Russia’s robust output belies a fundamentally fragile economy skewed toward commodity prices, enfeebled by poor corporate governance and a reactionary government distrusted by foreign investors, leading analysts have warned.
Gross domestic product in the world’s ninth-largest economy grew by 4.9% in the first three months of the year, slightly up on the previous quarter, with inflation dipping to 3.6% in March and retail sales rising 7.3%, on the back of high oil and commodity prices.
But analysts warned a eurozone-wide recession would severely dent the finances of a country that remained heavily reliant on exports to the European Union. “People are worried that what is going on in Europe might unravel the Russia story,” said Chris Weafer, chief economist at Moscow investment bank Troika Dialog.
Russian stocks slumped recently, with the MICEX stock market this week falling to its lowest level in more than five months.
Economists said this was a further sign that foreign investors were suspicious of Russia in general and President Vladimir Putin in particular. “The most obvious barometer of Russia’s [financial health] is through the equities market - and Russian stocks have underperformed emerging markets as a whole,” said Edward Cole, co-manager of hedge fund Finisterre Capital’s new emerging markets equity fund.
“Poor corporate governance and bad government decisions are keeping everyone’s investor time horizons too short.”
Many doubt that the returning president diversify Russia’s economy away from its overweening dependency on oil and commodity prices. The slide in Russian stocks has coincided with the falling price of all, which hit a four-month low this week, touching on $110. Stocks fell again after Saudi Arabia’s energy minister warned of a global oil glut.
“The high level of reliance on commodities is an ongoing structural weakness,” said Vladimir Tikhomirov, chief economist at Otkritie Securities. “Russia needs to diversify its economy. The other failing is policy weakness. We have seen expressions of support for reform by Putin, but little actual action.”
Falling energy prices also cast doubt on the country’s long-term growth strategy. Russia’s economy has outpaced most of its peers in central and eastern Europe as well as central Asia over the past two years.
But with oil prices softening, the rouble weakening and government expenditure rising – in part to pay for new social projects promised by Putin – many fear Russia is facing a period of stagnation. “Investors are nervous of Russia’s growth story, despite a pretty good picture today,” Weafer said. “The fear is that if we see a sharper fall in oil prices, that it will unravel the macroeconomic story.”
Markets have also been unnerved by capital flight. Money has been flooding out of the country for years, as people seek safe havens – London, Switzerland, Cyprus, Dubai - for their assets and savings.
Barclays Capital analyst Vladimir Pantyushin said that $42 billion in personal assets fled Russia in the first four months of the year, offsetting current account surpluses. “This implies little support for the rouble leaving it very vulnerable to outside factors,” Pantyushin said.
Those savings are not being replaced by foreign direct investment (FDI). A 2011 report by Ernst & Young showed investors ranked Russia the least attractive major market. Just 11% said they would invest in the country, compared to 29% in CEE and 35 per cent in western Europe.