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8 Jun, 2008 13:30

Temperature rising for Russian economy – but has it overheated?

On day two of the St. Petersburg Forum, RT has interviewed officials and businessmen on one of the most pressing economic issues facing modern Russia: whether its economy has overheated, and if it has, what could be done to address it.

Accelerating inflation, rising wages and dangerously low labour productivity – Finance Minister Aleksey Kudrin says Russia’s economy is fast becoming overheated. He notes that demand on the economy is growing every year by 15 per cent and GDP is increasing by 8 per cent.

He said: “This indicator lags behind sufficiently, so this lag gets compensated by something – by higher prices first, and second, by the growth of import. And we saw a serious growth of imports, that’s about 30 to 40 per cent a year. This is a lot for the country and it is quite risky.”

German Gref, former Russian Economy Minister and now the head of the country’s largest bank, Sberbank, agrees with his former counterpart.

“The economy is not on the verge of overheating but rather in the process of overheating, and high inflation is the result,” he said.

“A lack of infrastructure, extreme high income growth without the accompanying growth of productivity, a shortage of labour, especially skilled labour, along with other factors all point to the overheating of the economy”.

Gref believes that what is needed now is more balanced growth and institutional and infrastructural restraint.

Overheating means that demand is outstripping the economy’s long-term capacity to produce. Russia’s economy grew by more than 8 per cent last year, while investment into infrastructure has dragged far behind. Year-on-year inflation in May hit 15 per cent, which is well above the government's target of 10 and a half per cent.

But experts point out that high inflation is not untypical for emerging markets. Some say it is too soon to declare Russia’s economy out of control. Samuel DiPiazza Jr., CEO of PricewaterhouseCoopers, says that many of the emerging markets that faced growth over the last few years cause inflation and pressures on the economy.

“I think it’s a little early to say that the Russian markets are overheated, but inflation has to be dealt with,” he said.

The jury is still out on whether the economy is overheating, let alone whether it has reached boiling point. But all the signs suggest the temperature is rising fast.