Russian bear blames weak structure

The financial crisis of 2008-09 demonstrated the structural weakness in the Russian economy, according to Sergey Aleksashenko, the director of macroeconomic research at the Higher School of Economics in Moscow.

Speaking at an investment conference in St Petersburg organised by Centaur, Fund Strategy’s parent company, Aleksashenko said that of the 25 largest economies in the world, Russia in 2009 had the steepest year-on-year and quarter-on-quarter GDP decline.

In the fourth quarter of 2008 and the first quarter of 2009, Russian GDP fell 15% and 20% respectively. While there has since been a recovery, primarily led by rising exports, Aleksashenko says this has been exhausted and he predicts a period of stagnation for the economy. A dependence on commodities and the low competitiveness of Russia’s domestic industries are the main barriers to sustainable growth. (article continues below)

“Economic institutions in Russia are among its weakest,” he says. “These weak institutions are one of the main barriers to a recovery but the government is not doing anything about them.”

While Russia’s dependence on oil was a large factor behind why the economy suffered so badly during the financial crisis, Aleksashenko says the real reason was overheating, caused by growing credit and intensive foreign borrowing.

“In three-and-a-half years corporate debt increased by five times,” he says. “It was this debt that fuelled Russian growth before the crisis and the result was high inflation and a fast rising equity market and real estate prices.”

“Even the government does not foresee a bright future, envisaging 4% growth in coming years, which is well below pre-crisis numbers,” he adds.

Olga Trofimenko, an associate professor at St Petersburg University, told the same event that uncertainty in Russia is too high to make confident forecasts. She argued the crisis proved Russia is dependent on world markets, and in particular the oil market.

“The crisis underlined the fact that even a country that manages one of the world’s largest hydrocarbon resources needs global financial markets for funding its largest corporations,” she says.

Angelos Damaskos the chief executive of Sector Investment Managers, which advises the CF Junior Oils fund, agrees that oil price dependence is likely to create uncertainty.

“It is difficult to predict the short-term direction of the oil price because there is so much financial trading. It is dependent on economic growth. Growth in demand from emerging markets is being offset by demand in the developed economies. I can’t see oil getting to $100 a barrel until the developed economies start to recover. It is likely to stay range-bound between $65-85 and will move more on financial speculation.”