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IMF predicts sharp contraction as private funds desert Russia
Published: 01 June, 2009, 22:02
Edited: 10 January, 2010, 05:02
TAGS: Investment, Russia and the global economy, Economy, Finance
The international monetary fund has issued a new forecast for the Russian economy for this year. It's predicting a sharp contraction, but there's some good news amongst the grim statistics.
The Russian economy will shrink 6.5% in 2009 according to an International Monetary Fund report presented on Monday. That's in sharp contrast to growth of over 5% last year, and despite stimulus measures equal to almost 10% of GDP, according to Paul Thomsen, Head of the IMF's mission in Russia.
“Russia has some strong advantages compared to other emerging markets. The policy of taxing and saving oil revenues means that Russia has the fiscal room and reserves to have a monetary exchange policy that can counter negative shocks from abroad.”
IMF experts say the key to any revival is the banking sector. The Russian government claims a level of bad debt of around 10% is not bad.
The main problem for Russia lies not in bank balance sheets, but according to Clemens Grafe, Economist at UBS in the outflow of capital from Russia.
“The big story there is really returning capital to Russia. The way we think about the crisis, it’s not the oil price or the oil revenue that is missing in the economy, it’s the private sector capital that left when the oil prices fell.”
Russia's stock markets rallied to seven month highs on Monday, as demand from China picked up and oil reached over $67/bbl. UBS is predicting a return to growth in the third quarter.
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Unfortunately the IMF is a powerful institution which may be sneered at but not easily displaced. The sooner Russia through BRIC can establish an alternative currency for the world the better for Russia and the world. But the road ahead will be rough...
This article misrepresents the cause of the capital flight from Russia - rather than due to any systemic weaknesses in the Russian economy, the flight was caused by Western investors panicked by the US-triggered GFC, who pulled their money out of Russia and repatriated it back to the their home countries to shore up their own capital reserves. Western investors dumped rubles as they hurriedly converted to dollars, which hammered the Ruble value and forced the Russian reserve banks to spend dollar reserves to buy rubles and defend the currency. In short, the capital flight was a result of Western weakness, not Russian - not that the corporate business media outlets dare state such an inconvenient truth.
Now the opposite is happening and too much inflow of capital from private funds is arriving to the Russian Federation so they have to cut interest rates to make it less attractive the so called carry trade.