Troika Dialog Senior Economist, Anton Struchenevsky, believes that global economic imbalances, including debt servicing requirements, are likely to provide a backdrop to economic thinking over the longer term, but notes that Russia has a far lesser debt concern than many of its global counterparts.

“I think that the economic crisis will be the main topic through the following 5-10 years and will definitely drive governments to modernize economies and bring changes in the international financial system. The anxiety about uncovered debts and their growth among the EU countries will affect Russian economy in a few aspects, However, Russia external debts, which comprise nearly 40% of GDP are low compared to debts of other countries. It means that we do not face problems of paying our external debts.”

Bogdyukevich says that one key area of possible volatility which would have an impact on Russia is energy prices is energy prices, with any sudden downturn stemming from a marked global slowdown likely to hit Russia. But she adds that there is not sign of this at present, with oil getting support at about the $70/bbl mark in 2Q 2010, and that the government has some room to move should it eventuate.

“Well, the main sector to show volatility is energy sector. Energy costs could effect a market down turn and maybe lead to further fiscal stimulus measures. But, the Duma has signed several amendments cutting the budget deficit, and the financial sector won’t have as much help as it had before from the government. Recently we have seen the need for loans and credits remain stable and show even a slight decrease. Economic indicators have shown a smooth improvement in May.”

She adds that moving into 2H 2010 Russian economic indicators are mildly positive and provide some room for optimism.

“Consumer inflation has slowed, retail sales are growing and stable and unemployment has been reduced to 8.2%. Well, nothing tremendous is likely to happen. Moreover, monetary policy instruments are still favorable and the government is keeping an eye on financial system and business sector expenditures, and is working in improving the attractiveness of the Russian market for foreign investment.”

Struchenevsky says that to reduce volatility and to improve Russia’s longer term economic outlook the Russian government has to focus on maintaining budget discipline, improving transparency and the attractiveness of Russia’s investment climate.

“The government and financial sector have to pave the way for establishing a positive macroeconomic climate and balanced budget. We still need to build up a transparent economy to attract investors and raise the level of trust. However, in terms of reducing government spending and consumption, the real sectors of economy have to be ready to bring forward changes in pricing and the terms of payment for our main export commodities.”

He adds that although the longer term outlook provides room for optimism, in the short term the Russian financial system will need to adjust to a new environment.

“We are facing transition period. Creditors are frightened by interest rates of banks and overall economic situation. Loans are no longer in a huge demand, nevertheless, the deposits are growing steadily and soon or later the major banks will need to review their strategy, to be able to pay interest on deposits, as they will no longer have possibility of covering deposit rates through bonds.”