Country Report Russia September 2008

Outlook for 2008-09

• Any attempt by Vladimir Putin, the former president and current prime minister, to retain prolonged and decisive political influence, and to eclipse the new president, Dmitry Medvedev, would prove destabilising.
• The international fallout from Russia's conflict with Georgia is likely to be contained. However, poor relations with the West, reflecting conflicts of interest in a number of areas, will persist.
• Real GDP growth is expected to slow in 2008-09, as a result of stagnating oil output, high inflation, monetary tightening and real currency appreciation. Nevertheless, private demand should support a solid rate of expansion.
• High oil prices, capital inflows and the effects of an earlier fiscal relaxation are feeding inflationary pressures. A good harvest and a tightening of monetary policy should help to reduce inflationary pressures in the coming months.
• Strong import expansion and slower export growth are forecast to reduce the current-account surplus to 3.5% of GDP in 2009, despite high oil prices.

Monthly review

• In a surprise move, Russia has recognised the independence of Georgia's breakaway regions of South Ossetia and Abkhazia, following its military intervention in Georgia in August.
• Russia's actions have prompted widespread international condemnation, but the EU has adopted only modest measures to "punish" Russia. Subsequently, the EU and Russia reached a deal on the withdrawal of Russian troops from Georgia proper.
• The Russian Central Bank (RCB) has been forced to intervene to support the rouble, and to inject domestic liquidity.
• Recent measures proposed by Mr Putin to cut red tape for small and medium-sized enterprises (SMEs) stand in stark contrast to growing state intervention in "strategic" sectors and big business.
• A decision on whether or not to cut the rate of value-added tax (VAT) has been postponed.
• In addition to increased concerns over the business environment, slowing growth, rising inflation, and a deteriorating global economic outlook, the Georgia crisis has led to a sharp fall in investor confidence, prompting capital flight, a weakening of the rouble, and tougher borrowing conditions.
• In July real GDP grew at the second-slowest rate of the year so far, according to the Ministry of Economic Development. Inflation rose again in August, to 15%, from 14.7% in July.

Source: Country Report