MOSCOW. (Igor Nikolayev for RIA Novosti) - Today the growth of the Russian economy to a great extent depends on external factors. The reason for this is that raw materials are Russia's main export. Consequently, the prices of those goods on the international market are of crucial importance.
At the same time, Russia is gradually becoming integrated into the international economic community. That means it is important to take into account economic-growth trends in industrial nations and emerging markets, the volatility of the world's major currencies, and the movement of leading stock market indices, among other factors.
Growth Continues
Neither the government nor the expert community doubts that Russia's economic growth will continue in 2007. They only differ in their figures for what the growth rate will be.
Opinions differ even in the government, which is still considering two versions of the 2007 forecast. The first option (momentum-based) suggests that the volume of hydrocarbons exports will remain stable, while prices of products from Russia will continue to lose their competitive advantage. According to this scenario, GDP growth will decline from 6.6% in 2006 to 4.8-5.0% in 2008-2009.
The second option, conversely, envisages that Russian products and services will become more competitive, and Russia will succeed with its structural reforms. In this case GDP growth will reach 5.8-6.0% in 2007-2009.
The latter is currently considered to be the most likely option. It has been used as a basis to develop the 2007 federal budget. But even this version, as is now evident, forecasts a drop in economic growth.
Growth of the World Economy
The Russian Government has indicated that it is predicting stable growth of the world economy. It forecasts that the growth rate will be 5% in 2006, and will not fall below an annual rate of 4.8-4.9% in 2007-2009.
That is very good news for the Russian economy, since it ensures continued high demand for Russia's main exports as well as favorable prices.
The world economy's high growth rate also means that Russia will remain a prime destination for foreign investment, in itself a very important factor.
While the American economy is expected to slow down, the opposite is forecast for Europe and Japan. In the U.S., GDP growth may fall to an annual rate of 3.2% in 2007-2009. Even though the Japanese economy is on the rise due to higher exports and a reviving interest in investment, the growth rate will barely exceed the 2.7% mark.
China and India are also considered to be part of the driving force of the booming world economy. The Chinese economy is expected to grow by 10% in 2006 and by 9% in 2007.
At the same time the economic forecast for the Russian economy envisages a possible turnaround in the world economy's upward trend in 2009.
During the past few years, forecasts for the Russian economy have consistently been conservative and overly cautious. It is not surprising that there is also speculation about an imminent reversal of the world's economic fortunes.
Oil Prices
Oil prices are still crucial to the Russian economy, though some Cabinet ministers have expressed a different opinion, claiming that Russia's dependence on world oil prices has significantly diminished.
Nevertheless, the government forecasts that world market prices for Urals grade crude oil will be $61 per barrel in 2007. This figure is the leading indicator that was used to draft the 2007 federal budget.
Such a price forecast was considered conservative only recently, however, after Urals prices dropped to just over $50 per barrel in late summer-early fall of 2006, it became evident that the officially predicted level of $61 was optimistic.
Why was the Russian government so optimistic in its 2007 forecast of world oil prices? Its opinion was based on a report from experts at the International Energy Agency, which predicted that world oil consumption would grow by 1.57 million barrels/day in 2007 and would reach a level of 86.4 million barrels/day.
The following factors, which might objectively contribute to a price hike, or at least to maintaining world oil prices at a high level, were also considered:
- - an increase in crude oil demand in China and India, the countries that already account for over 50% of the growth of world oil consumption;
- - continuing high consumption of oil in the U.S.;
- - a lack of oil refining capacity in the world; and
- - limited capacities in OPEC states for increasing oil production.
According to experts' forecasts, world oil prices would begin to fall only in 2008-2009. The oil price slump in the second half of 2006 was therefore a painful surprise.
Still, no one is planning to revise world oil price forecasts, since at present Russia's federal budget maintains a high safety margin. Moreover, the Russia's Stabilization Fund should exceed 4 trillion rubles by the end of 2007.
Metal Prices
Experts predict that contract prices for ferrous metals will fall by 5% this year. The same level of decline is forecast for 2007.
The outlook for world non-ferrous metals prices is more favorable. The reason is evident: demand is increasing in China, India and other developing economies, the U.S. dollar is growing weaker against major currencies and fuel prices are rising.
Non-ferrous metals prices are expected to stabilize in 2007. Later, in 2008-2009, prices may even fall due to declining fuel prices and an expected excess of supply over demand following a number of large projects that are now being launched in China, Australia and Brazil to expand alumina and copper producing capacities.
Oil and Gas Exports
Oil exports are expected to reach 255 million metric tons this year, 264 million metric tons in 2007, 270 million metric tons in 2008 and 274 million metric tons in 2009.
Petrochemicals exports will not grow as fast as oil exports. The figure is expected to be stable in 2006-2008 - 103 million metric tons. Only in 2009 might we see a very slight increase in petrochemicals exports, bringing the figure up to 103.5 million metric tons.
This trend reflects a considerable growth in demand for petrochemicals inside the country. It is clear that this development will raise domestic prices of petrochemicals. In these conditions there will be fewer possibilities to export such products, so export profits will fall.
The volume of gas exports is expected to be 200 billion cu. m in 2006, then fall to 193 billion cu. m in 2007, and then grow to 200 billion cu. m. in 2008 and 212 billion cu. m in 2009. It is evident that Russia's exports in 2010 will not be significantly higher than in 2005, when the country exported 207.3 billion cu. m of gas.
These are the external factors that, according to the Russian government, will influence Russian economic growth in 2007-2009. Experts are already raising doubts about certain aspects of this scenario, such as, for instance, the trend in world oil prices, but on the whole the forecast is considered realistic.
Igor Nikolayev, FBK Director, Strategic Analysis department
