2006 has been better for the Russian economy than was predicted, with the last months of the year bringing mostly good news. According to data from the Ministry of Economic Development and Trade, Russia's gross domestic product growth in October alone was 8.2 percent higher than it was in October 2005.
However, this is not the only reason for optimism. Also in October, total investment in the Russian economy increased by 19.1 percent over the same month last year. The 2006 annual indicator may be 13.2 percent higher than the 2005 figure. Does this mean that we can look forward to an economic boom?
Completion of Russia's Transition to a Market Economy
Russia's GDP growth this year will be 6.8 percent to 6.9 percent. This is a respectable indicator, and higher than expected: the forecast was 6 percent. Over the course of the year, this figure was revised upwards, but the final result exceeded the boldest predictions.
Russia's economic indicators for this year are good not only because they exceeded the forecast. An increase of less than 1 percentage point is not, in itself, a great achievement.
The main reason to celebrate is that the trend towards a slowdown in economic growth that has persisted over the past several years has been reversed. In 2003, Russia's GDP grew by 7.3 percent, in 2004 by 7.2 percent, and in 2005 by 6.4 percent. The 2006 figure is 6.8 percent to 6.9 percent.
Of course, only next year's performance will show whether 2006 has signaled a turning point. However, it is obvious that Russia's economic performance this year has proven to be better than last year in terms of the key macroeconomic indicator: GDP growth.
The dynamics of Russia's economic development in 2006 have led to another significant conclusion: Based on this year's results, we can state with confidence that the country's deepest economic recession due to its transition to a market economy has been completely overcome.
Note that, by 1998, Russia's GDP had fallen by nearly 40 percent from the 1991 level (as you may remember, economic reforms in Russia were launched in January 1992). Thus, the Russian economy hit rock bottom in 1998. The decline lasted for seven years after the start of reforms, and in 1999 Russia's economy began to slowly grow again. It took eight years of growth, including the current year, for Russia's GDP to fully recover.
The 2006 figure means that Russia's transition to a market economy is complete. The economy has been fully restored to its pre-reform level.
Surely, one indicator is not enough to draw such a serious conclusion. Do not forget, however, that GDP is the key macroeconomic indicator. Such conclusions, therefore, can be made, though with some reservations.
Other Economic Indicators
Inflation this year will be about 9 percent, its lowest level in 15 years. It is also significant that, for the first time in the past several years, inflation is no longer in the double digits (in 2005, Russia's annual inflation was 10.9 percent).
Also note that the initial forecast for inflation this year was 7 percent to 8.5 percent, which means that the planned targets have not been met. Nevertheless, the year-end results are respectable.
Russia's lasting economic growth has served as the foundation for achieving the current inflation level. The government's efforts to restrict the money supply and the Stabilization Fund's efforts to sterilize it have also had a positive effect.
However, there are still reserves left for curbing inflation in 2007. Russian commodity producers' competitive potential has not been fully taken advantage of.
Foreign investment is a major indicator of investment activity in general. A total of $130 billion in foreign capital accumulated in the Russian economy by late September of 2006. From January to September, the Russian economy received $35.3 billion in foreign investment, or 31.7 percent more than in the same period last year.
It's interesting that Russian investment abroad amounted to nearly the same sum: $34.6 billion, registering a 51.4 percent increase over last year's figure.
There is little doubt that the total figure for the year will be even higher. However, Russian investment abroad will still nearly equal foreign investment in Russia.
How should we react to this? On one hand, it's not necessarily bad that Russian investment abroad is growing. On the other hand, this growth far outpaces the growth of investment in Russia.
This means that in the near future Russian investment abroad will exceed foreign investment in the Russian economy. Russia is becoming a kind of global donor.
It's good that Russia has money to invest, but it's also clear that it desperately needs investment itself. The task of making Russia more attractive to investors is still before us, and the above-mentioned trends confirm this.
What Are the Reasons Behind the Fast Economic Growth?
It might seem strange, but the government cannot find a proper answer to this important question. However, that doesn't matter much. It would be worse the other way around: if, in the absence of any economic growth, the government could clearly see the reasons for the country's stagnation.
In spite of the lack of an explanation, the government can certainly come up with replies to questions regarding economic growth. For instance, it has credited customs and amortization policies. Moreover, Russia's Finance Ministry says that the decision to reimburse the value-added tax as soon as possible has served as an economic accelerator in general. Apart from this, the government has explained the surge in economic activity by the launch of the Investment Fund.
This is all correct, but it's not enough to fully explain the developments underway.
No doubt, the reasons behind the rapid economic growth will soon be clear. We need this clarity in order for economic growth to stop being a pleasant surprise. Only then will we clearly understand what must be done in the future.
By Igor Nikolayev