Sharp falls in investment and soaring capital outflows are undermining the Russian economic recovery and offsetting the benefits of high oil prices, economists have warned.
They said that political uncertainty was a key problem in a week when President Dmitry Medvedev declined to say whether he would stand for re-election in March next year, and a gigantic oil deal between BP and state-controlled Rosneft collapsed.
New foreign direct investment into Russia was only $9 billion in 2010, the central bank estimated this month – less than half the $19.4 billion of outward FDI by Russian companies.
Natalia Orlova, chief economist at Alfa Bank, told Emerging Markets: “Before the crisis FDI was running at $20-30 billion a year. In money terms the fall to $9 billion might not seem disastrous, but the perception of Russia has changed dramatically.
“FDI at this level – between 1% and 2% of GDP – tells us, first, that Russia doesn’t rely on international money for its growth and, second, that it remains difficult for foreign investors to do business here.”
Russia could not make the necessary capital expenditures into its infrastructure in the next 10 years without confronting these issues, Orlova said.
Monthly economic data shows that in the first quarter of 2011 investment “collapsed” by 1.8% year-on-year, said Neil Shearing at Capital Economics.
Growth slowed to 4.1% year-on-year in Q1 2011, from 4.5% year-on-year in Q4 2010, despite oil prices jumping, despite oil prices jumping from $85/barrel to $100/barrel in the same time frame. Inflation was partly to blame, Shearing argued.
While there is no automatic pass-through from high oil prices to GDP growth, Shearing said it was worrying that inward capital flows – a benefit that should normally follow from high oil prices – have “broken down”. The central bank recorded a net capital outflow of $21.3 billion in Q1 2011.
Shearing said: “Political uncertainty in the run-up to next year’s presidential elections” was “the most obvious cause” of both capital outflow and the slump in investment.
Russia’s difficulty in sustaining structural reforms in a high oil price environment is also the central theme of the World Bank’s latest Russian Economic Report.
Zeljko Bogetic, the Bank’s lead economist for Russia, said a revised version of the report will be published next month, to factor in higher oil prices and tightening oil market fundamentals.
Structural reform is more difficult at high oil prices, Bogetic told Emerging Markets. “There is no magic bullet to achieve diversification [away from the hydrocarbons sector] and long-term growth. Russia has to develop human capital and develop infrastructure. Making sure investors stay in Russia is a long-term challenge.”
The report warns bluntly about a possible “return of the ‘oil curse’”. Russia’s current budget deficit target implies an oil price of more than $100/barrel, compared to the $75/barrel stipulated in the 2010 budget law.
This brings the risks that higher oil prices could encourage greater public spending in the pre-election period, undermining efforts to make spending more effective and fuelling inflation, and that a fall in oil prices will catch Russia short fiscally.