Downhill

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Raw Materials, Grain, and Transport
The Russian economy has been shrinking and devolving
Pavel Aptekar
Vedomosti
November 9, 2016

As many experts had predicted, the inertia of economic policy has led to an ever-increasing shrinkage of the economy and devolution of its structure. In the last two years, the role of primary industries and the cargo haulage they generate has grown even more.

In the latest issue of Commentaries on the State and Business, Nikolay Kondrashov of the Higher School of Economics has calculated that, in the third quarter of 2016, agricultural output grew in comparison with the annual averages for 2014 by 6.6%, mining by 3.6%, and cargo haulage by 3.4%. During the same period, the volume of retail trade has decreased by 14.7%, construction by 12.8%, and manufacturing by 7.2%. According to Rosstat, real wages decreased by 13% from the third quarter of 2014 to the third quarter of 2016. This has reduced domestic demand, purchasing power and, consequently, the production of a number of consumer goods and the tempo of new construction. Sales of domestic products have increased relative to banned or seriously inflated imported goods, but overall food consumption has fallen. The contribution of manufacturing, construction, and trade to GDP has decreased, while, on the contrary, the role of extractive industries, agriculture, and the cargo turnover they generate has grown.

It is extremely difficult to break away from a resource economy and get on the path of growth. It is impossible to radically restructure the economy without major investments. They are currently at a low level and, according Vladimir Nazarov, director of the Finance Ministry’s Finance Research Institute, they are unlikely to increase. Stronger guarantees of property rights are needed,  at least, for investments to start flowing.

We can take satisfaction in the growth of agriculture, which has received a good deal of government subsidies and import-substitution preferences, but it is unlikely to provide a robust multiplier effect: the agricultural sector is heavily monopolized, and it requires less and less manpower. Agricultural equipment manufacturers may still profit, but they face serious competition from the Belarusians. Given low economic growth, the best we can look forward towithin the current framework is a slight downtick in the primary industries due to an increase in retail sales and construction, notes Nazarov.

Some growth in the manufacturing sector can be attained through defense contrats, whose impact on demand and economic growth is generally quite small. Russia can produce a limited number of products that are popular not only in the domestic market but also foreign markets, but we should not expect them to be the source of structural improvements.

The Russia economy’s structural focus on extractive industries was also typical during the fat years, but then it was mixed with windfall profits from oil sales. Nowadays, there is no hope that oil will generate growth. During a crisis, we need freedom of entrepreneurship and the development of new sectors from the bottom up, thus increasing the demand for human capital, more than ever. Otherwise, human capital degrades as well. It does not take a lot of smarts to maintain pipelines and a small number of latifundia.

Translated by Death of a Salesman. Thanks to Gabriel Levy for the heads-up

The Putinist Economic Miracle

As Inflation Soars, One in Five Russians Can Only Afford Bare Necessities
Delphine d’Amora
May 14, 2015
The Moscow Times

Many Russians flocked to stores late last year as the ruble plummeted against the euro and dollar, eager to get the most out of their savings before the prices of imported goods rose.

Nearly 20 percent of Russians can now afford nothing more than the absolute necessities as double-digit inflation erodes their spending power, a survey by consumer research firm Nielsen found.

The figure is a record high for the survey, which has been conducted regularly since 2005. Even in the first quarter of 2009, in the depths of the previous financial crisis, only 4 to 7 percent of Russians reported having no spare income after paying for basic items such as food and accommodation.

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Runaway price rises are making it harder to make ends meet. Consumer price inflation was running at 16.4 percent in April this year after hitting a 13-year high of 16.9 percent in March, according to state statistics service Rosstat. Prices have been driven up by Russia’s ban on a range of food imports from the West — a response to Western sanctions over Ukraine — and a steep devaluation of the Russian currency.

High inflation has depressed real wages, which fell 9.3 percent year-on-year in March, according to Rosstat. It has also encouraged some unwise behavior — Many Russians flocked to stores late last year as the ruble plummeted against the euro and dollar, eager to get the most out of their savings before the prices of imported goods rose.

This wave of spending is now coming back to haunt consumers, Ilona Lepp, Nielsen’s commercial director for Russia, said in a statement.

“After spending a lot at the end of 2014, Russians ran up against a significant rise in prices on the most essential goods in the beginning of the year, which means the drop in real wages was felt particularly hard,” Lepp said.

Russians’ consumer confidence fell to a record low of 72 points in the first quarter on Nielsen’s Consumer Confidence Index, a seven-point dip from the previous quarter.

With falling real wages forcing Russians to reduce spending, 55 percent of respondents to the survey said they would cut back on entertainment outside the home. Fifty percent said they would save on clothing purchases and 48 percent planned to switch to cheaper food brands.

Such cutbacks brought overall consumer spending in Russia down 8.7 percent year-on-year in March, damaging a key sector of the economy and deepening an economic slowdown that is expected to shrink the country’s gross domestic product by up to 5 percent this year.

The survey, part of Nielsen’s global consumer confidence study, was carried out among Internet users between Feb. 23 and March 13 of this year. The margin of error did not exceed 0.6 percent.

Icon by artist Sergei Suksin