Country Report Russia October 2008

Outlook for 2009-10

• The ruling tandem between the president and the prime minister is facing a test in its efforts to prevent the global and Russian financial maelstroms from plunging the real economy into a crisis.
• A failure to prevent a crisis in the real economy would result in a clear threat to Russia's hitherto stable political scene.
• The international fallout from the conflict between Russia and Georgia has been contained. However, poor relations with the West, reflecting conflicts of interest in a number of areas, will persist.
• Whether the deterioration in Russian-Western relations could get worse depends on what happens next, beyond Georgia, including on crucial issues such as NATO enlargement.
• Real GDP growth will slow to below 6% per year in 2009-10, reflecting the impact of the financial turmoil and the tightening of credit conditions, ongoing real currency appreciation, and weak energy sector production.
• Falling commodity prices, slowing demand growth and the fiscal tightening of the past few quarters will help to reduce inflationary pressures. However, the injections of liquidity into financial markets will have an inflationary impact.
• Strong import expansion and slower export growth are forecast to reduce the current-account surplus to 3.1% of GDP in 2009 and 1.7% in 2010.

Monthly review

• The president, Dmitry Medvedev, has laid down five principles to guide Russian foreign policy. This has been labelled a doctrine, although it looks like a speedily crafted effort to provide justification for Russian actions in Georgia.
• There are some indications that Russia's leadership has become alarmed by the extent of the deterioration in relations with the West, especially in the context of the global financial upheaval.
• The Russian Central Bank (RCB) has been forced to intervene to support the rouble, and to inject domestic liquidity.
• A new liberal package of tax reforms has been adopted. The decision on whether to cut the rate of value-added tax (VAT) has been postponed.
• The World Bank's Doing Business 2009 report placed Russia in the bottom 10% of countries on business-friendly regulatory reforms in 2008.
• There was some recovery in industrial output in August, following poor performance in the previous two months. There are signs that domestic demand is weakening as investment growth falters.

Source: Country Report