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31 Jul, 2009 15:11

Troika Dialog: After a year of global financial crisis and economic downturn

Troika Dialog: After a year of global financial crisis and economic downturn

With the global financial crisis and ensuing economic slowdown passing its first anniversary, Business RT spoke with Evgeny Gavrilenkov, Chief Economist at Troika Dialog about how the Russian economy has fared.

RT: The crisis began as a global financial crisis but here in Russia it transferred itself into a local crisis. How successfully has the Russian economy shaped up?

EG: I think Russia’s crisis is largely manufactured. But here, I want to clarify, I don’t think that we are really witnessing a serious crisis globally. It’s not a crisis, its not wealth destruction which we have seen 60 years ago. I think it looks like more a wealth correction, because we have to keep in mind that, both in Russia and globally, in the previous years demand was artificially inflated by cheap money, easy borrowing, inflated domestic demand in Russia. It was very clearly seen when nominal wages were rising by 30% retail sales were rising, in real terms, by 15-16%. When construction was rising by 30-25% a year that was no sustainable, it was borrowed wealth. So the debt to GDP ration was rising steadily, on the private sector side, not the government, but private sector debt.

So it was borrowed wealth. And the same we have seen globally. Low interest rates, budget deficits in advanced economies. That is what has accelerated, helped accelerate, global economic growth in the previous years, when it reached nearly 5% during 5 years. And that was a very high basis, a year ago, two years ago. And what we are seeing now, when money became less available, we are coming back to a more balanced trajectory, a more balanced growth, more moderate. I don’t think that we’ll reach the same volumes of production of cars in Russia, for example, or globally as well. If we look at how many cars we produced on average per month last year, it was 120 thousand cars. That was a really accelerated growth of car production, and its only one example I am talking about. I am talking about cars, but the same we have seen in construction materials, trucks, investment goods, etc etc. Its borrowed demand, borrowed wealth.

If new borrowing is not available, at least not in the same amounts, it means that we need to moderate growth, the same as is happening globally, as I said. I’m not sure that people have to change every second year, buy a new car, a black one, a bigger one. And there is no need to increase car production by 20% a year, as Russia did in the previous years, if you don’t build more roads. Car ownership increased dramatically in the previous decade, while the length of paved roads didn’t change for 20 years. That’s what a sort of unbalanced growth, what I mean.

The same we’ve seen globally. Inflated construction sector, when people borrowed to build houses, people borrowed also to buy more cars, and not surprisingly those two sectors were affected most strongly globally, and in Russia as well. After financial sector where the origin of the problem came from. Then next was construction, and related sectors – construction materials and the car and automobile industry, car production also shrank. So I think that we won’t return to the same volumes. Money, if it becomes less available, we’ll see much more moderate growth rates in the future, much more reasonable volumes.

Mobile telephones. Its another example. I’m not sure that people need to change every six months, their phones, with more functions and more advanced ones. Normally, many people simply need a regular phone and a memory, that’s it. They don’t need cameras, they don’t need the various options. And services suggest that people only use 5% of those options, but this is simply – you cannot buy a regular phone without a camera, without all those options. It means you are forced to buy something which you don’t need. And that was possible when money was cheap, when money was easily available.

And what I think will happen in the future, globally and in Russia, is that people will become more selective, in finding what they are going to buy, and choosing what they are going to.

RT: What would you call the biggest success story in Russian business in the last year – if there were any?

EG: I think that one of the biggest success stories for business was that business recognised that, I hope that’s the case, that there is no need to return to those artificially inflated volumes of production. People no longer need to talk about increased production of the same cars or all this stuff, at the same rates. People started realizing that money should not be as cheap as it used to be in previous years. And I would say, most importantly, that business became more sober than in the previous years.

RT: When do you think that the Russian economy will start to rebound?

EG: My understanding is that we reached a bottom in January. Since then we, in some indicators, have shown month on month upturn. Still year on year numbers look negative because of the deep contraction shown at the end of last year. October, and mostly November and December, that was the period of contraction. And when we were talking about what sort of crisis Russia experienced I mentioned that it was a manufactured crisis. I have to say that as opposed to countries like Korea, Japan China, who are major exporters to the United States, and who were directly affected by the contraction of US demand, because they export automobiles, electronics, and all this stuff, Russia is not in this case. We do not export electronics or cars to the United States. We are connected to the rest of the world mainly via pipelines. And at the end of last year we kept pumping oil, we kept pumping oil products and gas in the same volumes as before the crisis. So it means that we got not a volume shock but, externally, a price shock. And we were very slow in adjusting the exchange rate. So its normally much easier to adjust to a price shock which is not directly translated to production, to volumes. And that’s what was a major mistake. A very slow devaluation of the exchange rate, the Rouble, which killed Russian growth and distorted the financial markets, the monetary system, interest rates – all during this devaluation. And that’s what we are paying for. That delay.

RT: Do you expect to see another Rouble devaluation?

EG: I don’t think that we are in front of a new danger of devaluation. Not at all. Devaluation was inevitable at the end of last year when the oil price fell considerably from around $146-$147/bbl down to first $100 then $80 and $70, it kept falling. Which meant that export revenues were shrinking because the exchange rate was too strong, imports were about the same. And what we needed, we needed to cut imports in proportion to falling exports, in order to secure a positive trade surplus a positive current account, which we also needed in order to secure debt repayments without additional pressure on the Rouble.

The government was quite reluctant to touch the currency at that time. So they delayed a few months before they started devaluing the currency. What they have done at that time, they have simply adjusted the exchange rate to a more equilibrium level. We were talking about the need to adjust budget expenditure, and what happened in the case of the exchange rate, the oil price retreated, for example if we are talking about $40 oil, its exactly what we had back in 2004. So the oil price retreated back to 2004. Which means that the exchange rate also needed to be as when the oil price was $40.