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Risks facing the Russian economy

MOSCOW. (RIA Novosti economic commentator Mikhail Khmelev) - In the first months of 2007, the Russian economy has been on the upsurge. There are many reasons for this and most of them are fundamental.

The Russian economy is becoming increasingly more competitive. It is getting rid of dependence on raw materials; investment is booming and the consumer demand is encouraging rapid economic growth. At the same time, the risks that may impede this growth and make the Russian economy less attractive to foreign investment have not disappeared.

According to the reports by the Russian Ministry of Economic Development and Trade, the economic situation in Russia is much better than a year ago in most indicators. It would seem that there are no reasons for pessimism. But there are a number of factors that are casting a shadow on what seems to be a generally bright picture. Experts from the Development Center are quoting two major risks that may materialize in the next few months.

The first one is linked with the continuously growing imports. "In the first quarter of 2007, the imports went up by 36% and I don't see any reasons why this should stop," said Sergei Smirnov, a leading expert of the Development Center. Indeed, an accelerated rise in incomes is compelling Russians to change the pattern of consumption. An increase in salaries has upgraded the economic status of most people, and they are starting to change their consumption standards.

Until recently, the consumer demand was shaped by the wealthy. However, gradually, more Russians are becoming more prosperous and paying more money for higher quality goods, primarily imports. The car market is the best example of change in consumer preferences. The share of foreign cars in total sales went up from 11.8% in 2002 to 68% in the first quarter of 2007.

A rapid re-orientation in the demand for imported goods is already telling on the structure of the national balance of payments. In the first quarter of 2007, surplus of current account operations went down by 29% to $22 billion in value terms. Against the backdrop of stagnating exports, a steadily high growth in the cost of imports became the main reason for a reduction in the flow of currency into the country. Bigger commercial loans and proceeds from a series of IPOs at foreign stock markets are saving the situation. But economists see this as a second major threat to Russia's macroeconomic stability.

The Central Bank has a mechanism for sterilizing export revenues, but it will have to use other instruments for dealing with currency from the balance-of-payments account. This is a real challenge to the Russian monetary system, which is engaged in a fierce battle against inflation. Thus, as of May 11, the Central Bank's gold and currency reserves, which keep swelling with oil money, reached a record $386.3 billion. The finance ministry is lamenting that the government is losing its once-powerful inflation-curbing potential.

Natalya Shvareva, an expert with the Institute of Comprehensive Strategic Studies, points out that incomes of the population are growing faster than labor productivity, which further speeds up inflation. In the estimate of the Market Research Center at Moscow State University, labor productivity in Russia is five times lower than in the United States and four times lower than in Germany. In 2006, $14,516 worth of goods and services were produced per one worker. In terms of labor productivity, Russia is between Eastern Europe ($25,000-$30,000) and Africa ($1,500-$9,000).

The Russian economy is still seriously lop-sided. The role of raw material branches is incommensurately big. Experts from the Market Research Center believe that Russia's high dependence on raw material markets will make its WTO adaptation very difficult. Last but not least, government policy takes little notice of how Russia could be affected by a global economic recession in 2008-2009, as predicted by most economists. The stabilization fund is not likely to have enough reserves to cover swollen social and military expenditures.

"All official government forecasts portray an averaged trend of economic development - somewhere in-between the optimum and inertia options," sums up Yury Danilov, senior consultant on macro economy from the Stock Market Development Center. "But nobody has analyzed how the economy may react to a sudden drop in oil prices or the growth of interest rates for Russian companies. The government is not creating mechanisms that could alleviate the aftermath of a potential crisis. It could strike quite a heavy blow."

The opinions expressed in this article are the author's and do not necessarily represent those of RIA Novosti.

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