Bellerbys Economics - Mr Stephenson

Friday, October 26, 2007

Russian Bear Rising

With economic growth of 7% a year, the Russian economy should double in the next 10 years probably moving Russia from ninth to fifth position in terms of PPP. The economic growth is being created by both demand and supply factors.

Certainly, in terms of supply, major investment in oil and gas pipelines and the development of new gasfields to the north - in conjunction with Norway's Statoil - and in Siberia with the major Sakhalin-2 project, the country is experiencing a major investment boom.

On the demand side, revenues from oil and gas supplies, because of massive increases in price, are creating inflationary pressure within the economy as the money cannot be spent intelligently fast enough!! The government has tried to slow down the increase in the money supply by creating a development fund for the country - aimed at investing in medium-sized businesses - but at the moment there aren't enough of them to take advantage. Inflation is now 10% and continues to be a problem for the government. In response, they have imposed a price freeze on many food projects - but all Economics students know what the outcome of that will be.

The relationship with the EU is also a difficult one. The EU needs Russia's gas in particular but is reluctant to allow Gazprom to invest in the EU energy industry when EU energy businesses are not given free access to Russia in return. There is a summit this week between the EU and Russia which may go some way to relieving this problem. One piece of positive news is that Russia has now agreed to accept WTO rules regarding tariffs and access and that does bring it closer to joining that organisation which may make it a more reliable trading partner in the future.


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