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August 2013 puts Russian economy between stagnation and recession

August 14, 2013, 16:14 UTC+3 Zamyatina Tamara

MOSCOW, August 14 (Itar-Tass) - The Russian economy and the exchange rate of the national currency are surely not at their prime. The euro has climbed to above 44 rubles for the first time ever since 2009, while the dollar has touched the 33-ruble mark. The Bank of Russia on August 13 set the official exchange rate of the euro at 43.8305 rubles.

In the meantime experts recall that tomorrow, August 15, will mark 15 years since Russia’s mighty 1998 default, when the ruble plummeted against the dollar in the blink of an eye. In general, August tends to reaffirm its reputation of a “black” month, when Russia witnesses financial crises and natural and man-made calamities.

The ruble is weakening against the backdrop of a noticeable slowdown of Russia’s economic growth. According to the federal state statistics service Rosstat, the GDP’s growth in the second quarter of 2013 was 1.2% in contrast to 1.6% in the first quarter (against the same period of last year).

However, Economic Development Minister Alexey Ulyukayev told the Kommersant daily in an interview on Monday no recession was in sight.

“There is currently no recession and there will not be any. Stagnation is possibly a more appropriate term. Growth rates are very low, that is true. This is an institutional, structural and macro-economic factor. It is something we shall have to deal with for a very long time,” he said.

Recession is a politically correct term that denotes a slowdown in the growth of the GDP for six months running. Stagnation is a situation where economic growth grinds to a halt. But juggling with terms will not make a big difference. The more so, since the Russian economy has been losing momentum for eighteen months running.

Former Economic Minister Alexey Belousov last spring warned that a recession would become a reality already this autumn unless crucial measures were taken to support the economy. President Vladimir Putin then told the government to draft a list of measures to encourage economic growth - restrict hikes in the prices charged by natural monopolies and lower the exchange rate of the ruble.

Many other players - industrial enterprises first and foremost - would like to see devaluation of the ruble, for a weak national currency would enhance their competitiveness. The Ministry of Finance wants devaluation because of the federal budget deficit. The Finance Ministry has warned the government that by the end of the year it will need an estimated 350 billion rubles to one trillion rubles to patch budget holes.

As for the average Russians, the risk of a devaluation of the ruble looks really scaring to them. The prices of imported goods will soar and the level of incomes and living standards will go down. The share of imported goods on Russia’s food market is about 50%, and on the market of manufactures - over 60%.

Against the backdrop of economic recession Russians’ incomes have begun to shrink. In the first quarter of this year the segment of Russians with incomes below the subsistence level grew by half a million - from 19.1 million to 19.6 million.

The Russian government at the end of July came up with a package of measures that would hopefully push economic growth rates up.

“Under this plan systemic measures are to be implemented to make bank loans better available, encourage small and medium businesses, create incentives to investment activity, improve the business climate and support the real sector of the economy,” the Cabinet of Ministers said on its official website.

A vigorous debate is on inside Russia’s economic community over the methods that may encourage growth. Former financial ombudsman Pavel Medvedev has asked his fellow Russians not to panic - in the medium term, he argues, a majority of the population will not see any considerable worsening, because the authorities have a wide safety margin, for which Alexei Kudrin, a former finance minister, takes the credit. However, this safety margin may last for only a short while. “According to my estimates it will be enough for one year, but surely not enough for five,” the weekly Argumenty i Fakty quotes Medvedev as saying.

A favorable situation in the economy and the possibility of protecting the national economy from various risks will depend entirely on government policies, experts say. If that policy undergoes no change and no conditions are created for the domestic economy to develop, we should brace up for some major upheavals over the next five years, Medvedev warns.

A deputy director of the Kalita Finance financial group, Igor Suzdaltsev, has told Argumenty i Fakty in an interview the recession in the Russian economy is a fact of life.

“We need a real market economy, and not the current slavery-biased mode of production, in which the slave as the main producer is absolutely de-motivated. In a situation where all property in the country belongs to a hundred families it is absurd to expect the other 140 million people will be eager to work for them.” The expert believes that the main reason why the Russian economy’s growth has slowed down is the people see no incentives to excelling at work.

The GDP growth slowdown is largely an effect of dwindling investment into fixed assets, which over the first two quarters of 2013 showed a downtrend, the first deputy director of the Institute of Economics under the Russian Academy of Sciences, Dmitry Sorokin, told Argumenty i Fakty. In his opinion, the fall was so significant that another growth source - an increase in the people’s incomes implying greater buying power has failed to rescue the Russian economy.

“Greater buying activity brought about no turn for the better. Take a look at the manufacturing industries. They have remained at the previous level,” he said.

The main source of budget revenues - oil - failed to contribute to GDP growth, either, although its price suffered a less significant fall than some had originally anticipated. Sorokin warns that the potential of the raw materials factor has been exhausted.

“Prime Minister Dmitry Medvedev pointed to that at a Cabinet meeting last January... We can no longer rely on crude, although its price is quite decent.” Sorokin believes it will be of the essence to find out why business people have stopped investing into fixed assets. Otherwise, more problems with the economy will start pouring in,” the analyst said.

Economic Development Minister Alexey Ulyukayev expects an early revision of Russia’s economic development forecast titled Strategy 2020.

“Without fundamental changes to the institutional environment one will find it hard to expect we may start growing considerably faster than the rest of the world on the average,” Ulyukayev said.