price."

Drastic Turn of Events

Although part of a global phenomenon, the slowdown in Russia is especially sudden and shocking. It comes after years of momentous economic growth, averaging 7% since the beginning of the decade. As recently as the first half of this year, Russia's economy grew by 7.8% from the previous year. And until recently most ordinary Russians seemed oblivious (, 10/24/08) to the deteriorating economic news.

Yet the severe impact of the global crisis on Russia's financial markets is becoming increasingly apparent. The banking sector is in turmoil, while the stock market has been among the worst affected in the world, losing 75% of its value in the past six months. The ruble has lost 17% of its value against the U.S. dollar since August.

Even so, the true extent of Russia's economic problems is only now being acknowledged at an official level. "Today it is clear that the crisis is spreading, unfortunately from the financial sector into the sectors of the real economy," Russian President Dmitry Medvedev admitted on Nov. 18.

A Daunting Scale

In sector after sector, corporate announcements about job losses, pay cuts, and production cutbacks show that the scale of the economic crunch is far more serious than most people had previously understood. On Nov. 19 Russian carmaker GAZ (GAZA.RTS) revealed it was introducing a three-day week, in response to slumping demand for vehicles. A day earlier, leading steelmaker Severstal (CHMF.RTS) announced it had slashed production by 50% since the summer and was deferring most of its $8 billion investment program for the next three years.

Just a few days before that, leading agricultural producer Razgulyay (GRAZ.RTS) announced it was sacking 2,200 members of its staff and cutting its investment by $190 million next year. "The situation is grim, and getting grimmer," says Chris Weafer, chief strategist at Russian bank Uralsib (USBN.RTS). "Until now, most people didn't think it would have an impact on their lives. Now the reality is beginning to dawn on them."

According to Russia's labor ministry, as of Nov. 13 some 3,079 Russian companies had announced plans for job losses, totaling 99,000. That's more than double the number of job losses announced just two weeks before. Companies in Moscow also are cutting employee pay, by anywhere from 1.5% to 10%, according to Moscow city officials.

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